Congressional resistance to bailout package keeps impatient markets nervous - USD sell-off takes a brief pause. Germany IFO on tap.

• US Jul. House Price Index fell -0.6% vs. -0.2% expected
• US Sep. Richmond Fed Manufacturing Index out at -18 vs. -12 exp. and -16 in Aug.
• US Weekly ABC Consumer Confidence out at -41 vs. -43 expected
• Australia Sep. DEWR Skilled Vacancies out at -3.5% vs. -2.0% in Aug.
• New Zealand Q3 Westpac NZ Consumer Confidence out at 104.8 vs. 81.7 in Q2
• Sweden Sep. Consumer Confidence out at -14.4 vs. -17.0 expected

• Germany Sep. IFO Business Climate Survey (0800)
• EuroZone Jul. Current Account (0800)
• UK Sep. CBI Distributive Trades (1000)
• Norway Norske Bank announces rates (1200)
• US Aug. Existing Home Sales (1400)
• US Fed's Bernanke to testify before Congress (1400)
• US Weekly Crude Oil and Product Inventories (1435)
• US Fed's Bernanke and Treasury's Paulson to Testify on Financial Crisis before House Panel (1830)
• UK BOE's Sentance to Speak (2045)
• New Zealand Q2 Current Account (2245)
• Japan Aug. Merchandise Trade Balance (2350)
• Japan Aug. Corporate Service Prices (2350)
• Australia Jul. Leading Index (0000)

Market Comments

Politicians on the Senate's Banking Committee gave Bernanke and Paulson a five-hour grilling yesterday, and gave the market the overall impression (judging from reactions) that immediate passage of Paulson's proposed bailout package has been thrown into doubt. The pair also face hearings before a House panel today. Although the doubts raised by the Senate are significant, we believe the forces operating here are too powerful for the legislature to offer any meaningful resistance and that passage of some form of the bailout package will more than likely occur in the coming days. The question is of course how the markets will react? While there may be a brief relief rally of a week or two on this, it is more than like that there are more difficult questions for markets ahead. On the credit spread/crunch issue, there is still the very open-ended question of the insanely complex CDS market and how its disruptions will be sorted out and how the US government will approach regulating this market. In the much longer run, the Paulson plan is likely to offer significant and necessary stability to the market place for mortgages and help ease the mark-to-market pressures on all financial institutions.

But once we get through another iteration or two of these serial credit crises, we will move along to the necessary outcome of this giant spasm in credit markets: a very weak global economy as overstretched consumers around the world retrench due to the effects of their assets having been devalued, tighter and more appropriately priced credit conditions generally, and the desire to shore up their personal balance sheets against the uncertainties of the future. It's possibly that only once we reach that phase that we will see the USD begin to return to a stronger stance. In the meantime, we could be in for a bit of a rocky road over the next month or two.

For today, we focus on the German IFO data, which is likely to show another decline to a multi-year low. The preliminary PMI numbers from Germany and Europe more broadly yesterday continue to show a decelerating economy. The question is whether the market really cares about the economic fundamentals at the moment as all focus has been on the US bailout package and how/whether it will work. So the stance appears to be a buy on the dips for EURUSD as long as it remains above 1.4600 (with caution on the prospects for a further rally if 1.4500 falls....)

The low yielders have been a bit weak considering the nervous environment - possibly due to the snapback in commodities and the fact that yields have remained fairly elevated over last couple of session. The Warren Buffett investment in Goldman Sachs was also a headline grabber and might be taken by some that it's time to buy risk assets (we must remind ourselves that we commoners don't have access to the kind of deal Mr. Buffett receive on his investment, so this announcement needs to be taken with a grain or two of salt.) The weakness in JPY and CHF could continue for a bit if it the market gets its bailout package and if we see commodities continue higher and equities bounce. But further out, we would look for a dramatic return to strength for JPY and CHF as the grimmer prospects for the global economy and the continued deleveraging of the financial sector come back into focus.

Chart: USDCAD
USDCAD is at a very interesting support area around 1.0300. If this support is unable to hold, it appears the pair could be headed for a quick test back to parity.