British Pound/Dollar at Support; Rally Expected

Daily Forex Technicals | Written by DailyFX | Jan 13 09 15:23 GMT |

euro / dollar shows signs of short term low GBPUSD forming right shoulder of incerse head and shoulders? USDCAD triangle underway AUDUSD due for a bounce; resistance at .6784 EUR/USD The decline from above 1.47 is wave (b) in what is either a triangle or flat that began at 1.2327. In either case, additional downside is expected but probably not before a test of resistance near 1.3450. We should have the opportunity to buy below 1.30 late this week. USD/JPY To review, the USDJPY rally failed just short of “the 61.8% of 1006.60-87.09 at 95.21. This is also the center of a former congestion zone (roughly 94-97) as well as the 100% extension of the rally from 87.09 to 91.31; at 94.08.” The rally from 87.09 is in 3 waves, which is corrective. As such, a drop below 87.09 is expected. Near term, the decline from 94.67 appears impulsive and a small second wave corrective advance may be complete at 91.69. Staying below there keeps the bear count on track. A move above 91.69 would bring to the forefront the possibility that the corrective advance from 87.09 is not complete and that a complex correction (w-x-y) is underway that will end above 95.21. GBP/USD The GBPUSD has plunged to test 1.4550 this morning. 1.4347 is viewed as the end of a 3rd wave that began at 2.0162 and a retracement of this decline is underway now. If this count is correct, then the GBPUSD should find a bottom soon (before 1.4347). An inverse head and shoulders pattern may be unfolding now as well. USD/CHF The sharp drop from 1.23 is in 5 waves and probably wave A within an A-B-C correction that will end below 1.0367. The rally from 1.0367 is the B wave of that sequence and likely tests resistance from Fibonacci 1.15, eventually. Since the advance from 1.0861 is an impulse (5 waves), wave b is considered complete at 1.0861. Near term, it is unclear whether or not a small second wave is complete. USD/CAD Recent strength in the USDCAD suggests that a triangle is unfolding as wave 4. Triangles unfold in 5 waves (a-b-c-d-e) and wave d is underway now. There is potential resistance at 1.2520 and 1.2750 going forward. The best strategy is to wait for wave e to end before attempting a long position (may be at least a week). AUD/USD I wrote yesterday that “weakness likely extends to .6750.” The AUDUSD has dropped below .67 and at least a corrective advance is due in what could be a small 4th wave. Initial resistance is at .6784. NZD/USD The advance from .5186 failed to retrace even 38.2% of the drop from .8219. As such, it seems unlikely that the rally from .5186 is complete. There is potential support in the .5346-.5415 zone. Additionally, an inverse head and shoulders may be underway from the October 2008 low. 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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Euro Battered Ahead Of ECB's Rate Decision

