Aussie Lifted By Stevens Comments, Euro Soft Ahead Of Italy Election

Aussie is boosted by comments from RBA governor Stevens that the central has likely paused the rate cut cycle. Stevens said in his testimony to a parliamentary committee that last year's cuts were already "substantial" and rates are at "appropriate level right now". He emphasized that there is already a "good deal of interest-rate stimulus in the pipeline" and the board judged that it was "sensible" to allow time for the rate cuts to "do its work". Meanwhile, Stevens noted that Australian dollar exchange rate is "somewhat" overvalued. But he warned that "you need to be pretty confident that it is seriously over-valued, or the market is behaving in some quite irrational way, before you would launch large-scale intervention." Separately, Treasurer Swan said he's "beginning to see some of the signs of stimulus flowing from monetary policy into some of the non-mining sectors of the economy."

Euro remains soft after yesterday's sharp fall on weak PMI data. traders are also cautious ahead of Italy's parliamentary election on February 24-26. Democratic Party's Bersani is still the front runner but polls have been showing that former prime minister People of Freedom's Berlusconi continues to close the gap. Markets are expecting to see Bersani winning a majority in the lower house and forms a coalition with outgoing prime minister Monti in the upper house. However, markets are also complacent on the risk that scandal-mired Berlusconi might return to power.

Overall, EUR/USD is still trading above 1.3 psychological level comfortably and we're still confident on the bullish outlook. Similar picture is seen in EUR/JPY and recent price actions from 127.70 are looking corrective only. However, EUR/GBP is staying to look heavy well below 0.88 level. EUR/AUD, thanks to the comparative strength of both currencies, breached an important near term support at 1.2805. We'd start to be cautious on deeper selloff in the euro in crosses, which could trigger further pull back in EUR/USD and EUR/JPY.

At a State Council meeting, Chinese Premier Wen Jiabao announced that the government would accelerate measures to curb the country's real estate market. Xinhua News, the CPC government's press agency, stated that the government would take various measures "ranging from raising the minimum down payment and higher interest rates for second-home mortgages to putting a conditional ban on the buying of properties by non-local residents" as "21 of 27 cities monitored register sales of floor space more than five times the area of the corresponding holiday week last year and at higher prices". Meanwhile, "40 of China's 70 major cities saw property prices rise from the previous year, compared with 18 cities in November and 14 in October". The government would maintain (may increase) the land supply and boost the construction of the government-subsidized housing for low-income households. Xinhua also cited media reports that the government would raise down payment for second-home purchasers 70% from 60% and increase he mortgage rate 1.3 times the benchmark interest rate instead of the current 1.1 times..

Looking ahead, Germany Ifo will be the main focus in European session and is expected to show mild improvement. Germany will also release finalized Q4 GDP reading. Canadian dollar will dominate US session with CPI and retail sales featured.