U.S.: CPI Surprisingly Soft

Daily Forex Fundamentals | Written by TD Bank Financial Group | Nov 19 08 15:56 GMT |

U.S. CPI was softer than expected, with headline CPI falling 1.0% M/M in October and core CPI falling 0.1% M/M. On an annual basis, headline CPI was 3.7% in October, while core CPI was 2.2% Y/Y. There were a number of categories which posted sizable monthly declines. Energy and transportation saw the largest declines in October. The monthly decline in headline CPI was the largest ever. The core CPI posted the first monthly decline in 26 years. The slowing pace of economic growth is clearly having an impact on price pressures in the U.S. Headline CPI posted its largest monthly decline ever, with a 1.0% M/M drop in October. That pushed headline CPI lower to 3.7% Y/Y from 4.9% Y/Y in September. Core CPI was also softer than expected with a 0.1% M/M decline, which left the annual rate at 2.2% Y/Y. This was the first negative monthly reading on the core measure in more than two decades. Lower energy prices played quite a significant role in the moderation in headline inflation in October, as energy prices fell 8.6% (SA) M/M. That too, is the largest monthly decline in the energy component in the history of this data series. Core CPI on a three month annualized trend is now a slight 1.1%, compared to 2.7% in September. Core CPI on a six month annualized trend also saw some deterioration in October. It is now 2.3% as compared to 2.6% in September. There was some softness in other components. Housing prices were flat in October on a seasonally adjusted basis, following two consecutive monthly declines. In addition, food and beverage prices were up only 0.3% M/M (SA) in October, which is the smallest monthly gain since May 2008. As consumers continue to sharply pare back spending, prices for apparel saw a massive 1.0% (SA) M/M decline in October. This was the largest monthly decline since September 1998. Moreover, recreation prices are seeing much of the same downward price pressure as discretionary spending takes a holiday. Recreation prices were up only 0.1% M/M (SA) in October, which is the smallest gain since June 2008. On balance, this report confirms the view that the retrenchment in economic activity is taking care of any inflationary pressures that previously existed in the U.S. economy. The hawks on the FOMC now have little to worry about. The bigger concern is clearly the dwindling pace of economic growth and the concern about inflation is definitely in the rear view mirror. These data provide further support for the Fed to provide additional stimulus. And we are therefore still of the view that the Fed will deliver easing to leave the fed funds rate at 0.50%, with some downside risks. TD Bank Financial Group The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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U.S.: Housing Activity Sinks to Record Lows

Daily Forex Fundamentals | Written by TD Bank Financial Group | Nov 19 08 15:55 GMT |

U.S. housing starts dropped to their lowest level on record in October. Building permits were also weak, falling also to a record low. Overall, the U.S. housing market continues to deteriorate. U.S. housing starts declined to 791K in October, following the upwardly revised 828K new homes constructed the month before (previously reported as 817K). The decline, however, was less than the drop to 780K expected by the markets, but nonetheless brought the amount of new residential construction to its lowest level on record. The 3-month average for new residential starts has now fallen from 877K to 824K. There were declines in the construction of both single-family (falling from 549K in September to 531K) and multi units (from 279K to 260K) constructed. Residential permits approvals were also weak, falling to 708K in October, which was far lower than the 774K expected by the markets. This was significantly below the 805K approved in September, and brings the number of approvals to a record low – going back to the 1960s. Most of the declines were in the single-family component, which dropped to 460K, from 538K in September, while multi-units approvals fell more modestly to 248K from 267K. Overall, the report was mixed, with starts slightly stronger, but permits approval much worse than expected. The correction in the U.S. housing market has continued at a fairly brisk pace in October. However, with construction and permits approvals reaching record lows, it may mean that the build-up of new home inventory could taper-off in the coming months. TD Bank Financial Group The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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Inflation Eases Big Time in US - More Rate Cuts from Fed

Daily Forex Fundamentals | Written by GFT | Nov 19 08 14:55 GMT |

US consumer prices dropped 1 percent last month, taking the annualized pace of growth to 3.7 percent, which is the lowest level since October 2007. Falling oil prices takes the credit for lower inflationary pressures with gasoline prices tracking the 50 percent decline in crude. Gas station receipts fell a whopping 14 percent and commodity prices have fallen in general, which has helped to push down transportation costs. Although the core PPI numbers accelerated, core CPI dropped 0.1 percent and we expect it to head even lower. Less price pressure will give the Federal Reserve more room to cut interest rates. We expect the Fed to cut by another 50bp in December, but it is important to note that Fed Fund futures are pricing in a tiny chance of a 75bp rate cut next month. The housing market continues to be one of the weakest links in the US economy. Housing starts fell to a record low while building permits dropped to the lowest level in close to 50 years. When you have an environment where foreclosures are rising at a very rapid pace, there is no desire by builders to break new ground. This afternoon, we have the minutes from the latest FOMC meeting at which the Fed cut interest rates by 50bp to 1 percent. Given the continued concern reflected in Bernanke's testimony to the House Financial Services Committee on Tuesday, the Fed is likely to support further easing. All of the major currency pairs have been consolidating since the middle of last week and the FOMC minutes could be the trigger for a major breakout. Kathy Lien http://www.gftforex.com DISCLAIMER: GFT refers to Global Futures & Forex, Ltd. and all of its divisions, branches and subsidiaries, including Global Forex Trading and GFT Global Markets UK Limited. GFT Global Markets UK Limited is authorized and regulated by the United Kingdom Financial Services Authority. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful. Trading of foreign exchange contracts, contracts for differences, derivatives and other investment products which are leveraged, can carry a high level of risk, and may not be suitable for all investors. It is possible to lose more than the initial investment. In Australia, GFT means Global Futures & Forex, Ltd. ARBN 103 508 461, AFS Licence 226625. A Product Disclosure Statement (PDS) is available at www.gft.com.au. You should read and consider the PDS before making any decision to deal in GFT products. © 2008 Global Futures & Forex, Ltd. All rights reserved.

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The Road to Financial Ruin: We Have to Spend Money Now

Daily Forex Fundamentals | Written by Merk Hard Currency Fund | Nov 19 08 15:40 GMT |