Daily Forex Technicals | Written by DailyFX | Jan 13 09 15:08 GMT |

Many euro crosses were exhibiting high volatility this morning that was a carry over from the risk appetite seen since yesterday. However, this market dynamic has not imparted a singular direction to the euro itself, but rather cross currency volatility. Will this volatility hold up through to Thursday's European Central Bank Decision; and what can we expect from direction after this notable event risk? Our DailyFX Analysts weigh in. Senior Currency Strategist - Jamie Saettele My picks: EURUSD short, limit order at 1.3490, against 1.3805, target below 1.30 Expertise: Technical Average Time Frame of Trades: 1 day to 1 month Near term, the decline from 1.3802 is in 5 waves and a corrective advance is due. Initial resistance is just below 1.35. Following the expected advance, additional weakness is expected as part of the complex correction from above 1.47. Support does not begin until former resistance at 1.3085. Measured support does not begin until 1.2968. open trades: short USDJPY (from last Wednesday); risk is at 91.69 short AUDUSD (from Friday); exit long USDCHF (from yesterday); risk is at 1.0861, target near 1.15 Currency Strategist - John Kicklighter My picks: Short EURUSD Expertise: Combining Money Management with Fundamental and Technical Analysis Average Time Frame of Trades: 3 days - 1 week There is a good chance that the EURUSD will lose its momentum heading into Thursday's serious event risk; but the pair's direction and drive are hard to argue against at this point. At this point, the euro is having far less influence on the pair's decline than the dollar - which is likely moving in response to swelling risk aversion trends. Therefore, this development of this bear wave will be dependent on a number of factors: risk trends; the European Central Bank's rate decision; and speculative momentum. For a trade, we certainly need momentum and direction; but it is a precarious situation to depend upon the perfect cooridiation of so many fundmental factors to carry a position to profitability. Looking at things objectively, it is very difficult to gauge how risk appetite will develop over the coming days; but for the central bank decision, we can have a more straightforward forecast. Economists expect a 50 basis point cut that would bring the central bank to 2.00 percent. Beyond this cut though, traders are more concerned with the precieved pace of policy going forward to gauge whether the region's benchmark is destined to a near-zero level like its US, Japanese and perhaps UK counterpart are. Fundamental factors aside, the pure technicals of the EURUSD's price action are encouraging. The bearish reversal from the December 18th swing high has come in phases, but has been otherwise consistent. With today's development, we seem to be breaking a recent range that has developed within the larger bias by slipping below 1.3250/300. This former support was developed through a confluence of Fib levels, a clear pivot and the wave defining 50-day simple moving average (SMA). Without the burden of heavy event risk, a move like this could make its own follow through; but we will have to gauge momentum before, during and after the rate decision. An early exit to avoid the event risk would be reasonable - and a stop based on momentum (cut the position when the decline stalls) could best serve our needs. Regardless, this position should be built through multiple lots with a first target that merely covers risk and isn't more aggressive than a test of the congestion band through November. The second stop can be treated more aggressively as long as its stop is trailed to secure profit. Currency Strategist - Terri Belkas My picks: Long EUR/GBP (pick from Monday) Expertise: Fundamentals combined with technicals Average Time Frame of Trades: 1 - 3 days Sticking with my pick from Monday, EUR/GBP has yet to hit my profit target of 0.9318, where we have the 50% fib of 0.9805 - 0.8838. Indeed, lingering risk aversion in the financial markets, which wasn't really allayed by comments from Federal Reserve Chairman Ben Bernanke this morning, should continue to work in favor of British pound weakness. Currency Analyst - David Rodriguez My picks: Take partial profits on the EUR/JPY position Expertise: System Trading Average Time Frame of Trades: 2-10 weeks On 12-31 I called for a EUR/JPY short against 131, and so far the trade has paid dividends. I'd like to begin taking profits on the trade, as it is already about 1000 pips in the green. A continued hold of 118.00 shows risk of a further bounce, but I don't want to close the entire trade here. Move risk on the position to 121.00 on the remainder and look for a test near 115.00 as a subsequent price target. Currency Analyst - Ilya Spivak My picks: Hold EURUSD Short Expertise: Macro Fundamentals, Classic Technical Analysis Average Time Frame of Trades: 1 week - 6 months In yesterday's pick, I wrote that EURUSD was "[testing] a key support/resistance level at 1.3409. A daily close below here clears the way for a selling opportunity targeting 1.3075, the range top that contained the pair from 10/22/08 - 11/10/08." Entry conditions were met and the position was triggered at 1.3364. Set a stop-loss at at 1.3508 above yesterday’s wick high. Currency Analyst - John Rivera My picks:Short EUR/USD Expertise: Fundamentals Combined With Technicals Average Time Frame of Trades: 1-2 Days The expectations that the ECB will cut rates by 50 bps and will need to continue easing as the region’s economic pictures grows dimmer has the Euro on the run. A push below 1.300 is a strong possibility with a re-test of 1.2500 not out of the question. However, President Trichet was overly optimistic about the global economy in 2010 in recent comments which could lead to hawkish post decision remarks from the MPC leader, which could curve Euro bearish sentiment. Currency Analyst - David Song My picks: Short EUR/CHF Expertise: Fundamentals and Technicals Average Time Frame of Trades: 2 - 10 Days Expectations for a 50bp rate cut by the ECB has weighed on the euro, and the regions currency is likely to face increased selling pressures over the near-term as market participants expect European policymakers to continue their easing cycle in 2009. After slipping to a low of 1.4299 on 10/27, the pair bounced back to reach a high of 1.5885 on 12/15, but the lack of momentum to push higher favors a bearish forecast for the pair. Moreover, the sharp retracement from the December high indicates that investors remain risk adverse, and I anticipate the euro-franc to face increased selling pressures over the week as risk sentiment continues to dictate price action in the currency market. I expect the euro-franc to work its way towards the 11/12 low of 1.4716 over the week, and a break below this level could drag the pair towards the 10/24 low of 1.4410 over the near-term. 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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Daily Forex Fundamentals | Written by Investica | Jan 13 09 15:15 GMT |

