Wen Fighting Prices Converges With Obama on Yuan: China Credit

China, facing the fastest inflation in almost two years, is allowing the yuan to strengthen the most since 2005 even as the U.S. and Europe say Premier Wen Jiabao isn’t doing enough to let the currency appreciate.

The yuan’s 1.7 percent advance last month was the most since July 2005. Non-deliverable forwards show that traders expect it to climb another 3.6 percent in a year, the most bullish projection since November 2009. The currency’s 24 percent gain since the start of 1999 is the third-best performance among 25 emerging markets tracked by Bloomberg.

Wen, 68, is allowing the yuan to strengthen after inflation reached a 22-month high of 3.5 percent in August. The government will report Oct. 21 that consumer prices climbed 3.6 percent in September from a year earlier, according to the median estimate of economists surveyed by Bloomberg. Price increases have the potential to trigger social unrest in China, where the 1.3 billion population gets by on little more than $10 a day on average, Wen said in March.

“While there are geopolitical and political pressures for China to appreciate its currency, there are also domestic reasons, especially on the inflation angle,” said Robert Minikin, senior foreign-exchange strategist at Standard Chartered Plc in Hong Kong. The bank raised its end-2011 estimate for the yuan two weeks ago to 6.36 to the dollar from 6.50.

China, the world’s fastest growing major economy, has limited gains in the yuan to about 2 percent against the dollar since June.

Obama Criticism

U.S. President Barack Obama said last month that the yuan is kept undervalued to give Chinese exporters an unfair trade advantage. The House of Representatives passed a measure on Sept. 29 that would let American companies seek duties on imports from China to compensate for the effect of a weak yuan.

The challenge for China’s policy makers is to allow yuan appreciation that is fast enough to help curb inflation without causing a jump in inflows of foreign capital that will add to record foreign-exchange reserves and worsen asset-price bubbles. Central bank Governor Zhou Xiaochuan said on Oct. 8 that China prefers appreciation “in a gradual way,” instead of a sharp revaluation that may hurt the economy.

‘Careful Review’

Zhou, 62, reiterated last week there would be a “very careful review” of economic policy to contain inflation and prevent asset bubbles. The central bank temporarily raised reserve requirements for six large commercial banks by half a percentage point, three people with knowledge of the matter said. The People’s Bank of China declined to comment.

Five-year interest-rate swaps, the fixed rate needed to receive the floating seven-day repurchase rate, have gained 25 basis points to 2.99 percent since the start of September, according to data compiled by Bloomberg. The yield on the 3.28 percent government bond due August 2020 has climbed 18 basis points in the same period to 3.40 percent, Interbank Funding Center data showed.

The risk of insuring against a default by the Chinese government is falling. Five-year credit-default swaps contracts on the nation’s bonds fell 26 percent in the past month, the biggest drop among more than 80 nations, and ended yesterday at 54 basis points, according to data compiled by CMA and Bloomberg.

Bonds Rise

China’s $1 billion of 4.75 percent bonds due October 2013 rallied in the past month, sending the yield down 20 basis points to 1.48 percent, according to prices compiled by Bloomberg. The extra yield investors require to hold China’s debt instead of Treasuries was 88 basis points on Oct. 8, according to JPMorgan’s EMBI Global Index.

China Development Bank Corp. sold 2 billion yuan ($300 million) of three-year bonds in Hong Kong that pay a coupon rate of 10 basis points over the five-day average of the three-month Shanghai Interbank Offered Rate, according to an e-mailed statement yesterday.

Twelve-month non-deliverable yuan forwards dropped 0.07 percent to 6.4420 per dollar as of 1:13 p.m. in Hong Kong. The yuan’s rate in the spot market was little changed at 6.6710, after yesterday touching 6.6610, the highest since the central bank unified official and market exchange rates at the end of 1993.

After keeping the exchange rate stable for a decade, China from July 2005 allowed its currency to strengthen 21 percent over three years before stopping the ascent as the global financial crisis curbed exports.

Price Swings

Implied volatility on one-month dollar-yuan options, a gauge of expected swings in exchange rates, jumped to 5.1 percent on Oct. 7, the highest level since January 2009, data compiled by Bloomberg show. It was as low as 0.45 percent on Jan. 1. One-month options granting the right to buy the yuan against the dollar cost 87 basis points, or 0.87 percentage point, more than contracts that allow sales, up from a 12-month low of 20 reached on Sept. 1, the data show.

Sydbank A/S, Denmark’s third-largest bank, said China may permit as much as 5 percent yuan appreciation against the dollar in a year to reduce import costs and help contain inflation. The median forecast of analysts surveyed by Bloomberg is for the currency to climb 4.2 percent to 6.4 by the end of 2011.

‘Easily Achieved’

“A 4 to 5 percent appreciation can be easily achieved in one year’s time,” Hans Bachmann, a money manager in Aabenraa at Sydbank, which oversees $8.2 billion of assets, said in an interview. “It can help take some strength away from the export sector. If the export sector grows too fast, it will also add to overheating risks.”

The reserve-requirement increase comes after banks were ordered to set aside more funds three times earlier in the year to cool a lending boom.

Yuan positions at Chinese lenders resulting from the central bank’s foreign-currency purchases expanded by 243 billion yuan in August, the biggest increase in four months, official figures show. China’s benchmark one-year deposit rate of 2.25 percent exceeds its U.S. equivalent of 0.688 percent.

The State Administration of Foreign Exchange, the nation’s currency regulator, today pledged to crack down on speculative capital inflows in the second half of this year. The agency also said the market should shed its “one-way” expectation for yuan appreciation.

China’s foreign-exchange reserves may have surpassed $2.5 trillion in the third quarter. Currency holdings rose about $48 billion, compared with a $7 billion gain in the previous three months, according to the median estimate in a Bloomberg survey of economists before a report due this week.

There are “rising speculative capital inflows as bets on appreciation grow,” said Hu Hangyu, a Beijing-based bond analyst at Citic Securities Co., China’s largest listed brokerage. “Those who bring hot money into China can make money by simply depositing their cash at Chinese banks.”

--Judy Chen, Patricia Lui. Editors: James Regan, Sandy Hendry

Dollar to Weaken 10% to $1.50 per Euro as Central Banks Sell, Faros Says

The dollar will fall 10 percent by December against the euro, extending its biggest quarterly loss since 2002, as Asian and South American central banks sell greenbacks for Europe’s common currency, said Faros Trading LLC.

Faros, which executes currency transactions on behalf of hedge funds and institutional clients, estimates policy makers in the two regions purchase about $12 billion a day to curb the strength of their currencies and support exporters. Unwilling to hold on to dollars, the central banks then sell those greenbacks for currencies including euro, yen and sterling, it said. Faros correctly predicted in July that the euro would rise 6 percent to $1.3684 over two months.

“The real weakening of the dollar is coming from Asian central banks who are essentially selling the dollar every single day as they get out of the dollars that they’re buying through intervention in Asia,” said Douglas Borthwick, Stamford, Connecticut-based head of trading at Faros. “We see continued dollar weakness going forward and expect the euro to strengthen a further 10 percent through the end of the year.”

The dollar traded at $1.3656 per euro as of 6:44 a.m. in Tokyo, falling for a third straight week. A decline of 10 percent to exceed $1.50 would see the greenback trading at its lowest level since December 2009.

The U.S. currency climbed as high as $1.1877 per euro on June 7, the strongest since March 2006, as concerns over budget deficits in nations including Greece, Portugal and Spain prompted speculation among investors that the European Union’s currency was in danger of collapse.

Currency Reserves

The dollar’s share of global foreign-exchange reserves rose in the second quarter as investors sought safe assets at the height of the European crisis. Allocations climbed to 62.1 percent in the second quarter from 61.7 percent in the previous three months, the International Monetary Fund reported yesterday. That was down from the 62.8 percent held in the same period a year ago.