When just about all economists agree, should we rejoice or be scared? During the Weimar Republic, economists at the Reichsbank argued that printing money to finance a war was “exogenous” to the economy and thus not inflationary. Hyperinflation in the ensuing years proved them wrong. We tend to think we are so much smarter today. Economists know how to run regression models; in the absence of a historic precedent, some economists know how to draw shifting supply and demand curves. But common sense seems to be missing in the toolbox of all but a few. This past Sunday, President-elect Obama was asked by 60 Minutes where the money would come from for the ambitious projects and stimulus plans: Question: Where is all the money going to come from to do all of these things; and is there a point where just going to the Treasury Department and printing more of it ceases to be an option? Obama: Look. I think what's interesting about the time that we are in right now is that you actually have a consensus among conservative, Republican leaning economists and liberal, left leaning economists. And the consensus is this: that we have to do whatever it takes to get this economy moving again that we have to, we're going to have to spend money now to stimulate the economy and that we shouldn't worry about the deficit next year or even the year after. That short-term, the most important thing is that we avoid a deepening recession. Just about every living soul has advice for our president-elect on where to spend money. Had McCain won the election, things would have been no different; indeed, McCain seemed to enjoy the race to bailouts even more than Obama. Economists are worried about deflation, about imploding asset prices, about demand destruction. They argue that the government must step in where the private sector is falling short. The goal is to prop up demand and preserve jobs. Political considerations on how to spend the money will come into play; it will be interesting to see whether healthcare and education will receive injections as spending in these areas doesn't translate to immediate boosts to employment, spending or investments. Many economists (Keynesians) believe that government spending ought to be countercyclical to dampen the impact of boom-bust cycles. In practice, everyone wants to be a Keynesian during bad times, boosting government spending, but there is no mechanism in place to force restraint, say through increased taxes, during boom times. This ‘restraint' existed when the gold standard was in place as money was backed by a limited supply of gold. But such restraints were inconvenient and central bankers are now in charge. There are cushions built into the system already; take unemployment benefits as an example: unemployment benefits reduce the impact of lost wages and stimulate demand during tough times. Note that European countries tend to have more generous unemployment benefits than the U.S.; further in the U.S., most states need to balance their budgets. As a result, when state revenues decline, the downturn in the U.S. economy is particularly exacerbated as government services are cut. There are some that argue that such spending cuts are healthy because the faster we weed out the excesses of the boom, the faster one finds a bottom upon which to have sustainable growth. Further, risk takers might be more cautious if they know that the government won't bail them out, reducing the risks of systemic failures in the first place. Some may even recall that there used to be a breed called fiscal conservatives in Congress, an almost extinct species. Democrats and Republicans alike are all Keynesians these days. There are two major reasons why we may be setting ourselves up for financial ruin: first, spending is unlikely to lead to a sustainable recovery; second, we cannot afford it. What started as a valuation crisis that sub-prime mortgage portfolios were kept on the books of financial institutions morphed into a liquidity crisis as financial institutions ceased to trust one another, nor their own balance sheets. The Treasury's $700 billion bailout addresses some of this. But the crisis has since moved to Main Street. Demand for goods and services has been destroyed, not only because of the lack of available credit, but because shell-shocked consumers and companies alike are scaling back their risk appetite. Importantly, even if we found a magic cure to the ills of Detroit and if credit was available to consumers, the car makers have already pre-sold cars years out by having offered zero percent financing on six year loans. During World War II, government spending was ramped up dramatically. Government spending stepped in as soldiers were abroad. As soldiers returned, government spending was scaled down and the private sector picked up again. This time around, we don't have a war, but too much debt. We are mortgaging our grandchildren because we want to ensure enough Chinese made large screen TVs are purchased. The cure to too much debt is a debt reduction program, i.e. more investments, less savings by consumers. It's possible that a fiscal spending program is going to boost demand. But is it sustainable? Unless real wages are boosted in the process, all we do is create even more debt; growth may falter as soon as the government aid is scaled back. We shall also mention that it is not very easy to scale back government programs once put in place. Social Security, the government sponsored entities (GSEs) Fannie and Freddie, Medicare, Medicaid are all programs that were put in place with the best of intentions and have taken on expensive lives of their own. To compete in the decades to come, the U.S. should invest in intellectual capital, in particular education, rather than subsidizing ailing industries. We cannot afford the massive fiscal stimuli that we are likely to see proposed in the coming months. It is one thing for China to inject $586 billion into its domestic economy as they have a budget surplus as well as enormous reserves. This money will be spent on infrastructure spending, potentially allowing the country to reposition itself in a world that will be more dependent on domestic economic activity than sales to the U.S. We estimate that the U.S. will need to finance about US$2 trillion in 2009. Who will finance this debt? There is less trade with Asia, so there will be fewer dollars to be potentially recycled into the U.S. economy. And Asia now needs its foreign currency reserves to finance its domestic spending programs. We don't think Asia will be financing the upcoming U.S. fiscal spending spree. In the absence of Asian buyers, borrowing costs should go up. Specifically, longer dated Treasury bonds should fall in price, boosting long-term financing costs not just for the government, but also all private sector debt including mortgages. But that's exactly the opposite of what policymakers want: after all, policy makers want homes to be affordable, interest rates to be low. In our assessment, this challenge won't stop policymakers from trying to beat the system. In particular, the Federal Reserve (Fed) has, in recent months, instituted a number of programs to prepare for exactly this scenario. In a simplified form, the Fed may just go out and buy the debt the Treasury needs to issue. This may happen outright and is called ‘monetizing the debt'. But it looks like the Fed is pursuing a slightly more elegant variant of the same idea: as part of the recent bailout, the Fed was granted authority to pay interest on deposits with the Fed. In a world where interest rates approach zero, the Fed now has a tool to put a floor under the Federal Funds rate; the Fed hasn't stopped there. The Federal Reserve Bank of St. Louis publishes excess reserves in the banking system on a weekly basis (column 4 in table H3 of the Aggregate Reserves of Monetary Institutions). These are reserves beyond the minimum capital requirements; during normal times, these reserves hover at around $2 billion; since late September, excess reserves have increased dramatically from week to week; as of November 5, excesses reserves stood at $363 billion. This reflects cash provided by the Fed to the banking system: the Fed is literally throwing cash at banks. The published data show that banks are hoarding the cash. Financial institutions do not lend because they don't trust the health of consumers or that of many businesses. The Fed can provide all the money it wants, but the Fed cannot force lending. If you think about this from the bank's point of view, what would you do with hundreds of billions if you don't want to lend to the private sector? How about buying government securities? Banks are in the business of borrowing short-term lending long-term: the cost of borrowing is very low, allowing banks to engage in a very profitable trade lending to the government. U.S. financial institutions are about to embark in the greatest carry trade of all times, all with money freely provided by the Fed. This solves many of the problems: the government can spend as much money as it wants as the Treasury's bonds will be purchased by banks that in turn receive funding from the Fed. This cycle keeps the cost of borrowing low for the private sector; eventually, Goldilocks will come back to life and we will live happily ever after. And just in case there are some out there that believe that one can't square the circle, the Fed will introduce an official inflation target to signal to the market that monetary policy will be tightened in case inflation takes the upper hand. That threat alone will ensure the money markets will behave. In our humble opinion, it won't work. We would like to point your attention to the Panic of 1908 - 100 years ago, there was a law that restricted New York City (NYC) from paying no more than 4.5% on debt it issued. Because investors considered it risky to extend a loan to NYC, there were simply no buyers for the debt. Only after J. Pierpont Morgan (the then 70 year old founder of what is now known as JPMorgan Chase) said he would provide a loan to the city did others come forward (including international investors). We see a direct parallel to what's happening now, although the tools are different: if you keep interest rates artificially low, buyers will abstain. It may be profitable for U.S. banks that receive free money from the Fed to buy the debt, but foreign buyers in particular may simply stay away. Given the enormous current account deficit, we see a severe drop in the dollar as the logical reaction to the policies in place. A substantial drop in the dollar seems to be in the interest of policy makers. A lower dollar could boost exports. Conversely, for China it is a unique opportunity to lower the cost of imports to allow their currency to appreciate. If China does not act, we will build the same imbalances once again. However, it is questionable whether at the next crisis China will have the luxury to launch a massive stimulus. Further, if policymakers don't want housing prices to fall, inflation may be welcome as the cost of goods and services will float higher, reducing the cost of housing relative to everything else. Fiscal spending is part of the problem, not the solution. At this stage, the dynamics over the coming years are shaping up. Investors may want to consider whether to take advantage of the panic buying of U.S. dollars to diversify their holdings. Typically, when a currency appreciates, the money is invested broadly in an economy; in recent months, most of the money flowing into the U.S. was invested in short-term Treasury Bills. We very much doubt that all this money will stay in the U.S. once the panic abates. Indeed, whereas just about everyone seems to be concerned about deflation, the risk of not only inflation, but hyperinflation increases with every step taken down this road. Axel Merk Manager of the Merk Hard and Asian Currency Funds Merk Investments http://www.merkfund.com/ The views in this article were those of Axel Merk as of the newsletter's publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard Currency Fund. Foreside Fund Services, LLC, distributor.