Sterling Support Fades Underlying Sterling confidence will remain very fragile as the economy continues to deteriorate, but the global risks suggest that losses should be limited from current levels. Sterling weakened back to lows beyond 0.90 against the Euro on Monday. Sterling also failed to hold above 1.50 against the dollar and dipped to lows around 1.4810 in US trading. The currency was unsettled by the decline in risk appetite as underlying confidence remained very fragile. There were continuing announcements of substantial job losses which offset the impact of government plans to support the labour market. The retail sales evidence remained weak with the BRC report recording an annual like-for-like sales decline of 3.3% for December which will reinforce consumer spending fears while there was a very weak BCC survey on economic trends. Sterling should still gain some support from the major difficulties seen in other global economies. The UK November trade deficit for goods rose to a record GBP8.3bn from GBP7.6bn the previous month as non-EU exports declined and this will further undermine confidence in the economy with fears that the improved competitiveness will not have a major beneficial impact. Sterling pushing to lows below 1.46 against the dollar. Investica http://www.investica.co.uk Disclaimer: Investica's market analysis is not investment advice and must not be taken as recommending particular market positions. Investica can take no responsibility for any actions taken by investors.

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U.S. Trade Balance Strengthens

Daily Forex Fundamentals | Written by RBC Financial Group | Jan 13 09 15:04 GMT |

The U.S. trade balance improved to -US$40.4 billion in November following the prior month's -US$56.7 billion reading (revised from -US$57.2 billion). The market had been expecting a more muted improvement to -US$51 billion. Both exports and imports fell, with the latter outpacing the former leading to the smallest trade deficit since November 2003. Both exports and imports registered weakness leading to a 28.7% month-over-month improvement in the trade balance. Exports fell 5.8% month-over-month with all categories posting declines except the volatile aircraft component. Industrial supplies and autos were particularly weak, registering falls of 13.4% and 10.8%, respectively. Imports were even weaker falling 12% in November. All categories except aircraft posted declines. Of particular note was the 9.4% fall in imports of consumer goods, boding ill for personal consumption in the month. However, a good portion of the trade balance improvement is attributable to the fall in oil prices as the import price fell from US$92 per barrel in October to US$66.7 per barrel in November. This led to a fall in the value of imported petroleum to $22 billion from US$37.6 billion in the prior month. Nonetheless, the real goods balance excluding petroleum narrowed to -US$32.8 billion from -US$36.9 billion. Despite today's improvement in the trade balance, we expect fourth quarter U.S. growth to decline at a 6.1% annualized pace. Falling consumer and investment spending will exert significant drags on growth and these factors are likely to keep the economy in recession in the first half of 2009. However, the Fed's aggressive easing of monetary policy combined with the hearty dose of fiscal stimulus that is in the pipeline are expected to lend support to the economy in the second half of the year and we forecast that GDP growth will turn positive. Even with a mild recovery expected later this year, we anticipate that the Fed will leave its target Fed funds rate in the current 0% to 0.25% range throughout this and much of next year in an effort to put the economy on a firmer growth path and ensure that the recovery picks up pace in 2010. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

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Net Exports to Support Canada's Growth in the Fourth Quarter

Daily Forex Fundamentals | Written by RBC Financial Group | Jan 13 09 15:03 GMT |

