Focus on the releases not what Bernanke says in Q&A

The market is focused on what Ben is going to say, but they should be alert to the release of the forecasts which come first. The Fed’s projections of ‘central tendency’ for GDP, unemployment, and inflation will be released at the beginning of the press conference (2.15 EST) and could be the actual market mover rather than Ben’s performance during question and answers.

The recent rally in US Treasuries suggests that the market is priced for a dovish FOMC. The press conference is expected to touch upon several topics, including the timing of the withdrawal of liquidity and the impact of commodity prices on the FOMC’s economic outlook.

Elsewhere, Cable has found support after a solid UK GDP release this morning (+0.5%), even the Euro-zone’s industrial orders rising +0.9% on the month and +21.3% on the year is supporting the single currency short term as capital markets shift their attention to the FOMC.

The US$ is weaker in the O/N trading session. Currently, it is lower against 15 of the 16 most actively traded currencies in a ‘volatile’ session.

US data releases did little for the dollar yesterday, despite being somewhat more positive. Consumer’s current assessment of economic prosperity, fueled by job prospects, edged up +1.6 points this month to 65.4 from March’s unrevised print of 63.4. It failed to recapture all of last month’s loss which plummeted on consumer’s pessimism of the six-month outlook (-16.2 points). This month’s present expectations category was again outpaced by future-expectations. Digging deeper, the present situation rose +2.1 points to 39.6 on the belief ‘jobs were plentiful’, while the six-month outlook advanced +1.3 points to 82.6. It seems that higher energy prices are again weighing on expectations.

February’s S&P/Case-Shiller House Price Index printed a -3.3%, y/y, decline, meeting market expectations, deteriorating from a -3.1%, y/y, decline in January. On a monthly basis, the seasonally adjusted (10 and 20-city index’s) felly by -0.2%, compared to a -0.3% fall in January. It was the smallest seasonally adjusted monthly fall in over a year.

The USD is lower against the EUR +0.21%, GBP +0.51%, CHF +0.07% and higher against JPY -0.36%. The commodity currencies are mixed this morning, CAD +0.00% and AUD +0.39%.

Investors seem to collectively dislike the dollar, otherwise the loonie should have traded much lower yesterday as commodities came under pressure. It seems that the consumers ‘disgust for US monetary and fiscal policy’ had the ‘small’ positive CAD carry overcome this drop in commodity prices.

Fundamental reason have aided the CAD rise of late, but the speed of its rise has been somewhat over zealous, requiring a pull back from its four-year high print of last week that occurred after the stronger than expected domestic inflation data. The market has been pricing in a tightening bias for the July BoC meeting.

Expect investors to covet the loonie as an alternative to the EUR and the dollar, assuming risk appetite remains the same and Bernanke gives the market no more surprises (0.9525).

The AUD has rallied to a post-1983 float high above 1.08 overnight after higher-than-expected Australian CPI-inflation in the first quarter has increassed expectations of further RBA rate hikes. Inflation rose +1.6%, q/q, far higher than the consensus forecast of +1.2%, pushing the year-on-year rate to +3.3% from +2.7% in the fourth quarter. It seems that flood related food price spikes and higher oil prices drove the headline. However, the underlying inflation was also high, rising +0.9%, q/q to +2.3% from +2.2%, y/y in the fourth-quarter.

Currently, the RBA seem comfortable with interest rates as highlighted in the released minutes earlier this month. The Governor viewed his policy setting as appropriate, saying they will ‘look through’ higher inflation and slower growth stemming from natural disasters. It’s expected that Governor Stevens will want to see more data that’s not so distorted by weather, which may take some time to come through, before moving on rates again.

Australian yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on any pullbacks as the currency marches towards 1.10 outright(1.0825).

Crude is little changed in the O/N session ($112.35 +14c). Oil prices remain range bound, despite the dollar underperforming and MENA unrest. Even comments from the Saudi’s about the impact of high oil prices on the global economy have been unable to provide sustainable pressure on the commodity just yet. Investors are waiting for the potential of ‘a signal of a change in monetary policy from the Fed’ this afternoon.

To a certain extent, last week’s EIA report has provided a level of support for crude. Supplies of commodity fell -2.32m barrels while the market had forecasted a stock increase of +1.3m. Gas inventories fared no better, falling -1.58m barrels. Stocks were expected to decline by -1.75m barrels. Year-to-date, crude has rallied +20%.

The IEA said it maintains its 2011 global oil demand growth forecast but noted that the high oil prices are beginning to dent demand growth based on its preliminary data for January and February. Both the IEA and IMF have said that prices above the $100 watermark are beginning to hurt the global economy.

Recent price movements are being dictated by the value of the dollar and on speculators pushing prices to extremes. Even OPEC sides with the other agencies and added that they are unlikely to alter output targets when it meets in June as there is ‘no shortage of oil anywhere in the world’ even after supply curtailments in MENA.

Gold came under pressure yesterday from investor uncertainty over the likely course of Bernanke and company’s monetary policy and tomorrows USD GDP release. Some investors were happy booking profits on event risk despite the dollar remaining under pressure.

It seems that gold’s usual inverse relation to the dollar has been weakening over the last few trading sessions. To date, the rally has been strong and it’s not surprising to see some profit-taking ahead of the FOMC meeting and Ben’s first public appearance post-rate announcement.

On these pullbacks, prices remain supported on speculation that record-low interest rates will encourage demand for an inflation hedge amid expectations that the Fed will maintain its accommodative monetary policy. Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise.

The precious metal has become the currency of choice, rallying +30.5% in the past year. At the moment, any price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets, especially metal being used as a store-of-value ($1,508 +$4.70c).

The Nikkei closed at 9,691 up+133. The DAX index in Europe was at 7,399 up+43; the FTSE (UK) currently is 6,064 down-6. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (3.35%) and is little changed in the O/N session.

Ten year product yields have fallen to a new-month low on speculation that the Fed will keep overnight lending rates accommodative and consider steps to stop yields from rising as the end of QE2 approaches.

With the auctions also this week, it’s difficult for the market to set up to take down the product. That’s probably why, even with equities rallying, dealers are keeping things close to their chest.

Yesterday’s $35b 2-year auction was fair, printing a yield of +0.673% that was 3.06 times subscribed versus the four-auction average of 3.34. Indirect bidders took +37.9%, while direct took down +13.4%. Dealers will now change their focus to today’s $35b 5-years and tomorrows $29b 7’s. Now we wait for Ben’s first post-FOMC announcement appearance.

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