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Daily Market Commentary - Fundamental Outlook

Daily Forex Fundamentals | Written by GCI Financial | Nov 19 08 15:43 GMT |

€ The euro moved higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2770 level and was supported around the $1.2590 level. The common currency moved to intraday highs during the early North American session as traders braced for more potential selling pressure in U.S. equity markets. Traders are closely monitoring the progress of Congressional talks involving the largest U.S. auto-makers who are appealing for a bailout of their cash-strapped, beleaguered industry. The Bush administration remains reluctant to steer some of the US$ 700 billion in bailout funds it partially controls to the industry and it is not clear if the U.S. Senate has the muscle to push through related legislation. Data released in the U.S. today saw October headline consumer price inflation up 1.0% m/m while the core rate was off 0.1% m/m. On an annualized basis, CPI was up 3.7% y/y with the core rate up 2.2% y/y. These data evidence the ongoing moderation in consumer-level price pressures in the U.S. and give the Federal Open Market Committee more room to ease monetary policy next month. Other data released today saw October housing starts off 4.5% to an annualized 791,000 while October building permits were off 12% to 708,000. Traders await remarks from Fed officials Kohn and Lacker today along with FOMC meeting minutes. In eurozone news, European Central Bank President Trichet reiterated the resolution of the ongoing financial crisis “will take time.” Euro bids are cited around the US$ 1.2135 level. ¥/ CNY The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥96.30 level and was capped around the ¥97.15 levels. The yen continues to benefit from traders' views that the global economy is sinking deeper into a recession and that the liquidity crisis has moved to different industries such as the U.S. auto-making industry. Data released in Japan overnight saw the September all-industries index fall 0.1% m/m, matching forecasts. Japanese financial giant Sumitomo announced it plans to raise at least US$ 2.9 billion via preferred securities to strengthen its capital base, much as its two larger competitors have done. Earlier in the liquidity crisis, Japanese banks were perceived to be in decent shape but Japan's economy has entered a recession. Most traders expect Bank of Japan's Policy Board to keep its unsecured call rate unchanged at 0.30% this week with some expecting the central bank to announced additional measures to enhance liquidity provision to the financial system. The Nikkei 225 stock index lost 0.66% to close at ¥8,273.22. U.S. dollar offers are cited around the ¥104.15 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥123.45 level and was supported around the ¥121.45 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥146.95 level while the Swiss franc lost ground vis-à-vis the yen and tested bids around the ¥79.90 level. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8285 in the over-the-counter market, up from CNY 6.8284. Some economists are predicting China's economy could experience deflation next year and this will lead to increased speculation about an easier monetary policy from People's Bank of China. ₤ The British pound moved sharply higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5230 level and was supported around the $1.4900 figure. Traders expressed surprise after minutes from Bank of England's November Monetary Policy Committee meeting were released. The minutes revealed MPC policymakers considering reducing interest rates by more than 200bps this month before unanimously voting for a 150bps cut to 3.0%. The 150bps reduction represented the U.K.'s largest rate cut since 1981. Many dealers expect more rate cuts because the quarterly inflation report that was subsequently published implied a larger reduction in the official Bank Rate - probably in excess of 200bps. Many MPC-watchers expect up to 100bps of additional easing by the central bank next month. Data released in the U.K. today saw CBI November manufacturing output fall to a balance of -42 from -31 in October, the lowest level since September 1980. Cable bids are cited around the US$ 1.4315 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.8365 level and was capped around the ₤0.8465 level. CHF The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1960 level and was capped around the CHF 1.2085 level. Swiss National Bank allotted €1.8 billion in a foreign exchange swap today with eurozone central banks. SNB bought euro in the near leg and sold euro in the far leg. U.S. dollar offers are cited around the CHF 1.2120 level. The euro and British pound appreciated vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5330 and CHF 1.8245 levels, respectively. GCI Financial http://www.gcitrading.com DISCLAIMER : GCI's Daily Market Commentary is provided for informational purposes only. The information contained in these reports is gathered from reputable news sources and is not intended to be used as investment advice. GCI assumes no responsibility or liability from gains or losses incurred by the information herein contained.

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Is A Jump In Japanese Yen Crosses This Morning A Return To Risk?

Daily Forex Technicals | Written by DailyFX | Nov 19 08 15:13 GMT |

Many of the yen crosses marked a sharp rally through the opening hours of the US session. However, with major technical levels still looming overhead and fundamentals projecting uncertain recessions and financial trouble, the DailyFX Analysts are weighing in on momentum that could determine whether this is a true trend change in risk appetite or merely a short-lived rally to sell in to. Currency Strategist - John Kicklighter My picks: Pending GBPJPY Breakout Expertise: Combining Money Management with Fundamental and Technical Analysis Average Time Frame of Trades: 3 days - 1 week Is risk appetite back on or are the Japanese yen crosses merely long-overdue for a technical correction after such an extended period of congestion overlaid with excessive volatility? Fundamentally, there have been few sentiment-shifting news or economic releases to drive a true change in the risk bias. However, when a market is trading at an extreme and can't find the additional fuel to sustain the pressure of being at these levels, capitulation often follows to find a balance with risk premium worked off. EURJPY has alread made a significant technical break; so it could sustain its reversal through momentum alone. GBPJPY still holds major resistance in place; so it will be a better gauge for the level of risk sentiment in the market. From a technical perspective, GBJPY is still just off of 13-year lows; and price is working its way into a major breakout setup. Driven by a falling wedge beginning with the September 28th swing high, a steady falling trendline with many tests has defined the higher time frame bear trend well. Add to that the spike lows in a double touch just below 139; and we have the makings of a major breakout scenario. Right now, the market still has around 1000 points of room to trade in without having to make a decision on broader direction. Besides holding the aforementioned trendline, resistance around 148.50/90 holds a major pivot level (that has acted as support and resistance for more than two decades) and a 38.2 percent retracement of the Oct 30th to Nov 13th downdraft. I will look to range trade this pair in reduced size and be prepared for confirmed breakouts with full size positions. A higher time frame bar's close above 149 or below 140 will mark my optimal breakout scenario. Currency Analyst - David Rodriguez My picks: Sell USD/JPY Rallies Expertise: System Trading Average Time Frame of Trades: 2-10 weeks The USD/JPY has been rallying fairly steadily as of late, but the pair nonetheless remains within its medium-term downtrend. Given that I maintain a bullish bias on the Japanese Yen, it makes sense to use this as an opportunity to go short the pair on rallies. That said, I'll look to get into a position above the 97.00 mark, placing max risk above previous spike-highs of 98.26. This is a shorter-term trade than I typically go for, but risk to reward ratios look attractive here and I'm willing to take on the risk of a short-term breakout to the topside. Currency Analyst - Ilya Spivak My picks: Long GBPJPY above 150.09 Expertise: Macro Fundamentals, Classic Technical Analysis Average Time Frame of Trades: 1 week - 6 months GBPJPY has put in a double bottom at the 139.00 and has paused to consolidate. Divergence with the RSI oscillator points to the likelihood of a bullish correction before the down trend resumes. Near term resistance stands at 150.09, the intersection of a downward-sloping trend line connecting the highs from 09/25 and the 14.6% Fibonacci retracement of the 07/24-10/24 decline. Look for a daily close above this level to go long initially targeting 161.75, the 11/04 swing high. Currency Analyst - John Rivera My picks: Short CAD/JPY Expertise: Fundamentals Combined With Technicals Average Time Frame of Trades: 4-8 Days I am bearish the CAD/JPY as the outlook for the global economy is continuing to decline and the demand for raw materials will continue to decline. We are seeing the 20-Day SMA serve as staunch resistance and the narrowing of its trading range makes it susceptible for a breakout. The 11/13 low of 76.16 is my target with a test of psychological support at 75.00 a possibility. Currency Analyst - David Song My picks: Short CAD/JPY Expertise: Fundamentals and Technicals Average Time Frame of Trades: 2 - 10 Days Fading risk sentiment paired with falling oil prices favors a bearish outlook for the CADJPY, and may fall back to test the October lows over the near-term as the flight to safety continues. On 10/27, the pair slipped to a low 70.98 after peaking to a high of 103.50 in September, but bounced back at the beginning of this month to find short-term resistance near 87.20-30 (50.0% Fib level). The lack of buying pressures to move higher suggests that the pair will fall to retest last week’s low of 76.17 before working its way down towards the October lows. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