Canada merchandise trade surplus came in at C$1.3 billion in November, less than one-half the forecasted C$3 billion surplus. October's surplus was revised down to C$2.3 billion from an initially estimated C$3.8 billion. The narrowing in the November current dollar surplus reflected decreases in both exports and imports, which fell 6.8% and 4.8%, respectively. In constant dollar terms, which measures the volumes of exports and imports after removing the effect of price changes, exports fell by 1.8% with imports declining by a stronger 2.3%. Current dollar exports fell in most major industry categories, with the largest single decline coming in energy products, which slumped by 19.4% as well as a 15% price drop and a 5.1% reduction in volumes. Exports of automotive products, forestry products and industrial goods also declined in November with only agricultural products and machinery and equipment posting increases. In constant 2002 dollars, exports fell 1.8%, marking the eighth decline during 11 months of 2008. The decline in imports in November largely reflected a 36.5% drop in energy purchases, with prices off 19.6% and volumes falling by 34.9%. In constant 2002 dollars, imports fell by 2.3%, outpacing the weakening in exports and producing a narrowing in the real trade deficit to C$5.56 billion, the smallest since March 2008. The drop in import volumes in October and November outpaced the decline in export volumes. We expect that the combination of the financial market crisis and deepening U.S. recession will continue to curtail export demand with import demand likely to weaken with Canada's economy having slipped into recession late last year. On balance, the data point to net exports acting as a support to the economy in the fourth quarter. However, while the trade sector may help the growth outlook, the weakening labour market and the sharp the erosion in both consumer and business confidence have dampened spending, which we forecast will result in Canadian GDP contracting at a 2.5% annualized pace in the fourth quarter. With the data signalling that Canada's economy stalled in the fourth quarter, the Bank of Canada is likely to remain on its easing course following up December's aggressive 75 basis point rate cut with another 50 basis points ease next week. Inflation pressures have clearly weakened in recent months, with the headline rate being buffeted about by changes in energy prices and the growing slack in the economy likely to rein in core prices in the months ahead. Our base line view is that the Bank will lower the overnight rate to 1.00% and hold it there throughout 2009 and into 2010. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

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Trade Deficit Falls to Five-Year Low as Oil Imports Collapse

Daily Forex Fundamentals | Written by Wachovia Corporation | Jan 13 09 15:02 GMT |

The trade deficit came out much smaller than expected, dropping to a five-year low in November. A collapse in the value of oil imports explains much of the decline. However, non-oil imports weakened sharply as well, reflecting weakness in the domestic economy. Meanwhile, foreign recessions are causing exports to decline. Collapse in Oil Imports Drives Trade Deficit Lower The trade deficit came out much smaller than expected, largely because the value of oil imports fell sharply. The collapse in the price of petroleum since July finally showed up in the nation's import bill. That said, non-oil imports were also off more than $10 billion, reflecting weakness in the domestic economy. Global Recession Pulling Exports Lower The trade deficit would have narrowed even further had exports not dropped $7.6 billion. Broad-based declines in exports reflect the effects of the global recession. Net exports have propped up real GDP growth over the past year or so. By our reckoning, however, net exports made very little contribution to growth in the fourth quarter. Wachovia Corporation http://www.wachovia.com Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.

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The Yen Continues to Appreciate