The euro’s share declined to 26.5 percent from 27.2 percent in the previous quarter and an all-time high of 27.8 percent in the three months ended Sept. 30, 2009. The yen’s share rose to 3.3 percent from 3.1 percent.

The euro has climbed 15 percent since its June low after European officials unveiled in May a 750 billion euro ($1 trillion) backstop to blunt the sovereign-debt crisis and restore confidence in the common currency.

Diversification away from the dollar will begin to register in IMF reserves data amid selling by Asian and South American central banks, Borthwick said.

Quantitative Easing

Faros expects the dollar to also weaken as the Federal Reserve announces another round of so-called quantitative easing asset purchases to spur growth and support prices. The Dollar Index, which tracks the greenback against the currencies of six trading partners, has dropped 3.3 percent since Fed policy makers signaled Sept. 21 their willingness to expand monetary policy stimulus.

Policy makers said that day they were “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

The policy-setting Federal Open Market Committee next meets Nov. 2-3 in Washington.

Pound Rises Against Dollar, Yen on Stock Gains; Gilts Decline

The pound rose against the dollar and the yen, fueled by gains in stocks and signs the global economic recovery is being sustained.

The pound also strengthened against 14 of 16 most active currencies as a report showed China’s manufacturing expanded at the fastest pace in four months in September and Fitch Ratings boosted its 2010 growth forecast for the U.K. The FTSE 100 Index jumped 0.9 percent, snapping two days of declines.

“The data from China suggests that perhaps the pessimism in the market about the global economy has gone too far,” said Jane Foley, a senior currency strategist at Rabobank International in London. “It injects some risk appetite into the market, and the pound reacts positively to that.”

The pound increased 0.7 percent against the dollar to $1.5832 as of 1 p.m. in London. Sterling jumped 5.2 percent in the third quarter, its biggest three-month gain since the period ended June 2009. It traded 0.4 higher against the yen at 131.8.

Gilts fell as gains in stocks reduced bids for fixed-income securities. The yield on the 10-year gilt climbed 4 basis points to 2.99 percent, and the two-year yield was up 2 basis points, to 0.67 percent.

An index of U.K. manufacturing growth dropped to a 10-month low last month, with the gauge falling to 53.4 from a revised 53.7 in August, data from the Chartered Institute of Purchasing and Supply and Markit Economics said today. The median estimate of 23 economists in a Bloomberg News survey was for a reading of 53.8. A measure above 50 indicates expansion.

Weekly Move

Gilts handed investors a 3.8 percent return in the third quarter, beating a 2 percent gain from German bonds and a 2.7 percent increase from U.S. Treasuries, according to indexes compiled by Bank of America Merrill Lynch.

Further gains in the pound may be limited. The currency is headed for a weekly loss against 14 of 16 most active currencies on speculation that the Bank of England will soon resume its bond-purchase program to support the economy. The so-called quantitative easing may undermine sterling as it’s seen as inflationary.

Policy maker Adam Posen said this week that Bank of England officials should discuss more bond purchases. The British Chambers of Commerce, a lobby group representing 100,000 companies, gave its backing to Posen’s idea.

“Adam Posen is right, BCC Chief Economist David Kern said in an interview in London. “All the evidence that we have suggests growth is slowing. Possibly as early as November we will get more quantitative easing.”

The pound has fallen 4.4 percent against developed-world currencies so far this year, according to Bloomberg Correlation- Weighted Currency Indices.

‘Global Factors’

Gilts declined alongside AAA-rated German bonds and French government securities as peripheral bonds, including those issued by Spain and Ireland, rallied amid signs that Europe’s high-deficit countries are tackling their crises.

Ireland’s government said yesterday it’s preparing to take majority control of Allied Irish Banks Plc and pump extra cash into Anglo Irish Bank Corp. to draw a line under its financial crisis.

“Gilts have fallen on global factors,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Data-wise, Europe’s doing well and plans have been announced that have given the market that bit of belief that maybe there is a way out of it. It’s taken a little bit of the edge off the gilt market.”

Demand for Europe’s safest assets also declined as European Central Bank Governing Council member Ewald Nowotny said the central bank will continue buying government bonds from countries with fiscal problems as long as there are inefficiencies in the markets, Wirtschaftwoche reported, citing an interview.

“Markets are exaggerating the risk premiums” for government bonds for countries including Ireland and Portugal, Nowotny was cited as saying. “As long as these inefficiencies prevail, we will correct them.

Merkel Straddles Fences After Euro's Near-Death Experience

For a fleeting moment last spring, it was possible to believe that Europe’s economic crisis had turned Angela Merkel into a true believer in the European cause.

Three days after putting up the biggest chunk of a 750 billion-euro ($1 trillion) package to save Europe’s common currency from the Greek financial contagion, the German chancellor gave voice to a set of pro-European musings straight out of the post-World War II dream factory, Bloomberg Businessweek reports in its Oct. 4 issue.

European unity, she said in a May 13 speech, is the “most tantalizing, magnificent, auspicious idea.” Not only must Europe forge a genuinely integrated economy, she declared, but it needs “a common European army.”

Reality soon burst the bubble. Beer-garden rage at the idea of throwing hard-earned German money after bad Greek debt gave Merkel’s popularity numbers a kick. If an election were held today, polls show, Germany’s first woman leader would not win. It’s a reminder that in Germany, which is still straining under the financial and social costs of unification, good deeds that further the cause of Europe offer no political payoff. The people who shattered Europe, then helped rebuild it, like the Continent just the way it is.

“Even in the absence of this crisis, Germany would be placing itself in the camp of the stand-pat, conservative powers,” says Jeffrey J. Anderson, a professor at the Georgetown University School of Foreign Service in Washington. A rebounding economy gives Germany “even less incentive to do anything risky on the European front. The Germans are standing back and saying: We fixed our problems with fiscal rectitude and a sober, conservative approach, and the rest of you ought to be following suit.”

Post-War Leaders

A child of Communist East Germany, Merkel, 56, lacks the emotional roots of the war-scarred German generation that built the European Union to be more than a marketplace. Konrad Adenauer bound Germany to the West in part to protect his country from itself. Helmut Kohl regarded German and European unity as two sides of the same coin--a coin that he made sure was denominated in euros. It is this legacy that Merkel is now struggling to uphold.

Merkel, a trained physicist, had her political awakening when the Berlin Wall fell. Within a year she was in the first all-German government as minister for women and youth, courtesy of Kohl’s eye for eastern talent. Her rise was so quick that she skipped the intensely local politics that gave her predecessors grassroots credibility. She also displayed a ruthless streak. When news broke in 1999 that Kohl had run a slush fund during 16 years as chancellor, Merkel, by then secretary-general of the Christian Democratic Union, publicly denounced her mentor.

Tied to Euro

Now Merkel is bound by the institutions Kohl created: the EU and the euro. As Greece veered toward default and threatened to drag Spain, Ireland, and Portugal down with it, the pressure on the euro drove the equivocating Merkel to rescue the system not because she loves Europe, but because Germany is its leading beneficiary.

While Kohl battled to keep German and European interests in perfect alignment, he was also the consummate domestic political opportunist. He dodged and weaved for months in 1990 before recognizing Poland’s border with Germany as inviolable--the same kind of fence-straddling Merkel was accused of when Greece pleaded for help. And by the end of his tenure in 1998, Kohl, with his treasury buckling under the cost of subsidizing the East, was making idle threats to stop paying into the EU budget.

‘Massively Exaggerated’

So when critics--including many from her Christian Democratic base--expressed outrage over Merkel’s handling of the debt shock, the complaints were “massively exaggerated,” says Horst Teltschik, 70, a Kohl confidant who negotiated German unification. “It would be superhuman to act immediately and know all the answers in such a crisis. Helmut Kohl wouldn’t have done it differently. Just like Chancellor Merkel, he would have been willing to take risks in order to preserve the euro.”