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Mid-Day Report: Dollar Weakens as Consolidation Continues, FOMC Minutes Next

Market Overview | Written by ActionForex.com | Nov 19 08 14:42 GMT |

Dollar is sharply lower against European majors in early US session as consolidation continues. Technically speaking, as discussed in our technical outlook reports, more upside is still expected in EUR/USD and GBP/USD. Meanwhile, USD/CHF retreats sharply after edging higher to 1.2082 earlier today. Dollar index's dip below 4 hours 55 EMA argues that some more pull back should be seen before resuming recent rally. Elsewhere, Crude oil, rides on dollar's retreat and rebounds strongly from intraday low of 53.66 to above 55.6. Focus will now turn to FOMC minutes for inspirations on further volatility. Though, ,markets are pricing in 90% chance of another 50bps cut from Fed on Dec 16 and the minutes will likely have little impact to this view based on current economic and inflation outlook. US CPI plunged 1% mom in Oct, worse than expectation of -0.38, and was the largest monthly decline since records began in 1947. Annual rate slowed sharply from 4.9% to 3.7% versus expectation of 4.0%. Core CPI also dropped -0.1% mom in Oct, first monthly decline since 1982. Annual rate slowed from 2.4% to 2.2%. New residential construction data showed housing market recession is still in progress. Housing starts fell 4.5% to 791k annual rate in Oct, lowest since records began in 1959. Building permits dropped -12% to 708k, lowest since at least 1960. BoE MPC minutes revealed that the board members voted unanimously by 9-0 to cut the Bank Rate by 150bps on Nov 6, to the lowest level since 1955 at 3.00%. The minutes noted that upside risks to inflation came down recently but downside risks to growth increased. The committee judged that "immediate reduction" of 150bps was "necessary to meet the 2% inflation target in medium term even though a bigger reduction of 200bps was considered. The committee would like to wait for the details of the fiscal stimulus package and effect of financial institutions rescue plan before acting further. Sterling strengthens mildly after the minutes by remains bounded in tight range. Also released today, CBI manufacturing orders index improved mildly from -39 to -38 in Nov. EUR/USD Mid-Day Outlook Daily Pivots: (S1) 1.2555; (P) 1.2628; (R1) 1.2689; More EUR/USD's strong rally in early US session suggests that rebound from 1.2389 is resuming. At this point, intraday bias is mildly on the upside as long as 1.2585 minor support holds. Further rise is in favor to 1.3290 high and 100% projection of 1.2329 to 1.3290 from 1.2389 at 1.3350 to complete the consolidation from 1.2329. Nevertheless, upside is expected be limited below 1.3768 cluster resistance and bring down trend resumption. On the downside, below 1.2585 will flip intraday bias back to the downside and break of 1.2389 will be an important indication that consolidation from 1.2329 has completed and recent down trend has resumed for next target of 50% retracement of 0.8223 to 1.6038 at 1.2131 In the bigger picture, as discussed before, the strength of the fall from 1.6038 reinforces the case that whole decline from 1.6038 is developing into a five wave impulsive fall. The completed decline from 1.4867 to 1.2329 might represent the third wave decline in the five wave sequence. Consolidation from 1.2329 might represent the fourth wave consolidation. Hence, another decline is still expected before making a medium term bottom. Below 1.2329 will target next long term fibonacci level of 50% retracement of 0.8223 to 1.6038 at 1.2131 or even further to 1.1639 key medium term support. On the upside, sustained break of 1.3768 cluster resistance (38.2% retracement of 1.6038 to 1.2329 at 1.3746) is needed to invalidate this view and indicate that whole decline from 1.6038 has made a medium term bottom.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
23:30	AUD	Australia Westpac leading economic indexSep	-1.00%	N/A	-0.10%
23:50	JPY	Japan All industry index Sep	-0.10%	-0.10%	-1.80%	-1.70%
09:30	GBP	BOE MPC vote outcome (C-U)	9--0	9--0	9--0
11:00	GBP	U.K. CBI industrial trend Nov	-38	-41	-39
13:30	USD	U.S. Building permits Oct	0.71M	0.78M	0.81M
13:30	USD	U.S. Building permits M/M Oct	-12%	N/A	-6.10%
13:30	USD	U.S. Housing starts Oct	0.79M	0.78M	0.82M
13:30	USD	U.S. Housing starts M/M Oct	-4.50%	N/A	-6.30%
13:30	USD	U.S. CPI M/M Oct	-1.00%	-0.80%	0.00%
13:30	USD	U.S. CPI Y/Y Oct	3.70%	4.00%	4.90%
13:30	USD	U.S. CPI core M/M Oct	-0.10%	0.20%	0.10%
13:30	USD	U.S. CPI core Y/Y Oct	2.20%	2.40%	2.50%
13:30	USD	U.S. Real earnings Oct	1.40%	0.50%	0.00%
13:30	CAD	Canada Leading indicators Oct	-0.40%	-0.30%	-0.20%
15:35	USD	Crude Oil Inventories		0.9M	0.0M
19:00	USD	FOMC minutes

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U.S. Housing Starts, Permits Drop to Record Low Pace

By Timothy R. Homan

Nov. 19 (Bloomberg) -- U.S. housing starts and permits for future construction both dropped to record lows in October, signs the housing downturn may extend into a fourth year.

Construction starts on housing fell 4.5 percent in October, less than economists forecast, to an annual rate of 791,000 that was the lowest since records began in 1959, the Commerce Department said in Washington. Building permits, a sign of future residential projects, dropped 12 percent to a 708,000 pace, the lowest since at least 1960.