Daily Forex Fundamentals | Written by Crown Forex | Jan 13 09 14:52 GMT |

We still see unwinding of carry trades in the markets as the yen has found its way to incline against majors. The global recession continues to deepen and threaten economies across the world as investor risk appetite has diminished significantly spurring investments in the Japanese yen as the lowest yielding currency and in the yellow metal after global stock indices plummeted triggering more fears. After breaching the 61.8% correction for the ascending channel yesterday at 90, the USD/JPY pair continued to decline targeting the next correction at 88.90 before resulting in a significant rebound to the upside as the pair has been trading within an oversold area on momentum indicators on the four hour charts. We still see the chance for the pair to retest the 90 level yet the upside direction seems to still be weak as volume and the trend of trading according to the MACD indicator is still bearish. Therefore, since we see contradicting signals on technical indicators, trading today could be of high volatility. As for the pound versus yen cross, the pair completed the correction today for the short term ascending channel that has been within a consolidation area since the beginning of December. However, as the pair fell, it failed to gather enough bearish momentum to breach the 100% correction at 129.86 to cause a similar rebound to levels above the 130 mark. William's percent range suggests that an upside correction should be expected anytime soon but as these movements are weakening, the correction will probably be halted by minor resistances before reaching the 76.4% resistance at 132.59. Concerning the EUR/JPY pair, we see the pair had breached the 76.4% correction at 119.17 to maintain trading levels below this correction to open the way for the next medium term target at 116.30 which is the key support for the consolidation area the pair has been trading within. However, before reaching this level, the pair will face several minor supports that in order for them to be breached, must first correct to the upside to the 119.17 level at the very least to shake off the excess selling orders and reverse back to the downside with enough bearish momentum to reach our above mentioned proposed target. Yet during today's session, we could witness high volatility in the markets as direction indicators still support the downside movements while momentum indicators are suggesting an upside correction but since we have yet to see any reversal signals, we expect the pair to continue to decline. Moving on to the majors, the selling pressure on the Euro cross, resulted in a decline in the EUR/USD pair as it is currently testing the 1.3220 support level where if successfully breached to the downside, will open the way to our next target at 1.3070. The target is achievable despite some momentum indicators showing the pair being oversold but reaching this level, will be difficult for the pair even if direction indicators such as the ADX indicator still signals more potential to the downside. Finally, the Royal Sterling continued to slide versus the dollar where it is currently targeting the key support for the consolidation at 1.4470. The target isn't far and we see no signs of divergence or reversals that suggest a possible upside correction and therefore we expect the pair to reach this target in the near future. Direction and momentum indicators are both supporting the downside direction but to confirm this, we will need to see a daily close below the 76.4% correction for the short term ascending channel at 1.4584. Crown Forex disclaimer:The above may contain information for investors/traders and is not a recommendation to buy or sell currencies, gold, silver & energies, nor an offer to buy or sell currencies, gold, silver & energies. The information provided is obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. I am not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trading currencies, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, gold, silver &energies presented should be considered speculative with a high degree of volatility and risk.

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U.S. Trade Deficit Falls to $40.4 bln

Daily Forex Fundamentals | Written by DailyFX | Jan 13 09 14:50 GMT |

The United States Commerce Department reported today that the U.S. Trade deficit fell to $40.4 bln in November, the lowest level in five years, from $57 bln in October. The report showed a record fall in the amount of imports from China and a remarkable fall in the demand for oil. The U.S. dollar extended gains against the euro after the government report was announced. However, the trade report for November is backward looking reflecting information that has been already discounted by the market. Moreover, one of the reasons why the trade deficit shrink so much was the rapid rise of the U.S. dollar during the month of October and November. 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 Firm as Trade Deficit Unexpectedly Narrowed to Five Year Low

