The Treasury International Capital system report printed positive for the month of February at $22 Billion versus -$36 Billion in January providing a sign of relief to the market that was concerned about the growing trend of capital outflow from US.

As we noted, today’s TICs report could prove pivotal to the currency market if it prints yet another negative number. The market is anticipating a rebound to $27 Billion from the prior month deficit of -$43 Billion. However, if the report shows yet another outflow of capital from US for the fourth month out of the past five, it could send tremors through the currency market highlighting the vulnerability of US balance sheet position.

FOMC's stunning announcement yesterday that it will buy up to $300 Billion in Treasury bonds took the currency market by surprise and rallied the EUR/USD by more than 500 points in less than 24 hours. As we wrote earlier the FOMC announcement ,” represents an 'all-in' bet on massive monetary stimulus in order to stem the worst contraction in the US economy since World War II. The move is of course wildly dilutive to the currency with nearly $1 Trillion created out of thin air. Little wonder then why the dollar collapsed across the board even as other asset classes rallied. It also indicates that the Fed may have come to the conclusion that the two biggest customers for US debt – China and Japan – may be unable or unwilling to provide additional capital to finance the gargantuan expansion of US fiscal spending this year and next.”

Japan reported a Current Account deficit today as export demand and higher yen significantly reduced export earnings while global credit crisis lowered the value on overseas investments. Japan’s Current Account balance fell to deficit of -172.8 Billion yen from a surplus of 125.4 Billion yen a year ago.

All eyes have been on Washington today with Fed Chairman Ben Bernanke testifying before Congress and Treasury Secretary Geithner releasing details on the US’ capital assistance program. The financial markets have been waiting for the details from the Treasury since they first announced the Financial Stability Plan and now investors have reacted positively. The Dow Jones Industrial Average turned positive temporarily after having been down close to 200 points this morning. Interestingly enough, the recovery in US equities has failed to have a meaningful impact on the currency market. The US dollar strengthened across the board and has remained strong going into the close of the US trading session.

The drop in the GBP/USD at the start of this week has been nothing short of astonishing. In less than 48 hours the pair erased more than 1000 points off its price depreciating by more than 6% against the dollar. Although cable has been in decline since the turbulent markets of last fall, this latest freefall carries a whiff of true panic about it as markets fear that that UK government spending schemes to rescue the country’s ailing banking sector will put unsustainable stress on the Treasury.

The euro rebounded in Asian and early European trade tonight after yesterday’s ECB’s decision to lower rates by 50bp to 2.00%. The pair reached its lowest level in a month yesterday when it hit a low of 1.3024 after Jean Claude Trichet admitted that the economic situation in the Eurozone was deteriorating rapidly and suggested that more cuts would be coming.