Builders mired in a three-year housing slump are finding it hard to attract buyers as property values drop and banks tighten lending standards. Declines in construction spending remain a drag on economic growth, increasing chances of a prolonged recession.

``The problems in housing were exacerbated by the credit problems we had in September and October,'' said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who forecast housing starts would drop to a 790,000 annual pace. ``Housing will be slow to rebound from that period.''

Starts were projected to fall to a 780,000 annual pace from a previously estimated 817,000 in September, according to the median forecast of 75 economists polled by Bloomberg News. Estimates ranged from 700,000 to 870,000.

Compared with October 2007, work began on 38 percent fewer homes.

Permits Plunge

Permits decreased more than forecast, compared with a 805,000 annual pace in the prior month.

Construction of single-family homes dropped 3.3 percent to a 531,000 rate, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, fell 6.8 percent from the prior month to an annual rate of 260,000.

The decrease in starts was led by a 31 percent decline in the Northeast. Construction dropped 13.7 percent in the Midwest, while starts in the West rose 7.5 percent and were up 1.5 percent South.

The National Association of Home Builders/Wells Fargo index of builder confidence dropped lower than forecast in October to 9, its lowest since record-keeping began in 1985, the Washington-based association said yesterday. The gauge averaged 27 last year.

``We are in a crisis situation,'' NAHB chairman Sandy Dunn, a builder from Point Pleasant, West Virginia, said in a statement. ``Tremendous economic uncertainties have driven consumers from the housing market, and it's going to take some major incentives to bring them back.''

Foreclosures

U.S. foreclosure filings in October jumped 25 percent from a year earlier, compared with average monthly gains of about 50 percent so far in 2008, according to RealtyTrac, a seller of foreclosure data. Filings increased 5 percent from September after California passed a law delaying foreclosures for some borrowers.

Home prices dropped in four out of every five U.S. cities in the third quarter, a record spurred by distressed foreclosure sales across the country, the Chicago-based National Association of Realtors said yesterday. The median price of a U.S. home fell 9 percent from a year earlier as sales of properties with mortgages in default accounted for at least a third of all transactions.

The housing slump is cutting into builders' profits. Toll Brothers Inc., the largest U.S. luxury homebuilder, reported its 10th straight quarterly revenue decline on Nov. 11.

The five largest U.S. homebuilders reported a combined $1.09 billion in losses in their most recent quarters as prospective buyers had difficulty obtaining mortgages. About 70 percent of U.S. banks surveyed indicated they tightened standards on prime mortgage loans, down from 75 percent in the previous survey, the Federal Reserve said on Nov. 3 in its quarterly Senior Loan Officer Survey.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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Consumer Prices in U.S. Decline 1%, Most on Record

By Bob Willis

Nov. 19 (Bloomberg) -- The cost of living in the U.S. fell by the most on record as fuel costs plummeted and retailers used discounts for cars and clothing to entice consumers hobbled by job losses and sinking home values.

Consumer prices plunged 1 percent last month, more than forecast and the most since records began in 1947, after being unchanged the prior month, the Labor Department said in Washington. Excluding food and energy, so-called core prices unexpectedly fell for the first time since 1982.

Today's report signals deflation, or a prolonged slide in prices, may become another hazard facing Federal Reserve Chairman Ben S. Bernanke and President-elect Barack Obama. Deflation could worsen what some economists already call the deepest recession in decades, by making debts harder to pay off and countering the impact of Fed rate cuts.

``We are moving into an environment where prices are falling across the board,'' David Resler, chief economist at Nomura Securities International Inc. in New York, said in an interview with Bloomberg Television. ``That is going to continue. Deflation is spreading across the economy.''

Target Corp. is among retailers cutting prices in an effort to lure away cash-strapped holiday shoppers from Wal-Mart Stores Inc., the discount retailer that last week reported a gain in third-quarter profit.

A separate government report today showed housing starts fell 4.5 percent in October to an annual rate of 791,000, the lowest level since the Commerce Department began keeping the data in 1959.

Treasuries Gain

Treasuries, which rallied earlier in the day, remained higher after the reports. Yields on benchmark 10-year notes fell to 3.45 percent at 8:37 a.m. in New York, from 3.52 percent late yesterday.

Consumer prices were forecast to fall 0.8 percent, according to the median forecast of 77 economists in a Bloomberg News survey. Estimates ranged from a decline of 1.2 percent to a gain of 0.4 percent. Costs excluding food and energy were forecast to rise 0.1 percent, the survey showed.

Prices increased 3.7 percent in the 12 months to October, the smallest year-over-year gain since October 2007. They were forecast to climb 4 percent from a year earlier, according to the survey median.

The core rate increased 2.2 percent from October 2007, after a 2.5 percent year-over-year increase the prior month.

Energy expenses dropped 8.6 percent, the most since 1957. Gasoline prices fell 14 percent, the biggest decline in four decades.

Gas Prices

Gasoline has kept falling this month. A gallon of regular gasoline at the pump averaged $2.07 on Nov. 17, down from an October average of $3.08, according to AAA.

``We are seeing the fallout of global recession on inflation,'' said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. ``In commodity prices, it's leading to deflation.''

The consumer-price index is the last of three monthly price gauges from the Labor Department. The CPI is the broadest gauge because it includes goods and services.

A Labor report yesterday showed wholesale prices fell 2.8 percent last month, the most on record. Last week, the government also said the cost of imported goods declined by the most ever.

Food prices, which account for about a fifth of the CPI, increased 0.3 percent after a 0.6 percent increase in September.

The drop in core prices reflected declines in the cost of clothing, automobiles, air fares and hotel rates. New-vehicle prices fell 0.5 percent and clothing costs dropped 1 percent. The price of airfares plunged 4.8 percent, the most since June 1999.

First Since '82

The cost of all services, excluding fuel, was unchanged, the first time it hadn't increased since 1982.

The benefit of the drop in prices can be seen in its effect on incomes. Today's figures also showed wages increased 1.4 percent after adjusting for inflation, following no change in September. They were still down 0.9 percent over the last 12 months. The decline in purchasing power is contributing to the slowdown in consumer spending.

Retail sales fell 2.8 percent last month, the most on record, Commerce Department figures showed last week. Mounting job losses and record foreclosures are causing American consumers, who account for more than two-thirds of the economy, to retrench.

Wal-Mart, the world's largest retailer, said yesterday it planned to reduce U.S. prices on Thanksgiving food and Christmas merchandise to lure customers during the holidays.

Price `Rollbacks'

``You'll see a lot of rollbacks,'' Eduardo Castro-Wright, Wal-Mart's U.S. stores chief, told analysts at a Morgan Stanley conference in New York. Rollbacks refer to price reductions the retailer scatters throughout grocery, pharmacy and other departments to spur sales.

Target, the second-largest U.S. discounter, said this week it plans to add grocery items and offer ``sharper'' discounts to draw shoppers who are shunning jewelry, clothing and home goods, which account for more than 40 percent of its revenue.

``Right now, the consumer is very hesitant,'' Chief Executive Officer Gregg Steinhafel said during the company's Nov. 17 earnings call. ``They're very stressed.''

Sales of clothing and home goods have been ``sharply lower,'' partly because of banks decreasing consumer credit limits, Chief Financial Officer Douglas Scovanner said during the call.