Market Overview | Written by ActionForex.com | Jan 13 09 14:26 GMT |

USD/CAD soars in early US session after the release of trade balance data from both countries. US trade deficit unexpectedly narrowed to -40.4b in Nov, much smaller than expectation of -54.4b and hit a five year low. On the other hand, Canadian trade surplus shrank more than expected to 1.28b in Nov. Fall in oil prices is the main reason behind the surprises in the trade data. USD/CAD extends recently rebound to as high as 1.2312 in early US session and is set to take on 1.2345 near term resistance level. Though the rally lost some team as oil rebounds from day low of 36.1 to above 38. Dollar remains strong in general with dollar index taking out last week's high of 84.01. This indicates that whole rebound from 77.69 has resumed and should now be targeting a retest of 88.46 high. Fed Bernanke warned in a speech today that fiscal stimulus are "unlikely to promote a lasting recovery" and should be accompanied by "strong measures to further stabilize and strengthen the financial system". Bernanke said the "more capital injections and guarantees" would be needed for stability and normalization of credit markets. Released earlier, trade deficit in the UK widened to -8.33B pounds in November (consensus: -7.5B pounds; October: -7.63B pounds (revised)), the largest deficit since record began in 1697 as exports outside of EU, especially to the US, declined sharply. DCLG house price plunged by another -5.3% after the revised drop of -7.44% in October. Earlier today, the RICS house price balance eased slightly to -73% in December, compared with market expectation of -74% and November's -76%. In Germany, Wholesale price index dropped -3.0% mom, -3.3% yoy in Dec. Japan's trade balance came in at a deficit of -93.4B yen in November, compared with consensus of -76.2B yen and a surplus of 145.8B yen in October. Current account surplus in November narrowed for a 9th month to 581.2B yen, -66% from the same period last year. The reading is worse than market expectation of 600B yen and 960.5B in October as export declined by 26.5% while import dropped by 13.7%. Economic watch DI dropped further to 17.6 in Dec. USD/CAD Mid-Day Outlook Daily Pivots: (S1) 1.1963; (P) 1.2079; (R1) 1.2287; More. USD/CAD's rebound from 1.1761 extends further to as high as 1.2312 in early US session. The decisive break of inner trend line resistance argues that fall from 1.3005 has completed at 1.1761. At this point, intraday bias remains on the upside as long as 1.2139 minor support holds. Break will confirm this case and bring retest of 1.3005/15 resistance zone. On the downside, below 1.2139 will turn intraday outlook neutral first. In the bigger picture, there is no confirmation of completion of medium term up trend from 0.9056 yet. Such rise is expected to be developing into a five wave sequence (1.0378, 0.9823, 1.3015, ......) Though, recent development, with weekly MACD crossed below signal line, suggests that consolidation from 1.3015, which should be the fourth wave consolidation, is still in progress. Another fall could be seen to 1.1464 support and below. Though downside is expected to be contained by 50% retracement of 0.9823 to 1.3015 at 1.1419 and bring medium term up trend resumption. Above 1.3005/15 will pave the way towards 61.8% retracement of 1.6196 to 0.9056 at 1.3469 before making a medium term top. On the downside, however, decisive break of 1.1419 will dampen this view and argue that a medium term top is possibly in place at 1.3015 already and much deeper decline could then be seen back to support zone of 0.9709/1.0378.

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Goodhart Says ‘Sack’ DMO to Bolster U.K. Economy

By Svenja O’Donnell

Jan. 13 (Bloomberg) -- Prime Minister Gordon Brown should “sack” the U.K. Debt Management Office and refrain from issuing government bonds as a way of bolstering the economy, former Bank of England policy maker Charles Goodhart said.

“The one single thing that I would like to see, in a sense to get us out of the present problem, would be very simple,” Goodhart told lawmakers on Parliament’s Treasury Committee today. “It would be: sack the Debt Management Office and just not issue gilts for quite a long time so that the huge deficit simply comes into the system in the form of increases in liquidity and increases in the money supply.”

Policy makers are seeking new tools to fight the recession as interest rates approach zero. Brown’s government plans an unprecedented 146.4 billion pounds ($214.15 billion) of debt sales in the fiscal year ending March 31 to finance bank bailouts amid a decline in tax revenue.

“To keep the system sufficiently liquid and monetary growth sufficiently high, the government ought to be under- funding the deficit,” Goodhart said. “When banks are having difficulty in lending to the private sector, there needs to be a much greater expansion of lending to the public sector.”

Underfunding the gap would see the government selling fewer bonds than are necessary to pay for its budget deficit. That leaves more money in the hands of investors who may have spent them on gilts, keeping more money in the economy than would otherwise be the case. Brown forecasts a deficit of 118 billion pounds in the year through March 2010, or 8 percent of gross domestic product, the most since modern records began in 1970.

Rate Cuts

The Bank of England on Jan. 8 cut the benchmark interest rate to 1.5 percent, the lowest since 1694. With the prospect of further reductions, Governor Mervyn King may have to cooperate with Brown to inject money into the economy through so-called quantitative easing.

Banks, nursing more than $1 trillion of losses from the financial crisis, have rationed lending, driving Britain deeper into a recession. After almost 16 years of continuous growth, the economy contracted 0.6 percent in the third quarter. The economy slumped the most in at least two decades during the fourth quarter, the British Chambers of Commerce said today.

“Under-funding the deficit would be far less damaging to the economy that to force some minimum of lending,” Goodhart said today.

The Debt Management Office, which oversees auctions of government bonds for the Treasury, on Jan. 7 held the first of 20 sales earmarked for January through March.

Policy makers have yet to explain what options may be available to them to combat the recession if they cut interest rates close to zero.

