It works fine for me.Does not work, both ways.
Hereby I confirm that the option Default avatar type: Text or Image is completely USELESS.
Because after selecting "Text" as avatar type, I entered something in 'Default Avatar Text' like : abcd but even that is not working.
So, I assume that it does not matter whether you choose Default avatar type as Text or Image, it simply does not work.
Let me know anybody, if you are using it successfully in Xenforo2 with UI.X2.
In my short test, it appears that the default avatar is for "guests" and not users already registered.