Leaders in the U.S., Europe and Asia are calling for increased government spending to make up for the loss of consumer purchasing power and lessen the global recession.

Obama and House Democrats are planning to spend as much as half a trillion dollars to stimulate the world's biggest economy and U.K. Prime Minister Gordon Brown pressed other leaders of the Group of 20 nations to follow that effort last weekend.

To contact the report responsible for this story: Bob Willis in Washington at bwillis@bloomberg.net

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India May Reduce Key Interest Rate as Inflation Slows

By Paul Gordon and Cherian Thomas

Nov. 19 (Bloomberg) -- India's central bank has scope to cut borrowing costs further as growth slows and inflation approaches a level ``we can live with,'' Finance Minister Palaniappan Chidambaram said.

The inflation rate dropped the most in close to two decades to 8.98 percent this month as commodity prices tumbled. Chidambaram expects price increases to slow to between 6.5 percent and 7 percent by December, almost half the 16-year high reached in August.

``How rapidly inflation declines will decide how the central bank moves,'' India's longest-serving finance minister since 1980 said in an interview with Bloomberg Television in New Delhi yesterday. ``We have not yet licked inflation, though our expectation is it will come down.''

Chidambaram yesterday met with Governor Duvvuri Subbarao as Indian policy makers work to limit the impact of a global recession on Asia's third-largest economy. The finance minister said companies benefiting from lower borrowing costs should cut prices to help revive domestic demand.

``The writing is on the wall for interest rates to drop in India,'' said Ravi Chaudhry, chairman of Cemex Investment & Services Ltd., a New Delhi-based company that provides investment advice to governments including Norway and Brazil. ``The crisis in the U.S. is endemic.''

The U.S., Europe and Japan slipped into recession last quarter, and China's economy, the biggest contributor to global growth in 2007, is slowing.

`Rapid Rate'

``We need to ensure that our domestic economy, at least the insulated parts of the domestic economy, continues to grow at a rapid rate,'' said Chidambaram, who holds an MBA from Harvard. ``It's the external sector that's causing us problems, so we will have to compensate that. If exports decline, we will have to compensate that by stimulating domestic consumption.''

India, whose 1.1 billion population is second only to China's, is relying on spending by local consumers and companies to make up for a slump in overseas sales. Exports, which make up about a fifth of the $1.2 trillion economy, grew in September at the slowest pace in 18 months.

Subbarao cut the central bank's benchmark repurchase rate by 1.5 percentage points to 7.5 percent in the past month, in addition to slashing lenders' reserve requirements in cash and bonds by 3.5 percentage points and 1 percentage point respectively.

``We expect inflation to decline with falling commodity prices,'' Chidambaram said.

Anticipating Cuts

Bond investors are speculating on further reductions in interest rates. The yield on the benchmark 10-year Indian government bonds fell 6 basis points to 7.40 percent at the close of trading in Mumbai today, extending the decline since the start of last week by 32 basis points. A basis point is 0.01 percentage point.

The benchmark Bombay Stock Exchange Sensitive Index fell 1.8 percent to 8773.78 after gaining as much as 3.4 percent earlier in the day on the Bombay Stock Exchange, while the rupee declined 0.7 percent to 49.99 against the U.S. dollar.

State-run banks, which control half the assets in India's banking sector, slashed their prime lending rates by 75 basis points following the reductions in central bank rates.

Non-state lenders are waiting to see ``if there is enough liquidity in the system'' before they cut their rates, said K. V. Kamath, chief executive officer at ICICI Bank Ltd., India's second-largest lender.

Ball in Suppliers' Court

``Now I think the ball is in the court of suppliers and manufacturers -- they have to cut prices,'' Chidambaram said. ``If they cut prices, I am a 100 percent sure that demand for homes, cars and two-wheelers will sharply pick up.''

The lawyer-turned-politician said the government will consider a stimulus package if required, aimed at supporting specific industries.

Chidambaram said the global credit crunch posed different risks for India and China, which earlier this month announced a $564 billion spending plan.

``I don't think we need to compare China and India,'' the minister said. ``Each country has to address the problems it faces. In our case, the problems are providing liquidity, getting the price right and ensuring banks get over their innate caution and deliver credit at that price.''

India's efforts at propping up the economy may see the government miss its budget deficit target of 2.5 percent of gross domestic product in the year to March 2009.

Chidambaram on Oct. 22 obtained parliament's approval to spend an extra 2.4 trillion rupees ($49 billion) in the year to pay for food subsidies and a rural jobs program, and to refund commercial banks that waived farm debt.

``This is not the year to worry about the fiscal deficit,'' he said. ``We will overshoot the target a bit. We will reach the target later. It doesn't matter.''

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net.

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U.K. Gets Lower Price in Carbon Auction Than Germany

By Mathew Carr

Nov. 19 (Bloomberg) -- The U.K., the European Union's second-biggest economy, sold emissions allowances at a price 32 percent lower than an average for German sales as slumping energy demand has pushed down the cost of carbon credits.

The U.K. got 16.15 euros ($20.37) a metric ton in today's sale of 4 million metric tons of EU carbon dioxide allowances, according to data compiled by Bloomberg, which provided the auction platform. Germany has gotten a price of 23.58 euros a ton, on average, in auctions in the first 10 months of this year, according to a statement from the Environment Ministry.

Under the EU's greenhouse-gas trading program, the world's largest, governments have handed out most permits for free to about 11,000 factories and power plants. Some nations are selling as many as 10 percent of their allowances in the five years through 2012. The permits fell to a 19-month low today.

``I don't think it would have been right to pull the auction'' because of low prices U.K. Treasury Minister Angela Eagle said in a phone interview. The nation had reserved the right to set a floor price and sell fewer than the 4 million tons. Going ahead ``helps give stability'' to the carbon market, Eagle said.

Germany started its sales in January via development bank KfW Group. Prices rose as high as 29.69 euros on July 2, according to the European Climate Exchange in London, the biggest bourse for emissions trading.

Buyers' Potential Profit

The spot price was 16.59 euros as of noon London time, according to the Bluenext SA exchange in Paris, providing a potential profit of 1.8 million euros for today's buyers.

Buyers in the auction bid via so-called ``primary participants,'' which were Barclays Capital, BNP Paribas SA, JPMorgan Chase & Co. and Morgan Stanley.

The U.K. sold 3,999,875 tons of allowances and got bids for 16.6 million tons, the U.K. Debt Management Office said.

EU allowances for December fell as much as 44 cents to 16.11 euros a metric ton after the auction, a 19-month low on the ECX. They were at 16.61 euros as of 12:06 p.m. London time.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

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Cadogan Says Court to Hear Appeal on Ukraine Licenses

By Ben Farey

Nov. 19 (Bloomberg) -- Cadogan Petroleum Plc, a British oil and gas producer operating in Ukraine, said an appeal over two disputed exploration licenses will be heard by a court in Kharkiv.

``Cadogan has been informed that appeals have been lodged with the Kharkiv Administrative Appeals Court in relation to the licenses, though it has yet to receive written confirmation or information as to the substance of such appeals,'' the London- based company said today in a statement.

Cadogan's Pirkovskoe and Zagoryanksa permits were withdrawn by Ukraine's environment ministry in July following a decision by the Poltava Regional Court. In September, two courts ruled that the annulment was unlawful and invalid, and last month the ministry agreed to recognize Cadogan's ``exclusive right'' to the licenses, the company said Oct. 16.