Merkel, the overnight political phenomenon, lacks her patron’s gift for milking a European crisis for gains at home, and now she is paying the price. In May the CDU lost control of North Rhine-Westphalia, Germany’s largest state, and with it a majority in the upper house of Parliament. A rare contested vote almost upended Merkel’s candidate for Germany’s ceremonial presidency. Battles with her coalition allies over taxes stirred talk of a leadership vacuum less than a year into her second term.

The fiscal crisis and cleanup operation confirmed Germany’s preeminence in Europe. It also made the German people even more hesitant to embark on new EU ventures: 53 percent regard the euro as a “bad thing,” according to a June poll by the German Marshall Fund of the U.S.

Reluctant Leader

Merkel is not the only reluctant leader the country has seen. Hesitancy was hardwired into Germany’s postwar politics as the nation did penance for the crimes of the Nazi regime. Its response was to wield power through the EU, in tandem with former archenemy France. That worked as the EU grew from 6 countries in 1957 to 15 in 1995, and it worked for the creation of the euro in 1999. But things are different in today’s larger bloc.

Defeats for German-French projects used to be rare; now they are increasingly common, as when other governments rejected France and Germany’s argument for a European financial transaction tax on Sept. 7. “For a long time the German-French relationship has been much more appearance than reality,” says Guenter Verheugen, 66, Germany’s EU commissioner from 1999 to 2010. “The days are gone when a German-French directorate could set the course of European integration.”

More Than Numbers

It’s not only a numbers game. German and French interests have been drifting apart since the end of the Cold War. As France tapped on the brakes, Germany was the prime mover behind the EU’s expansion to the east, seeing it not only as a moral imperative but as good for business. Eastern Europe bought 11 percent of German exports in 2009, trumping the U.S.’s 7 percent share. The eastward shift in the EU’s center of gravity also reestablished Germany’s buffer zone to Russia.

As doubts swirled around the euro, the French were the first to accuse Germany of having benefited unfairly. Europe’s economic imbalances weren’t due only to peripheral countries living beyond their means, French Finance Minister Christine Lagarde said in March. Germany was also at fault for saving too much, the argument went, spending too little, and getting rich off exports to the rest of Europe.

Export Engine

Merkel bristled at the charge that Germany, by boosting its industrial competitiveness, was winning a zero-sum European game. One prong of Germany’s export model is to invest in factories abroad. Some 64 percent of that investment is in the EU, sustaining 2.9 million jobs, according to Bundesbank data.

“The export model directly benefits other countries,” says Heleen Mees, a researcher at the Erasmus School of Economics in Rotterdam. “It’s very worthwhile for those countries to have German factories and technologies.”

Merkel has won on one point. As the EU tries to strengthen the euro region’s financial management, the onus is on weaker countries to improve how they do things, not on Germany to abandon fiscal rigor and loosen the lid on wages. Yet that’s about the only point she has taken so far. German calls for harsher sanctions on deficit offenders face resistance, and German pleas for an “orderly” default mechanism for debt- swamped countries are going nowhere.

Enthusiasm Wanes

It’s no wonder that German enthusiasm for Europe has soured, with the proportion calling EU membership a “good thing” plunging to 50 percent from 60 percent in an EU poll in May. That attitude underpins a tough German stance against increasing the EU’s annual 123 billion-euro budget. Grand European projects --- such as joint bond issuance or a centralized foreign or immigration policy --- fail to excite a country that, after centuries of strife, is at last satisfied with its place on the map.

While consenting to the EU’s unhurried expansion to the Balkans, Merkel has transformed Germany from being a supporter of Turkish membership to a die-hard opponent. The best Turkey can hope for is a “special relationship,” she said in Istanbul in March. Even in her Europe-of-the-future speech in May, the message was that the EU had enlarged too far and too fast.

What about the Europe of the present? It can look to Merkel’s Germany for crisis management, if not for bold steps that go beyond the status quo. “When the crunch comes and there’s a crisis, Europe takes action,” says Hans Eichel, 68, German Finance Minister from 1999 to 2005. “I’d like to see us make progress not only when there’s a crisis, but day in and day out. For that we need politicians with a passionate commitment, not politicians who just react to crises.

Dollar Drops to Six-Month Low as Investors Seek Higher Yields

The dollar fell to the lowest level since March versus the euro and dropped against the yen as signs the global economic recovery will be sustained buoyed investor appetite for higher yields.

The U.S. currency fell against all of its most-traded counterparts as Federal Reserve Bank of New York President William Dudley said more action from the central bank to support the economy is needed. The U.S. currency has declined 1 percent against the yen and 1.8 percent versus the euro this week. U.S. stocks and commodities jumped as consumer spending and incomes rose in August more than forecast.

“The dollar is being sold on an across-the-board basis as investors search for yield,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $20 trillion in assets under administration. “With the Fed upping the ante by saying they’re keeping the door open for quantitative easing, that is not only introduced an element of additional risk and uncertainty, but likely pushed off the day of reckoning for raising interest rates.”

The dollar declined 0.9 percent to $1.3755 per euro at 10:07 a.m. in New York, from $1.3634 yesterday. It touched $1.3764, the weakest level since March 17. The U.S. currency dropped 0.3 percent to 83.25 yen, from 83.53 yen, after falling to 83.16 yen, the lowest level since Japan intervened in foreign-exchange markets on Sept. 15. The euro advanced 0.5 percent to 114.55 yen, from 113.88 yen.

Weak Dollar

“We now have some of the clearest dollar-weakness trends in place we’ve seen for a while,” said Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. “The euro is clearly back as the anti-dollar and as you continue to get the news from the Fed that point towards QE2 being imminent, that is feeding dramatically in to euro strength.”

U.S. consumer purchases rose 0.4 percent for a second month, Commerce Department figures showed today in Washington. The gain exceeded the 0.3 percent increase projected by the median forecast of economists surveyed by Bloomberg News. Incomes were up 0.5 percent, the biggest advance this year, propelled by the resumption of extended and emergency unemployment benefits.

Factory Pace

The Institute for Supply Management’s factory index fell to 54.4 in September from 56.3 a month earlier, the Tempe, Arizona- based group said today. Readings greater than 50 signal growth.

Economists forecast the gauge to drop to 54.5, according to the median of 83 projections in a Bloomberg News survey. Estimates ranged from 51.5 to 57.

The Standard & Poor’s 500 Index rose 0.5 percent, building on the best September rally since 1939.

The Reuters/Jefferies CRB Index of raw materials added 0.5 percent as oil rose to a seven-week high after economic data from the U.S. and China bolstered optimism that demand is growing. Crude for November delivery climbed as much as 1.5 percent to $81.40 a barrel, the highest price since Aug. 10.

Asian currencies headed for a fifth weekly advance, the longest winning streak since March, after data showed Chinese manufacturing improved.

China’s purchasing managers’ index rose to 53.8 in September from 51.7 in August, the nation’s logistics federation and statistics bureau said in an e-mail. The median forecast of 15 economists surveyed by Bloomberg News was 52.5, with none forecasting such a large gain. Readings above 50 indicate expansions.

Australian Dollar Falls From Near Two-Year High After Home Approvals Drop

Australia’s dollar fell from near a two-year high after a government report home-building approvals dropped in August, giving the central bank more reason to delay raising interest rates next week.

New Zealand’s currency weakened for a second day after data showed home building permits dropped to the lowest in 13 months. The Australian dollar was still within 2 U.S. cents of the strongest since it was allowed to float freely in 1983 as the extra yield on the nation’s two-year notes over similar maturity Treasuries was near the highest since June 2008.

“This will take some of the heat out of the argument about how well the Australian economy is going,” said Michael McCarthy, head of Asia-Pacific dealing at City Index Ltd. in Sydney. “The Aussie is holding fairly firmly although we’ve pulled back from the highs above 97 cents -- there doesn’t seem to be much downward momentum at the moment.”

