It’s your move, US Congress

US Fed Chairman Bernanke’s pivotal semi-annual testimony on the state of the economy and the Fed’s monetary policy, is up shortly – today before a Senate panel and tomorrow before a House panel. Will US lawmakers provide any hint that Helicopter Ben’s cash drops will end with the expiration of QE2?

RBA and Australia Retail Sales
The RBA was out with a fairly dovish assessment on policy and noted that the currency’s strength is helping to allay inflation risks. The current rate of 4.75% was described as “mildly restrictive” Still, the market took expectations a few bps higher after the bank’s meeting and is still looking for another hike and then some over the next 12 months. Australia Retail Sales were out slightly stronger than expected on the headline, but the headline disguised the weakest level of discretionary spending in two years.

With copper prices on a torrid four day rally that is also reflected in the equity market (where the S&P500 future this morning is back to within a percent of the recent high for the cycle, it is now surprise to see AUDUSD pushing the 1.0200 resistance. Let’s see if the Bernanke testimony accelerates or throws up a roadblock in front of current developments. Despite the apparently risk positive environment, we have noted some measures of risk willingness express some degree of worry, and the rate spread between Australia and US at the short end of the curve has hardly budge from the lower end of the recent range, so we look on any further rally in AUDUSD with some degree of suspicion from a fundamental angle, even if a break is a break if the pair manages to close the day above 1.0200.

China
The HSBC measure of Chinese manufacturing was barely above the 50 mark, suggesting that Chinese manufacturing is barely expanding while PMI’s elsewhere in the world are hitting or close to cycle peaks. The noise level from Chinese authorities on the need for further tightening to get inflation under control has increased sharply in recent days. Premier Wen Jiabao announced over the weekend that a new growth target of 7% per year will be announced for the coming five-year plan versus 7.5% for the previous plan, and that growth needs to be of better quality and spread to more participants in the economy. There are also announcements emerging related to the need to reduce loan growth, etc. A Chinese slowdown is an important factor to consider for all markets in the coming months as we watch for whether the regime there can engineer a soft landing.

UK
The UK manufacturing PMI was a bit stronger than expected and the Nationwide housing price data and national mortgage activity data (some spillover from a very weak December there, no doubt) was fairly positive. This saw the pound following through on its comeback yesterday against the Euro and it even managed to post a new high vs. the USD before GBPUSD shied back away from the 1.6300 level later ahead of the Bernanke testimony. The interest rate spreads between the UK and the US are still below where they were at their widest levels some days ago.

Bernanke testimony today
The Bernanke testimony starts today (and continues tomorrow before the House) as Bernanke is set to appear before the Senate panel. The market really appears to be building a strong case for a very dovish performance from the Fed chairman as the year forward interest rate expectations have absolutely collapsed over the last couple of weeks (the March 2012 EuroDollar STIR, for example, has rallied a frantic 36 ticks since the lows at mid-month and is back close to its January high). An article out today in Bloomberg may be encouraging the view that US Republican lawmakers are less likely to crack down on the Fed since Bernanke has made noises recently about the need for the US government to tighten its fiscal belt. (Of course, Bernanke could help this process by not monetizing the US deficit, but that is conveniently not a part of the discussion).

Bank of Canada preview
Bank of Canada rate expectations have hardly budged so far this year, but still-high oil prices, a vigorous bounce in equities, and diving Fed rate expectations coming into today’s Bernanke testimony have seen USDCAD testing its lowest levels since late 2007. While recent terms of trade improvements for Canada suggest that the Canadian economy is doing quite well despite the very strong currency, we would still expect that the Bank is reluctant to signal any dramatic worries about inflation in order to avoid a further spike in the Canadian dollar. More than 75 bps of tightening is priced into the year forward for the Bank of Canada – will the Bank want to encourage this speculation or throw ice on it. We suspect that Carney will do his utmost to say as little as possible and couch everything in very cautious language.

Looking ahead
As EURUSD flirts with the final short term resistance area ahead of the Bernanke testimony, it is important to consider the bigger picture here – not only the degree of Fed dovishness in light of recent inflation threats, but also the fate of the EuroZone project and its single currency. And on that account, the excellent commentary from Bloomberg’s Matthew Lynn from today is worth serious consideration: essentially that the popular will is diametrically opposed to the Euro project, whether in Ireland and Greece or in Germany and that a politician’s fight for the Euro cause is a fight for his or her own demise. In democratic countries, is it not a politician’s job to listen to the will of the people? Remember that we have the critically important Euro summits coming up later this month. We also have the ECB later this week for those who are more concerned about the likelihood of the ECB futzing around with rates in coming months rather than the entire EuroZone project.