``We remain confident that we will be able to defend our rights to our licenses in any renewed challenge,'' Chief Executive Officer Mark Tolley said in today's statement.

Cadogan lost 11 percent to 66 pence in London trading as of 12:50 p.m. local time, valuing the company at 152.5 million pounds ($230 million).

Commercial production from the fields, set to start early next year, will boost gas supplies in the former Soviet state, which relies on imports of the fuel from Russia and Central Asia. Ukraine consumed 64.6 billion cubic meters of gas last year, about the same as China, according to BP Plc's Statistical Review of World Energy. It produced 19 billion cubic meters of the fuel.

Production `On Track'

``Our operational plans are materially on track,'' Cadogan said. ``However, in light of the current economic and financial markets backdrop we are taking steps to manage our cash resources and cost base'' and are reviewing development plans.

Ukraine is in negotiations with OAO Gazprom, Russia's gas export monopoly, on a price for gas supplies next year. Ukraine currently pays $179.50 for 1,000 cubic meters of the fuel, a price Russia is seeking to increase to European market levels.

Cadogan has asked U.K. auditor Gaffney Cline & Associates Ltd. to reassess its gas deposits, with a view to ``converting contingent resources to reserves'' following recent drilling and testing. The explorer expects a report from the auditor next year.

The company said it has 93 million pounds of cash on its balance sheet, according to today's statement.

To contact the reporter on this story: Ben Farey in London at bfarey@bloomberg.net

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Petrobras Says It's Too Early to Decide on Oil Plans

By Jeb Blount

Nov. 19 (Bloomberg) -- Petroleo Brasileiro SA, Brazil's state-controlled oil company, said it's too early to decide whether the decline in oil prices and the worldwide credit crunch will require a revision of exploration and output plans.

Petrobras, as the company is known, said today in a statement on its Web site that a revision of its 2009-2013 strategic plan hasn't been completed. The scheduled October release of the revision already has been delayed until the end of the year. All budgets are under review with an aim of cutting costs, refining chief Paulo Roberto da Costa said Nov. 4.

The plan revises the company's $112 billion 2008-2012 spending outlook. In August, before bank failures led to the credit crisis and New York oil futures traded for an average close to $117 a barrel, Chief Financial Officer Almir Barbassa said the revision would probably raise spending.

On Nov. 11, following the plunge in oil prices, Barbassa said the plan would focus on projects that generate cash. Oil currently is trading below $54 a barrel in New York.

Rio de Janeiro-based Petrobras today said it still plans to bring 12 contracted deepwater drilling rigs into service by 2012. No date has been set for a planned tender for 28 Brazilian-built drilling rigs. The lack of a date won't delay plans to bring the Brazilian-built rigs into service between 2013 and 2017, Petrobras said.

To contact the reporter on this story: Jeb Blount in Rio de Janeiro at jblount@bloomberg.net

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BW Gas, TMT, Euronav May Avoid Somalia After Attacks by Pirates

By Alaric Nightingale and John Martens

Nov. 19 (Bloomberg) -- BW Gas Ltd., the world's biggest operator of liquefied-gas tankers, Euronav NV and TMT Co. Ltd. said they may divert ships away from Somalia after an escalation in piracy led to the capture of a Saudi Arabian supertanker.

BW Gas is urging its customers to avoid the area and may re- route its own ships, Chief Executive Officer Jan Hakon Pettersen said by phone today. TMT, an owner of oil and gas carriers and coal and ore transporters, urged other shipowners to ``consider similar action,'' in a statement to Bloomberg. Euronav, Belgium's only publicly traded oil-tanker owner, may also shun the area, Chief Financial Officer Hugo De Stoop said by phone.

``We've always told our captains to stay far from the coast in that region, but that may not be enough now,'' De Stoop said. ``Terrorists or pirates, I don't really see the difference.''

The three companies join Frontline Ltd., the world's largest operator of supertankers, which yesterday said it was considering avoiding the region. There have been at least 88 attacks against ships in the area since January and Somalian pirates are holding 250 crew hostage on board 14 merchant vessels.

Shippers may instead have to route their vessels around South Africa's Cape of Good Hope rather than use Egypt's Suez Canal, increasing the cost. The waterway linking the Mediterranean and Red Seas is Egypt's third largest foreign- currency earner after tourism and expatriate remittances.

Customers have been given ``the option to safeguard their cargo,'' BW Gas's Pettersen said from Oslo. ``For us, we would prefer them to use the cape route.''

Pirates on Nov. 15 seized their largest ever prize, a Saudi Arabian supertanker laden with 2 million barrels of crude, worth about $108 million at current prices. The ship itself is worth about $148 million.

Chemicals Shipping

Odfjell SE, the world's largest chemicals shipping line, said Nov. 17 it will avoid the Suez Canal and Gulf of Aden.

The Joint Hull Committee, a group representing ship insurers, is advising shipowners to ``seriously consider'' avoiding Somalian waters, Chairman Simon Stonehouse said yesterday. Insurance premiums will rise and unless the Egyptian government becomes ``more actively interested'' in combating piracy in the region they risk damaging the business of the Suez Canal, Stonehouse said.

The European Union last month joined the North Atlantic Treaty Organization, India, Malaysia and Russia in deploying vessels to combat piracy.

To contact the reporters on this story: Alaric Nightingale in London at Anightingal1@bloomberg.net; John Martens in Brussels at jmartens1@bloomberg.net.

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Pirates Demand Ransom for Tanker; Three Ships Seized

By Caroline Alexander and Hamsa Omar

Nov. 19 (Bloomberg) -- Pirates demanded a ransom for an oil- laden Saudi supertanker amid reports three other merchant vessels have been hijacked in one of the worst spates of attacks in the Gulf of Aden and off the East African coast.

``Negotiators are onboard the ship and on land,'' a man identifying himself as Farah Abd Jameh, a member of the group that hijacked the Saudi tanker, said in an audio tape aired by Al Jazeera television. ``Once they agree on the ransom, it will be taken in cash to the oil tanker.'' He didn't say how much money his group wants.

Saudi Arabia's state-owned shipping line, Vela International Marine Ltd., yesterday said it set up negotiation teams to free the tanker, Sirius Star, and its crew of 25, seized about 420 nautical miles (833 kilometers) off Somalia on Nov. 15. The vessel is carrying more than 2 million barrels of crude valued at $110 million.

Since January, at least 91 vessels have been attacked in the Gulf of Aden, an area of 1 million square miles (2.6 million square kilometers) flanked by Yemen and Somalia and leading to the Suez Canal. Since then, both Indian and British naval ships have engaged pirates in combat and French commandos freed two nationals held by hijackers.

Ransom payments have spurred raiders to step up their activities, the International Maritime Bureau says, even as NATO, European Union, Indian, Malaysian and Russian naval fleets patrol the waters in an anti-piracy mission. NATO said today it didn't plan to increase its mission in the region.

The Sirius Star is anchored near Harardhare, a town in Somalia's semi-autonomous northern Puntland region. ``We assure the safety of the ship carrying the ransom,'' the man said in the Al Jazeera broadcast, warning against any attempts to use counterfeit cash.