Australia’s dollar fell to 96.65 U.S. cents as of 4:04 p.m. in Sydney from 96.97 cents in New York yesterday, when it rose to 97.30 cents, the strongest since July 2008. The currency has climbed 8.5 percent this month and 15 percent since June 30. The so-called Aussie declined 0.8 percent to 80.53 yen.

New Zealand’s dollar dropped 0.3 percent to 73.55 cents, paring its advance this quarter to 7.4 percent. The currency slid 0.8 percent to 61.28 yen.

The number of permits granted to build or renovate houses and apartments in Australia dropped 4.7 percent in August, the Bureau of Statistics said in Sydney. Economists surveyed by Bloomberg had forecast them to be unchanged.

Rate Bets

Swaps traders reduced to 52 percent the chance the Reserve Bank of Australia will raise borrowing costs at its next meeting on Oct. 5, according to a Credit Suisse AG index, from a 64 percent probability yesterday.

Benchmark interest rates are 4.5 percent in Australia and 3 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

Australia’s dollar rose to 98.50 U.S. cents on July 15, 2008, the strongest since it was trade freely in 1983.

Sell Aussie

Australia & New Zealand Banking Group Ltd. recommended investors sell the Aussie as it approaches 98.50 cents as worsening perceptions around Europe’s sovereign debt damp demand for higher-yielding assets.

“The market is ignoring flaring concerns in Europe, particularly in the periphery, and they seem to be getting worse by the day,” said Grant Turley, a senior foreign-exchange strategist with ANZ in Sydney. “We’re expecting a shallow pullback to the low 90s.”

Investors should purchase the currency if it falls to that level, the bank said, as it predicted the currency will climb to parity versus the U.S. dollar in 2011.

Australia’s dollar is the second-best performer versus the greenback this quarter on speculation the Federal Reserve will expand stimulus measures to support growth. Demand has also been bolstered as economists forecast the Reserve Bank of Australia will raise its benchmark to 4.75 percent next week.

“If the RBA raises rates next week and the Fed does quantitative easing in November, then this could be the catalyst to push the Aussie toward parity,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia, the nation’s largest lender.

Approvals for home-building in New Zealand slumped 17.8 percent in August to the lowest since July last year, Statistics New Zealand said today, citing seasonally adjusted figures.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was little changed at 3.67 percent.

Bank of Tokyo Mitsubishi Says Sell Euro, Dollar's Weakness is `Excessive'

Investors should sell the euro against the dollar, betting the single currency will decline to $1.2650, because speculation the Federal Reserve will increase asset purchases pushed the U.S. currency too low, Bank of Tokyo- Mitsubishi UFJ Ltd. said.

“The fear of quantitative easing is now approaching excessive levels,” Lee Hardman, a strategist in London, wrote in a research note today. “We recommend taking advantage of excessive dollar pessimism to position for the euro’s renewed descent.”

The euro rose 0.3 percent to $1.3663 as of 11:10 a.m. in London.

Canadian Currency Strengthens as Economy Shrinks in Line With Forecasts

The Canadian dollar gained for the first time in four days against its U.S. counterpart after data showed the nation’s economy contracted in July, in line with economists’ forecasts.

The currency advanced against all 16 of its most-traded counterparts as Canada’s gross domestic product shrank 0.1 percent after gaining 0.2 percent in June, the government said. It was the first drop since August 2009. Economists predicted a 0.1 percent decline, and Finance Minister Jim Flaherty said yesterday the data might be negative.

“After comments from the finance minister yesterday, the market had priced in poor numbers for Canadian GDP,” Steve Butler, director of foreign-exchange trading in Toronto at Bank of Nova Scotia’s Scotia Capital unit, said via e-mail. “Coming in on expectations is actually a bit of a relief to the market, so initial reaction is a stronger Canadian dollar.”

Canada’s currency, nicknamed the loonie, appreciated 0.8 percent to C$1.0245 per U.S. dollar at 9:48 a.m. in Toronto, from C$1.0326 yesterday. One Canadian dollar purchases 97.61 U.S. cents.

Traders are trimming bets that economic growth will be strong enough for Bank of Canada Governor Mark Carney to raise borrowing costs at a fourth consecutive policy meeting next month because the U.S. economy, consumer of about three-quarters of Canadian exports, remains fragile. The U.S. said today its economy grew at a 1.7 percent annual rate in the second quarter, compared with a 3.7 percent pace in the first quarter.

‘Limits’ on Divergence

The Federal Reserve said last week it’s “prepared to provide additional accommodation” to spur U.S. growth. Carney said later in a speech there are “limits” to how far monetary policy in the two countries can diverge.

Probabilities of a quarter percentage-point increase at the Oct. 19 Bank of Canada meeting stood at 18 percent today, down from 40 percent two weeks ago, according to Bank of Nova Scotia data derived from overnight index swaps. Bank of Montreal pegged the odds of an October rise at 20 percent.

“This morning’s number will not likely add to any” expectations for an increase, Jack Spitz, managing director of foreign exchange at National Bank of Canada, said by phone from Toronto. “It may even take away from some of the pricing-in that’s already in the market. I see it as confirming the market’s overall bias against a rate hike in October.”

Canada’s government bonds fell, pushing the 10-year note’s yield 3 basis points higher, or 0.03 percentage point, to 2.77 percent. The price of the 3.5 percent security maturing in June 2020 dropped 26 cents to C$106.19.

Reverse Head-and-Shoulders Supports Euro, Citi Says: Technical Analysis

The euro may strengthen further against the dollar after rallying through $1.292 to form a so- called reverse head-and-shoulders pattern, according to Citigroup Inc., citing technical analysis.

The break of the $1.292 level contributed to the pattern, which is produced when price movements in a security form three bottoms, the middle of which is the deepest. The level that unites the troughs between the peaks is known as the neckline.

“The euro has broken and stayed above levels that suggest that it can push higher,” said Tom Fitzpatrick, chief technical strategist at Citigroup in New York. “People are not as short euro-dollar as they were, but the general sentiment is still bearish.”

He said the euro should rally and test $1.325 versus its U.S. counterpart.

“A close back below support at $1.2920 would question the bullish setup,” Fitzpatrick wrote in a note.














The U.S. dollar has gained 10 percent against the euro since the start of the year. The euro was little changed today at $1.3009.

“The market will need to see more in the near-term, but this is potentially a building block to a higher euro and weaker dollar,” Fitzpatrick said.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

`Mr. Yen' Says Japan Can't Stem Currency's Rise as U.S. Economy Falters

The Japanese yen, the best performer among major currencies this year with a 7.9 percent gain against the dollar, may surge further as concern grows that U.S. efforts to boost economic growth will fail.

“What we are seeing is not appreciation of the yen but weakness of the dollar, reflecting concerns that the U.S. economy may falter,” Eisuke Sakakibara, formerly Japan’s top currency official, said yesterday on the Fuji television network. “There is a chance the yen will reach an all-time high and stay at that level for the time being.”

The Japanese government has yet to formulate strategy for stemming a yen surge that threatens the earnings of exporters including Toyota Motor Corp., Honda Motor Co. and Canon Inc. A report today probably will show the nation’s economy grew at the slowest pace in three quarters in the period ended June 30, economists surveyed by Bloomberg News forecast.

The yen reached 84.73 to the dollar on Aug. 11, a high since July 1995. Sakakibara -- known as “Mr. Yen” for his efforts to influence exchange rates through verbal and actual currency market intervention while at the Ministry of Finance in 1997-1999 -- said the currency may match its April 1995 peak of 79.75.

‘Feel the Pinch’

“Japanese companies will feel the pinch of a stronger yen and a weakness in share prices around the end of this year,” Sakakibara said. The Nikkei 225 Stock Average fell to a year-to- date low of 9,065.94 on Aug. 12.

Canon, the world’s second-largest printer maker loses about 6.8 billion yen of annual operating profit for every 1 yen gain in its value against the dollar and 4.1 billion yen of profit for each 1 yen rise versus the euro, the company said in April.