Chart: EURUSD
EURUSD is poised near the recent highs as we head into today’s Bernanke testimony. We all know that the Fed Chairman will talk up the virtues of the Fed’s actions and the wonderful effects they are having on the economy and especially equity markets (thanks a billion, POMO power!). He will also “talk tough” on the need for the US government to get tough on the budget to subtly send some of the responsibility for the coming times of trouble their way. The question is whether US lawmakers will swallow this pablum whole or are actually finally willing to stand up to the Fed and its disastrous policies. We don’t have any great hopes – but a toehold of resistance that suggests enough pressure may be building against the Fed to stop the possibility of QE3 might be a start for the greenback. We’ll check back in later today with our first impressions of the first day of testimony.

Up later today we also have the ISM Manufacturing for February. It is interesting to consider whether the new Obama package will artificially pump the ISM (yes – but for how much longer this year?) for a because of the massively accelerated depreciation it allows for companies this year on new equipment.

Be careful out there.

Economic Data Highlights

• Australia Feb. AiG Performance of Manufacturing Index out at 51.1 vs. 46.7 in Jan.
• Japan Jan. Jobless Rate out unchanged at 4.9% as expected
• Japan Jan. Overall Household Spending out at -1.0% MoM vs. -1.4% expected
• Australia Jan. Retail Sales out at +0.4% MoM vs. +0.3% expected
• Australia Q4 Current Account Balance out at -7299M vs. -7000M expected and -6490M in Q3
• China Feb. PMI Manufacturing out at 52.2 vs. 52.1 expected and 52.9 in Jan.
• Japan Jan. Labor Cash Earnings out at +0.2% YoY vs. +0.3% expected and vs.+0.1 % in Dec.
• China Feb. HSBC Manufacturing PMI out at 51.7 vs. 52.5 expected and vs. 54.5 in Jan.
• Australia RBA Cash Target unchanged at 4.75% as expected
• Switzerland Q4 GDP out at +0.9% QoQ and +3.1% YoY vs. +0.5%/+2.7% expected, respectively and vs. +2.6% YoY in Q3
• UK Feb. Nationwide House Prices rose +0.3% MoM and fell -0.1% YoY vs. -0.2%/-0.2% expected, respectively and vs. -1.4% YoY in Jan.
• Sweden Feb. Swedbank PMI Survey out at 60.9 vs. 61.5 expected and 61.5 in Jan.
• Norway Feb. PMI out at 58.7 vs. 56.2 expected and 56.0 in Jan.
• Sweden Q4 GDP out at +1.2% QoQ and +7.3% YoY vs. +1.0%/+7.0% expected, respectively and vs. +6.9% YoY in Q3
• Switzerland Feb. SVME PMI out at 63.5 vs. 60.9 expected and 60.5 in Jan.
• Germany Feb. Unemployment Change out at -52k vs. -18k expected and -18k in Jan.
• Germany Feb. Unemployment Rate out at 7.3% vs. 7.4% expected and vs. 7.4% in Jan.
• UK Feb. PMI Manufacturing out at 61.5 vs. 61.0 expected and 61.5 in Jan.
• UK Jan. Net Consumer Credit out at -0.3B vs. +0.2B expected and +0.8B in Dec.
• UK Jan. Net Lending Security on Dwellings out at +1.8B vs. +0.1B expected and -0.3B in Dec.
• UK Jan. Mortgage Approvals out at 45.7k vs. 42.9k expected and 42.7k in Dec.

Upcoming Economic Calendar Highlights (all times GMT)

• Canada Bank of Canada Rate Announcement (1400)
• US Fed’s Bernanke to testify before Senate committee (1500)
• US Jan. Construction Spending (1500)
• US Feb. ISM Manufacturing (1500)
• US Weekly API Crude Oil and Product Inventories (2130)
• US Feb. Total/Domestic Vehicle Sales (2200)
• Australia Jan. HIA New Home Sales (0000)
• Australia Q4 GDP (0030)