War-Torn Somalia

Pirates from war-torn Somalia, which hasn't had an effective government since the 1991 fall of the Siad Barre regime, have asked for $1 million ransoms on average this year, according to Chatham House, a London-based research organization that advises mainly European governments.

In the past 48 hours, pirates in the region have taken control of ships from Hong Kong, Greece and Thailand, Andrew Mwangura, head of the East African Seafarers Association, said in a phone interview from Kenya. Pirates generally use speed boats for raids near the coast and captured fishing trawlers for attacks further out to sea, according to Chatham House.

Today, pirates freed a Hong Kong-flagged ship and 25 crew members captured two months ago, Agence France-Presse said.

Indian Navy

An Indian Navy ship fired at a pirate vessel in the Gulf of Aden yesterday, the government in New Delhi said today. The Navy's+ Tabar encountered the pirate vessel 285 nautical miles southwest of Salalah in Oman. The Tabar has been on an anti- piracy mission in the Gulf of Aden since Nov. 2.

A fire broke out on the pirate ship ``possibly due to exploding ammunition that was stored on the vessel,'' it said in a statement. The clash came a week after the Indian frigate rescued the Saudi Arabia-registered merchant vessel Timaha and a 38,000 metric-ton Indian bulk carrier from pirates.

On Nov. 13, the British Royal Navy commandos gave chase to suspected pirates off the coast of Yemen, killing two of them in an ensuing gunfight. A third pirate later died. In September, French commandos freed two kidnapped nationals, killing one pirate and capturing six.

Hong Kong Ship

The Hong Kong-flagged Delight was hijacked in the Gulf of Aden yesterday. It was carrying 36,000 metric tons of wheat to the Iranian port of Bandar Abbas and had a crew of 25. The Thai- operated boat was also taken yesterday off the coast of Yemen as it sailed toward the Red Sea. The Greek Merchant Marine Ministry in Athens said it couldn't confirm a Greek-flagged or Greek-owned vessel had been seized.

``The pirates really demonstrate unexpected things and are sending a message to the world that they can do what they need to,'' the seafarers association's Mwangura said.

More than 14 vessels and 250 crew members remain hostage, according to the IMB, including a Ukrainian-crewed vessel carrying at least 30 Soviet-designed T-72 tanks bound for Kenya. That ship is anchored near the Sirius Star in Harardhare, Colonel Abshir Abdi Jama, a national security official in Puntland said yesterday.

Pirates are honing their techniques and using Global Positioning System navigational aids and satellite phones to find potential targets, according to Chatham House.

Bigger Than Chrysler Building

The Sirius Star, bigger than the Chrysler Building, a 77- story Manhattan skyscraper, is the largest ship seized and the hijacking was the farthest out to sea that Somali pirates have struck, according to the U.S. Navy. Analysts said the chances of a military response to rescue the ship are slim.

``Everything is possible but it would take extraordinary means and organization, and the risk of an ecological disaster is very high,'' Dominique Montecer, director of operations at GEOS, a French risk management company, said by phone from Paris yesterday. ``They are sitting on a bomb.''

The U.S. Navy Fifth Fleet hasn't had any communication with the pirates or the ship, spokesman Lieutenant Nate Christensen said by phone from Bahrain today.

Hijackers may force shippers to divert vessels from the Gulf of Aden, to take the longer route to Europe and North America around South Africa's Cape of Good Hope, delaying deliveries to Europe and the U.S. and adding to costs.

Still, the Indian Ocean is vast and patrolling it is extremely difficult, the Fifth Fleet's Christensen said.

Extensive Area

``We patrol an area of 2.5 million square miles, from Pakistan to Kenya. The area is extensively large and we can't be everywhere at once,'' he said.

When asked why the Sirius Star wasn't being taken back by force, he said an armed response would require a great deal of international agreement and cooperation.

``It's certainly a very complex environment to work in -- a Liberian-flagged vessel, owned by a Saudi company, in Somali waters, with so many different nationalities on board,'' Christensen said.

The pirates probably fired grappling hooks onto the supertanker's deck, allowing them to scale the ship's 10-meter- high (33-foot) side using rope ladders, said Roger Middleton, an analyst at Chatham House.

Ships are normally attacked by five or six pirates, though as many as 15 may have been involved this time, Middleton said. Once the pirates are on board they're normally joined by others, he said.

Frontline Ltd., the world's largest owner of tanker ships, said it has yet to make a final decision about sending carriers away from Somalia, Jens Martin Jensen, interim chief executive officer of the company's management unit, said by mobile phone from Singapore today.

Sirius Star Crew

The crew of the Sirius Star, 19 Filipinos, two Britons, two Poles, a Saudi and a Croatian, is ``believed to be safe'' and Vela is ``working toward their safe and speedy return,'' Vela said in a statement.

Saudi Arabia is unlikely to be considering an armed response to the hijacking because it may endanger the crew, according to Nick Day, London-based chief executive officer of Diligence Inc., a security and intelligence group.

``Once in port you've got several hundred people around there, heavily armed,'' said Day, a former member of the U.K. military's Special Boat Service.

In any case, shippers say firepower won't rid the region of piracy. Naval units must go after the pirates' dens and boats to reduce piracy, they say, not just patrol the 2,400-kilometer coast waiting for raiders to make the first move.

To contact the reporters on this story: Caroline Alexander in London at calexander1@bloomberg.net; Hamsa Omar in Mogadishu via Johannesburg at pmrichardson@bloomberg.net.

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Solarworld Offers to Buy General Motors' German Sites

By Nicholas Comfort and Chris Reiter

Nov. 19 (Bloomberg) -- Solarworld AG, Germany's third- largest solar company, plans to offer to buy German sites belonging to General Motors Corp.'s Opel division and build environmentally-friendly cars.

The solar company can offer Opel 250 million euros ($315 million) in cash and credit lines amounting to 750 million euros, pending ``complete separation'' from the parent company, Bonn-based Solarworld said today in a statement.

Opel has asked the German government for ``somewhat more than'' 1 billion euros in credit guarantees, to help offset what GM has called the worst auto market since 1945. Solarworld wants to make the German company the first European ``green'' automaker by building more efficient, cars with lower emissions such as hybrid and electricity-powered vehicles.

The offer is subject to the success of federal guarantees for the carmaker's loans, as well GM paying Solarworld compensation of 40,000 euros per employee in Germany, the company said. That amounts to 1 billion euros, according to the statement.

``The scope of possible options widens if there's a bankruptcy in the U.S., but at the moment I think strategically this is something that GM wouldn't contemplate right now,'' Nigel Griffiths, London-based director of research firm IHS Global Insight. ``It's basically giving the company away for nothing.''

Not Viable

The proposed sale would leave GM stuck with factories in Spain and the U.K. that may no longer be viable, he said. ``It would lead to an enormous amount of disruption,'' Griffiths said.

Opel spokesman Joerg Schrott declined to comment when contacted by Bloomberg via e-mail. Milan Nitzschke, a spokesman for Solarworld, wasn't immediately available for comment.

Solarworld stock extended declines in Frankfurt trading on news of the plan.

The company, which makes panels mounted on roofs or in fields to yield power from sunlight, traded down 2.46 euros, or 15 percent, at 13.86 euros as of 1:13 p.m. local time, valuing Solarworld at 1.59 billion euros.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.netChris Reiter in Berlin at creiter2@bloomberg.net.

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