Sakakibara spoke after Finance Minister Yoshihiko Noda last week refrained from outlining steps to slow the yen’s rise and the Bank of Japan maintained its policy guidance.

“We will monitor economic conditions carefully and respond appropriately,” Noda said in an unscheduled press conference in Tokyo on Aug. 12. Asked whether action could include currency intervention, he declined to elaborate.

Noda and central bank Governor Masaaki Shirakawa said on Aug. 12 they were closely watching the currency, comments investors said indicate preparedness to curb the yen’s gains to protect the nation’s economic recovery.

Poised to Move?

More than a third of Japan’s margin traders think policy makers will intervene to weaken the yen if it strengthens past the 15-year high reached this week, a survey by Gaitame.com Research Institute Ltd. showed.

Lawmakers from Japan’s ruling party last week urged Prime Minister Naoto Kan to consider intervening in the currency market for the first time since 2004. They also called on the Bank of Japan to “engage in large-scale monetary easing.”

Kan and Shirakawa may meet this week to discuss measures to address the yen’s strength, the Asahi newspaper reported on Aug. 13. Kan said he’s “concerned” about the yen’s recent appreciation, Kyodo News reported on Aug. 14.

“Investors know that the Japanese government can’t come up with decisive measures that can stem the appreciation of the yen,” said Morio Okayasu, chief analyst in Tokyo at FOREX.com Japan Co., a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey.

Japan hasn’t intervened in the currency market since March 2004, when the yen was around 109 per dollar. The Bank of Japan sold 14.8 trillion yen ($172 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. The currency ended 2004 at 102.63 to the dollar.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

China Favors Euro Over Dollar as Bernanke Alters Path

China, whose $2.45 trillion in foreign-exchange reserves are the world’s largest, is turning bullish on Europe and Japan at the expense of the U.S.

The nation has been buying “quite a lot” of European bonds, said Yu Yongding, a former adviser to the People’s Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2. Japan’s Ministry of Finance said Aug. 9 that China bought 1.73 trillion yen ($20.1 billion) more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.

“Diversification should be a basic principle,” Yu said in an interview, adding a “top-level Chinese central banker” told him to convey to European policy makers China’s confidence in the region’s economy and currency. “We didn’t sell any European bonds or assets, instead we bought quite a lot.”

China’s position may make it harder for the greenback to rebound after falling as much as 10 percent from this year’s peak in June as measured by the trade-weighted Dollar Index. The nation cut its holdings of U.S. government debt by $72.2 billion, or 7.7 percent, through May from last year’s record of $939.9 billion in July 2009, according to the Treasury Department, which releases new data today.

U.S. Concerns

Concern the U.S. economy is faltering was underscored by the Federal Reserve on Aug. 10. Chairman Ben S. Bernanke said the central bank will reinvest principal payments on its mortgage holdings into Treasury notes to prevent money from being drained out of the financial system, its first expansion of measures to spur growth in more than a year.

“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement after meeting in Washington. “The Committee will keep constant the Federal Reserve’s holdings of securities at their current level.”

Asian central banks holding some 60 percent of the world’s foreign-exchange reserves are turning away from the dollar. Concerned about weakening U.S. growth and the Treasury’s record borrowing, they are switching toward euro assets to safeguard reserves, driving gains in the 16-nation currency. South Korea, Malaysia and India reduced their holdings of Treasuries, U.S. government data show.

Cutting Treasuries

The allocations to dollars in official foreign-exchange reserves declined in the first three months of the year, to 61.5 percent from 62.2 percent in the final quarter of 2009, the International Monetary Fund said June 30.

The yen’s share was 3.1 percent, up from 3 percent, The euro’s was 27.2 percent, little changed from 27.3 percent, even after the currency tumbled 5.7 percent versus the dollar during the first quarter on speculation that nations including Greece will struggle to rein in their budget deficits.

“Short of concerns of a default, the investor community in terms of big reserve managers will probably be forced to invest in the euro zone,” said Dwyfor Evans, a strategist in Hong Kong at State Street Global Markets LLC, part of State Street Corp. which has $19 trillion under custody and $1.8 trillion under management. “They can’t be putting all of their eggs in one basket, which is U.S. Treasuries.”

Dollar Index

The Dollar Index’s 5.2 percent drop in July, the biggest decline in 14 months, failed to dissuade most foreign-exchange forecasters from predicting the greenback will strengthen against the euro and yen by December.

The dollar traded at $1.2817 per euro as of 7:13 a.m. in New York from $1.2754 last week, when it rose 4.1 percent. The greenback was at 85.60 yen after falling to 84.73 yen on Aug. 11, the weakest since July 1995.

The U.S. currency will climb to $1.23 per euro by Dec. 31 and to 92 yen, based on median estimates of strategists and economists in Bloomberg surveys. Economists forecast U.S. growth will be 3 percent this year, compared with 1.2 percent for the region sharing the euro and 3.4 percent for Japan.

“There’s no sign of panic or urgency from the Fed and that supports our view that this is a temporary soft patch and the U.S. economy will fight its way through,” said Gareth Berry, a Singapore-based currency strategist at UBS AG, the world’s second-largest foreign-exchange trader. UBS forecasts the dollar will rise to $1.15 per euro and 95 yen in three months.

Slower Growth

Japan’s economy expanded at the slowest pace in three quarters, missing the estimates of all economists polled, the Cabinet Office said today in Tokyo. Gross domestic product rose an annualized 0.4 percent in the three months ended June 30, compared with the median estimate in a Bloomberg survey for annual growth of 2.3 percent.

Slowing purchases of Treasuries by Asian nations haven’t hindered President Barack Obama’s ability to finance a projected record budget deficit of $1.6 trillion in the year ending Sept. 30. Investor demand for the safest investments compressed yields on benchmark 10-year Treasury notes to a 16-month low of 2.65 percent today, even after the U.S.’s publicly traded debt swelled to $8.18 trillion in July.

U.S. mutual funds, households and banks in May boosted their share of America’s debt to 50.2 percent, the first time domestic investors owned more Treasuries than foreign holders since the start of the financial crisis in August 2007.

‘Concrete Steps’

Chinese Premier Wen Jiabao urged the U.S. in March to take “concrete steps” to reassure investors about the safety of dollar assets. The nation, which is the largest overseas holder of Treasuries, trimmed its stockpile of U.S. debt to $867.7 billion in May, from $900.2 billion in April and a record $939.9 billion in July 2009.

Increases to its holdings made between June 2008 and June 2009 amid the global financial crisis were mostly in short-term securities, signaling a “lack of confidence” in the U.S. ability to reduce its debt, UBS said in a research note Aug. 9.

“China has confidence in Europe’s economy, in the euro, and the euro area,” Yu said. A member of the state-backed Chinese Academy of Social Sciences, Yu was selected by the official China Daily to question Treasury secretary Timothy F. Geithner during his June 2009 visit to Beijing about risks the U.S.’s budget deficit will undermine the value of its debt.

Chinese Purchases

Chinese purchases of Europe’s bonds come in the wake of measures taken by European policy makers to allay concern the sovereign-debt crisis will threaten the single-currency union. In May, they announced a loan package worth as much as 750 billion euros ($956 billion) to backstop euro-area governments.

That month, foreign investors were net buyers of euro-zone debt as the 16-nation currency plummeted by the most since January 2009. Foreigners purchased 37.4 billion euros of bonds and notes after buying 49.7 billion euros in April, the latest data from the European Central Bank show.

China’s concern is mirrored by neighboring central banks that are building up foreign-exchange reserves as they sell local currencies to maintain the competiveness of exporters, according to Faros Trading LLC, which conducts currency transactions on behalf of hedge funds and institutional clients.

Indonesia’s central bank and Thailand’s prime minister said in the past month they are watching the performance of their nation’s currencies amid speculation gains will curb exports. Taiwan’s dollar has depreciated in the final minutes of trading on most days in the past four months as policy makers bought dollars, according to traders familiar with the central bank’s operations who declined to be identified. Exports account for about two-thirds of Taiwan’s gross domestic product.

‘Rapidly Diversifying’

“Asian central banks, other than China, don’t want to be caught holding all of the dollars when China is rapidly diversifying,” said Brad Bechtel, a Connecticut-based managing director with Faros Trading. “When sentiment shifts and people start getting very bearish on the euro again, beware central banks might be aggressively buying euros on the other side.”

The yen has climbed 8.4 percent against the dollar this year. China bought a net 456.4 billion yen of Japanese debt in June, after purchasing 735.2 billion yen in May, which was the largest in records dating from 2005, according to Japan’s Ministry of Finance data.

“China’s policy of steady and relatively rapid accumulation of foreign-exchange reserves means they have to be invested somewhere,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “It is easy to imagine that given the low yields in the U.S. and the debt crisis in Europe, China is now willing to invest more of these reserves in the yen.”

Euro Rises for First Time in Eight Months as Sovereign-Debt Concern Eases

The euro rallied against the dollar for the first time in eight months as concern eased that the 16- nation region’s sovereign-debt crisis will worsen and spread to the global economy.

The dollar dropped in July against all of its most-traded counterparts before next week’s payrolls report as Federal Reserve Chairman Ben S. Bernanke testified last week that “the economic outlook remains unusually uncertain.” The greenback slid yesterday below 86 yen for the first time this year as a report showed U.S. economic growth slowed in the second quarter.

“European data has been surprisingly robust, while all signs are that the U.S. is heading for slower growth in the second half,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “There have been some hints from Fed policy makers that further easing could be on the table should the economy deteriorate.”

The euro climbed 6.7 percent to $1.3052 yesterday, from $1.2238 on June 30, in its first monthly advance since November, when it increased 1.9 percent. The shared currency rallied 10 percent from a four-year low of $1.1877 reached on June 7. The euro gained 4.3 percent to 112.84 yen, from 108.22. The dollar slid 2.2 percent to 86.47 yen, from 88.43, in its third monthly decline.

Sweden’s krona was the best performer among major currencies in July, appreciating 8.1 percent to 7.2104 versus the dollar and climbing 1.3 percent to 9.4113 against the euro.

Sweden’s Growth

The Scandinavian nation’s gross domestic product grew 1.2 percent in the second quarter after a revised 1.5 percent advance in the first three months of the year, Statistics Sweden said on its website yesterday. The Riksbank on July 1 doubled its main lending rate from a record low to 0.5 percent to stem house price gains.

The euro rallied after the Committee of European Banking Supervisors said on July 23 that only 7 of 91 European Union banks failed stress tests.

European Central Bank President Jean-Claude Trichet told reporters in Basel, Switzerland, this week that the stress tests were “a very important transparency exercise that, I have to say, we in the ECB appreciate.” The ECB and the Bank of England both have policy meetings scheduled on Aug. 5.

An index of executive and consumer sentiment in the euro nations increased this month to 101.3, the highest level since March 2008, the European Commission said this week. The number of people out of work in Germany fell in July for a 13th consecutive month, dropping by a seasonally adjusted 20,000 to 3.21 million, the lowest level since November 2008, the Federal Labor Agency reported.

‘Strong Data’

“What’s helping the euro is continued strong data,” said John Doyle, a strategist in Washington at the currency-trading firm Tempus Consulting Inc. “That German unemployment number as well as the economic confidence, it’s enough to push it higher.”

The U.S. economy grew at a 2.4 percent annual rate in the second quarter after a revised 3.7 percent increase in the first three months of the year, the Commerce Department reported yesterday. The median forecast of 81 economists in a Bloomberg News survey was for a gain of 2.6 percent.

The unemployment rate will increase to 9.6 percent in July, from 9.5 percent in the previous month, according to the median forecast of 57 economists in a Bloomberg News survey before the Labor Department’s Aug. 6 report. Employers may eliminate 60,000 jobs from nonfarm payrolls in a second consecutive reduction.

St. Louis Fed President James Bullard wrote in a research paper released on July 29 the U.S. is moving closer to Japanese- style deflation and the central bank should resume purchases of Treasury securities if the economy slows and prices fall.

Bernanke’s View

Bernanke said in testimony on July 21 before the Senate Banking Committee that policy makers “remain prepared” to act as needed to aid growth even as they get ready to raise interest rates eventually and shrink a record balance sheet.

The yen appreciated to 85.95 versus the dollar yesterday, its strongest level since Nov. 30 and close to a 14-year high of 84.83 reached that month.

Japanese policy makers signaled this week that a stronger currency poses a danger to growth, spurring speculation they will take steps to counter that risk.

The Bank of Japan board member Hidetoshi Kamezaki highlighted in a speech in Sapporo the economic risks of a rising yen and said the bank will act to combat deflation, a more aggressive stance than his colleagues have indicated.

“We are reaching multi-year and in some respects even multi-decade lows in the dollar-yen, which is likely to result in a fair bit of rhetoric and even actions from the government of Japan,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto.

Nissan Motor Co. said this week it will boost output capacity in Mexico to about 700,000 vehicles a year and may consider increasing exports from the U.S. as the strong yen makes North American production more competitive.

RBS Issues `Win-Win' Notes Based on Currency Swings in Euro, Swiss Franc

Royal Bank of Scotland Group Plc issued structured notes that pay a return based on swings in the Swiss franc versus the euro, regardless of what direction they’re in.

Investors in the so-called win-win notes get a coupon equal to the franc’s rise or fall against the common currency after five years, according to Kemal Bagci, a Frankfurt-based director in RBS’s equity derivatives unit. The notes pay a minimum return of 10 percent, he said.

RBS plans to issue about 20 million euros ($26 million) of the notes, which will be listed on the Frankfurt and Stuttgart stock exchanges when the subscription period closes at the end of August. The note includes a 1.5 percent fee which is incorporated into the pricing structure.

“This suits the current market conditions as you’ve seen a lot of currency speculators betting on the future of the euro, while the Swiss currency has drawn investors in who view it as a safe haven,” Bagci said. “We are mainly targeting private banks for this product.”

Morgan Stanley Ends Advice to Sell Kiwi Versus U.S. Dollar, Booking Loss

Morgan Stanley analysts ended a recommendation to sell the New Zealand dollar against the U.S. currency after the so-called kiwi appreciated beyond the level set to protect against potential losses.

The month-old “tactical trade” was ended on July 23 at 72.73 U.S. cents per New Zealand dollar, a team of strategists led by Stephen Hull in London said today in a note distributed by e-mail.

The trade, based on an opening level of 70.54 cents on June 24, booked a loss, the analysts wrote in the note.

The kiwi rose 0.3 percent to 72.98 U.S. cents at 11:31 a.m. in London.

Yen May Strengthen as Regulations Force Mrs. Watanabe to Curb Carry Trades

Yen May Strengthen as Regulations Force Mrs. Watanabe to Curb Carry Trades
By Yasuhiko Seki and Hiroko Komiya - Jul 25, 2010
Email Share
Business ExchangeTwitterDeliciousDiggFacebookLinkedInNewsvinePropellerYahoo! BuzzPrint The yen may climb next month as tighter regulations force Japanese households controlling about $76 billion in daily exchange trading to unwind bets on higher- yielding currencies, analysts said.

The government will cap debt used to boost trading bets, or leverage, at 50 times committed cash from August 2010, down to 25 times in 2011, the Financial Services Agency decided last year. Individual traders have started to prepare for the change, according to Japan’s biggest online currency broker which saw accounts with 100 times or more leverage fall by half last month.

“If margin traders decide to discontinue highly leveraged transactions, it will put upward pressure on the yen as those positions are unwound,” said Yuji Kameoka, senior economist in Tokyo at Daiwa Institute of Research Ltd., a unit of Japan’s second-biggest brokerage. “The Australian dollar, a favorite among margin traders, may feel the pinch in particular.”

The yen rose to an eight-year high of 107.32 per euro June 29, and climbed to 86.27 U.S. cents on July 16, near a 14-year peak of 84.83 set Nov 27. It gained to 72.69 per Australian dollar on July 1, the highest since May 25. Japan’s currency traded at 113.23 per euro, 87.62 U.S. cents and 78.36 to the Aussie as of 12:23 p.m. in Tokyo.

The FSA enacted the leverage standards to protect against excessive losses for customers and aid in risk management in the financial industry, according to a release by the agency last year. There was previously no official limit on leverage in currency margin transactions.

Traders who use margin accounts collectively came to be called “Mrs. Watanabe,” drawing upon the common Japanese surname and the fact that wives traditionally control the purse strings in Japanese families.

Housewives, Gnomes

Bank of Japan Deputy Governor Kiyohiko Nishimura said in 2007 “the housewives of Tokyo” had a stabilizing effect on currency markets, in contrast to the “gnomes of Zurich,” a term used by U.K. politician Harold Wilson to describe pound speculators based in Switzerland.

Benchmark interest rates are 4.5 percent in Australia and 2.75 percent in New Zealand, compared with 0.1 percent in Japan, attracting investors to the South Pacific nations’ higher- yielding assets. In carry trades, investors borrow money in countries with low interest rates to invest in higher-yielding assets.

The Australian dollar versus the yen "has historically been the most-favored play by leveraged Japanese investors,’’ said Sue Trinh, senior currency strategist in Hong Kong at Royal Bank of Canada. “Limits on leverage could therefore see reduced demand from August.”

Net Shorts

Trinh recommends selling the Australian dollar, saying it may retest the 72 yen level reached in May amid ebbing sales in Japan of overseas-focused mutual funds and a pattern of seasonal weakness for the Aussie in August.

Net short positions on the yen, equivalent to yen carry trades, stood at 1.89 trillion yen ($21.6 billion) at the end of June, up 59 percent from the previous month, according to the Financial Futures Association of Japan, which compiles data from 57 margin brokerages.

The average trading volume of foreign currencies in Tokyo stood at $254.2 billion a day in April 2009, the latest figure available from the Foreign Exchange Market Committee. Currency margin traders account for up to 30 percent of daily turnover, according to an estimate from JPMorgan Chase & Co.

“The new leverage regulation just sounds like harassment for individual traders,” said Nobuhide Suzuki, 42, a Tokyo- based private investor who leverages exchange trades by 100 times on average. “The reduced leverage limits will simply deteriorate the efficiency of investment.”

‘Preparatory Mode’

Gaitame.com, Japan’s largest foreign-exchange margin dealer, said 7 percent of its accounts were leveraged at more than 100 times in its latest survey conducted between June 16 and June 23, down from 13.6 percent the previous month.

“Individual investors were already in a preparatory mode ahead of the regulatory tightening, trimming highly-leveraged positions,” said Tsuyoshi Okada, managing director in Tokyo at Gaitame.com’s research unit. “The new regulations may spur intraday volatility at the start.”

Japan’s currency typically rises during times of financial turmoil as the nation’s trade surplus means it doesn’t have to rely on overseas capital. Global risk aversion in the wake of Europe’s debt crisis has spurred an 10 percent surge in the yen in 2010, according to Bloomberg Correlation-Weighted Currency Indexes, the most among 10 currencies tracked.

Yen-denominated margin accounts had deposits of 595.1 billion yen as of March 2009, according to private-research institute Yano Research Institute Ltd. That’s down from a record 696.4 billion yen a year earlier when the collapse of Lehman Brothers Holdings Inc. accelerated gains in Japan’s currency.

“Margin traders are likely to stay on the sidelines initially to adapt themselves to the new rules and see how things will develop before they return to the market,” said Toshiya

Euro Bears Vanish as End of Stress Makes Goldman Sachs a Bull

Losers eat sour grapes & claims winners are lunatic. See bottom paragraph.


The combination of growing confidence in Europe’s economy and mounting evidence of a slowdown in the U.S. is driving euro bears into hiding.

After tracking the euro’s slide from about $1.45 at the beginning of 2010, the median forecast of currency strategists has stayed within two cents of $1.20 since the start of June, according to data compiled by Bloomberg. Goldman Sachs Group Inc. and Wells Fargo & Co. raised their estimates in the past two weeks, joining HSBC Holdings Plc and Deutsche Bank AG in predicting a stronger euro.

While the euro weakened 15 percent in the first half as the region’s debt crisis threatened to tear the currency union apart, investors have shifted their focus to the U.S. as the dollar depreciated 8 percent from a four-year high in June. U.S. economic data fell short of economists’ estimates this month by the most since March 2009, while euro-region reports exceeded forecasts since April, according to Citigroup Inc. indexes.

“People got a bit too excited about the idea the euro-area was going to break up and forgot that the U.S. has a whole load of problems of its own,” said David Bloom, global head of currency strategy at HSBC in London, who has predicted since the start of June that the euro would end the year at $1.35.

Confidence in the euro returned after the most-indebted countries in the region announced budget cuts and the European Union crafted a 750 billion-euro ($970 billion) financial backstop in May to forestall defaults. Spain, Portugal, Ireland and Greece successfully auctioned more than 17 billion euros of bonds and bills since July 13.

Economic Outperformance

Speculation the recovery would accelerate increased when Germany’s Ifo institute said July 23 that its business climate index unexpectedly jumped to the highest level since July 2007. A composite index of European services and manufacturing industries climbed to 56.7 in July from 56 the month before, London-based Markit Economics said a day earlier.

Investors showed little surprise on July 23, when the Committee of European Banking Supervisors said seven of 91 EU banks subject to stress tests failed with a combined capital shortfall of 3.5 billion euros.

The euro rose 0.2 percent today to $1.2934 today after gaining in three of the past four weeks. The 16-nation currency appreciated 8.9 percent since June 7, when it slid to $1.1877, the weakest level since March 2006. It also rose 2.3 percent since falling to a more than seven-year low on June 29, according to Bloomberg Correlation-Weighted Currency Indexes.

Outlook Reversed

Analysts are raising their forecasts as Citigroup’s euro- region economic surprise index reached a three-year high of 131 on May 27. The equivalent U.S. gauge fell to a 16-month low of minus 43.6 on July 1. The measures examine historical standard deviations of data surprises by comparing releases with Bloomberg median estimates.

Goldman Sachs analysts led by Thomas Stolper in London reversed their outlook for the euro twice in two months, and said in the most recent forecast that the dollar will weaken against the euro by January as U.S. growth slows. The New York- based bank says the shared currency will reach $1.22 in three months, $1.35 in six months and $1.38 in a year. As recently as June, Goldman Sachs forecast the dollar would surge to a seven- year high.

Weaker Growth

“Weaker U.S. growth, reasonably solid euro-zone macro data and less political-fiscal disruptions than feared have been a feature of the past few weeks,” Goldman Sachs analysts wrote in the report dated July 14.

Wells Fargo, based in San Francisco, raised its six-month euro forecast to $1.24 from $1.20 on July 14, said Vassili Serebriakov, a currency strategist in New York.

“The main positives for the euro have been stronger-than- expected euro economic numbers and a recovery in risk appetite,” he said. Serebriakov said the euro will weaken longer term, falling to $1.18 in 12 months.

While U.S. growth has slowed more than forecast, the economy will still outpace Europe over the coming year as budget cuts start to brake the recovery, said Ian Stannard, a senior foreign-exchange strategist in London at BNP Paribas SA. The Paris-based lender scaled back its forecast for a decline in the euro on July 23, saying it will fall to $1.12 in the first quarter, from a previous prediction of parity.

‘Still in Place’

“The reasons why a weaker euro are both likely and needed are still in place,” said Stannard. “The market still hasn’t really adjusted to the prospect of lower euro-zone growth once the fiscal tightening that has been announced is implemented and begins to bite.”

The U.S. economy will expand 3.1 percent this year, according to the median of 55 analyst forecasts compiled by Bloomberg. The euro-region will grow 1.1 percent, a separate median estimate shows.

German Chancellor Angela Merkel’s Cabinet approved four years of budget reductions and revenue programs worth 81.6 billion euros on July 7. Greece aims to cut its budget deficit to 8.1 percent of gross domestic product this year, from 13.6 percent in 2009, and meet the EU’s 3 percent limit by 2014. Portugal plans to reach the EU target by 2012, reducing it from 9.4 percent last year.

The euro-region deficit will narrow to 6.1 percent of GDP in 2011 from 6.6 percent this year, according to European Commission forecasts on May 5. The U.S. gap will hit 10 percent in 2010 and 9.9 percent next year, the figures show.

While European governments are pruning, U.S. President Barack Obama signed into law a $34 billion extension of unemployment benefits on July 22.

Treasury Yields

“The market seems to be favoring regions where policymakers are taking an active role on deficit reduction and that’s not the U.S.,” said Thanos Papasavvas, who helps manage more than $5 billion in currencies at Investec Asset Management Ltd. in London. “For Europe it may be painful in the short-term, but they are dealing with it. The U.S., which has a much bigger problem, isn’t even beginning to deal with it.”

At the same time, the bond market is telling the U.S. government to focus on growth, not the deficit. Yields on two- year Treasury notes fell to a record low 0.5516 percent on July 23 and are 16 basis points, or 0.16 percentage point, less than similar-maturity German debt.

Housing starts in the U.S. fell more than forecast last month, the Commerce Department said July 20. Initial jobless claims rose to 464,000 in the week ended July 17, exceeding the highest estimate of economists surveyed by Bloomberg, Labor Department figures on July 22 in Washington showed.

Bearish on Dollar

Futures traders turned bearish on the dollar for the first time in almost three months on July 13, according to data from the Commodity Futures Trading Commission in Washington. So- called short positions, or bets prices will fall, by hedge funds and other large speculators outnumbered long positions by 99,175 on July 20, CFTC figures show.

The changing fortunes for the euro and the dollar caught foreign-exchange funds by surprise, according to the Parker BlackTree Currency Index, which tracks 22 currency funds that manage about $15 billion. The index lost 1.7 percent between May 14, when valuations reached the highest level since November, and July 16.

“Foreign exchange is the world’s biggest fruit and vegetable store, with millions of people playing it 24 hours a day,” Goldman Sachs Chief Global Economist Jim O’Neill said on July 21 in a radio interview with Tom Keene on Bloomberg Surveillance. “Anybody who thinks they can get foreign exchange right all the time should be in a lunatic asylum.”

11 July 10 FX Summary and World Cup Finals

It has been 5 months since I first published my forecast back in 8 Feb 10.
The majority of the forecast have turned out to be right.
USD and JPY have rose.
GBP, EUR, AUD plummet during this period and we have seen volatility for the past few days.

Since the end of May and beginning of June, sentiments towards Euro has turned bullish. There could be a few reasons.

Firstly, EURUSD had registered an huge 20% loss since December 09 as a result of the European sovereign debt crisis. Since July this year, the stronger European nations eg Germany, have imposed strict measures to assist the countries in need of stronger fiscal control over their public finances. Germany is obligated to prevent a breakup of the Eurozone and to offer funding to Greece. No doubt that featured news have suggested that Greeks had failed to managed their expenditure over the last 10 years, but also Germany companies have also 'forced' Greece to buy some 5 submarines 2 years back, which has resulted in the Navy Chief having to resign as he opposed the purchase and insisted that Greece do not have the money and need to buy the 5 submarines. Its is just to keep the German company that makes the submarines, keep its workers employed. Talks of corruption have also arised.

Secondly, as a result of the cheap exchange rates, goods and services (real estate, tourism, consumer goods, etc) have became much cheaper for foreign investors. These will drive inflows of Eur, and boost consumer prices eventually, which could lead to a rise in CPI. In the latest ECB, the governor said inflation is still under control and left interest rates at 1%. Ok, this is a bias toward a potential rate hike in the event CPI continues to rise. Using logical thinking, this should continue to rise as the cheap exchange rate continues to offer bargains for the European goods and services.

Thirdly, currencies seldom falls for 3 quarters in a row. 2 quarters is bad enough.

Fourth, breakup of the eurozone? Unlikely, though doomsayers would hope to see it happening.

Fifth, the technical charts are overstretched. EURJPY is way too low. Japanese companies earning Eur found themselves instead of being more profitable, yet now losing big money when earnings are converted back to JPY for quarterly reporting. And this will be priced into their share prices, which can cause weak earnings. Of course, new measures will arises to turn this around.

In summary, new forecast as follows:

EUR, GBP to rise from now till December. At least higher than where they are now.
CHF has rallied, and the above should follows.
AUD upside is limited.
USDSGD should be limited too.
JPYSGD should fall.
USDJPY could go lower than 87 before turning up to mean 94. (USDJPY has fell to 86.50 as of 20 July 10)

Let's see if I'm right again.

FX Outlook 8 Feb 10

Bullish for 3 mths wef tod: USD, JPY
Neutral: GBP, CHF. To turn bullish on GBP from June 10 onwards est.
Short: NZD, CAD
Bearish for 3 mths: EUR, AUD (strong headwinds from Central Bank withdrawn guarantee and China's lending curb for 2010.












Feb. 8 (Bloomberg) -- For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago
A day earlier, strategists at New York-based Morgan Stanley boosted their dollar forecast, saying it will strengthen to $1.24 per euro by year-end from its previous estimate of $1.32. It traded at $1.3676 as of 6:46 a.m. in New York today. The firm sees the U.S. currency gaining to 109 yen from 89.42 today, and rallying to $1.49 to the pound from $1.5578 Rally by Default

Rather than a referendum on the U.S., the dollar may be rallying by default. Nouriel Roubini, the New York University professor who predicted the credit crisis, said on Feb. 4 that the greenback may weaken for the next three years


Feb. 1 (Bloomberg) -- Investors are pulling cash out of Europe at a record pace as central banks slow euro purchases, jeopardizing its status as a substitute to the dollar as the world’s reserve currency. Last year, policy makers load up on euros, while analysts at Barclays Plc in London and Aletti Gestielle SGR SpA in Milan
predicted central bankers would make good on threats to reduce the greenback’s dominance. Now the euro is down 8.4 percent since Nov. 25 in its fastest slide in 10 months amid concern that cash-strapped countries like Greece won’t pay their debts. Billionaire investor George Soros said Jan. 28 that there’s “no attractive alternative” to the dollar.


Feb. 2 (Bloomberg) -- The Bank of Japan’s expanded lending program to fight deflation won’t stall the yen’s gain, leaving the nation’s exporters less competitive in global markets, according to JPMorgan Chase & Co
Low prospects for fresh currency-market intervention and higher real-policy rates in Japan compared with previous years will support the declining trend of the dollar, Tanase said. JPMorgan Chase forecasts the yen to reach 85 yen by March 31.
Traders have spurned European stocks in favor of shares elsewhere for a record 19 straight weeks, “clearly hurting” the currency by draining a net $13 billion from the market, said Geoffrey Yu, a UBS AG analyst. Investors are as bearish on the euro as they were when the 2008 financial crisis was pushing them to the dollar’s perceived safety, futures data show. After buying more euros than ever in 2009’s second quarter, central banks pared back, International Monetary Fund data show.
“The euro can fall further,” said Neil Mackinnon, a former U.K. Treasury official who is a Londonbased economist at VTB Capital Plc, the investment-banking unit of Russia’s second- biggest lender. “Sovereign-debt risk will continue to be a key theme,” he said. “The stresses created by the fiscal situation in Greece won’t go away quickly.” Worst Since Inception Without specifying a timeframe, Mackinnon predicted the euro will weaken to $1.20. If it finishes 2010 at that level, the year’s 16.2 percent loss would be the worst since the currency’s 1999 inception.