Former Bank of England economists Shamik Dhar and Danny Gabay suggested last week that the government should purchase houses on the verge of repossession to add money to the economy and save families from being thrown out of their homes. The plan would cost about 50 billion pounds over five years, they said in a report on Jan. 9.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.

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Merkel’s Coalition Forges $66 Billion Stimulus Plan

By Rainer Buergin and Brian Parkin

Jan. 13 (Bloomberg) -- Chancellor Angela Merkel’s coalition agreed to spend an extra 50 billion euros ($66 billion) this year and next and backed a fund to guarantee loans to companies, seeking to stem Germany’s worst recession since World War II.

The package approved late yesterday plus steps passed in November bring Germany’s fiscal stimulus to 82 billion euros over two years, about 1.6 percent of gross domestic product, the biggest in Europe. It underscores Merkel’s election-year shift away from a focus on eliminating the budget deficit.

The program of economic aid is “the biggest in the history of the Federal Republic of Germany,” founded in 1949, Merkel told reporters in Berlin today. “We will do everything possible to ensure that Germany not only overcomes this crisis, but emerges stronger from it.”

Merkel is not the only European leader crafting new measures to counter the slump. U.K. Prime Minister Gordon Brown has proposed 500 million pounds ($734 million) to spur hiring and will outline measures tomorrow to ease lending for small businesses. French President Nicolas Sarkozy is preparing a second package for banks worth 10.6 billion euros and said Jan. 8 that he will emulate German plans to help companies borrow.

‘More Capable’

“When I look around Europe, I can’t see anyone doing more or doing things more appropriately,” Foreign Minister Frank- Walter Steinmeier, leader of the Social Democratic Party, coalition partner to Merkel’s Christian Democrats, told the same press conference.

Germany’s AAA long-term and A-1+ short term credit ratings, the highest investment grade, were reaffirmed today by Standard & Poor’s. Germany is comparatively “well-positioned to weather the economic crisis” and its economy remains “very competitive,” said S&P.

The German program, forged during a six-hour meeting in Berlin last night, includes investment in schools and roads, steps to lower health-insurance payments, a reduction of the lowest income-tax rate and 100-euro checks for each child. The parties also agreed on a “protective umbrella” for non- financial companies of about 100 billion euros to guarantee loans. A Social Democrat proposal to raise the highest rate of income tax was rejected.

DAX Falls

Industry bodies including the BDI lobby and BGA exporters group welcomed the package. Germany’s benchmark DAX index was trading at 4,605.26 as of 2:03 p.m. in Frankfurt, down 2.4 percent from yesterday’s close.

The stimulus may still be too late to bolster Germany’s export-driven economy in 2009, said Andreas Rees, chief German economist at UniCredit Markets & Investment Banking in Munich.

The package “will have an effect, but after the summer of 2009 at the earliest,” Rees said in a Jan. 11 note to investors.

International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview on Jan. 9 that western European governments are “behind the curve” in implementing stimulus packages and are “still underestimating the needs.”

President-elect Barack Obama plans a two-year U.S. stimulus program of about $775 billion, or about 2.8 percent of GDP.

Recession Deepens

Merkel faced criticism from business lobbies, unions and economists last year who said that the first stimulus package was insufficient to arrest the deepening recession in Europe’s biggest economy, where one in three jobs relies on foreign sales. Manufacturing orders extended their worst decline on record in November and exports dropped by a record.

Volkswagen AG, Daimler AG and Bayerische Motoren Werke AG are among car manufacturers that have suspended production, canceled shifts and shortened working hours in recent weeks. German car sales fell last year to the lowest level since reunification in 1990.

The “awful” numbers signal a “terrible year for growth,” said Dominic Bryant, an economist at BNP Paribas in London, who expects the economy to shrink 3 percent this year, the most since 1949. The government is scheduled to release new growth forecasts on Jan. 28.

Even so, Merkel, 54, will probably reap any political gains from the second stimulus package rather than Steinmeier, 53, her challenger at national elections on Sept. 27, according to Manfred Guellner, managing director of polling company Forsa.

Three of four polls published last week showed Merkel’s Christian Democrats and the pro-business Free Democratic Party, her favored coalition partner, with 50 percent support or more - - enough to form a government if replicated in September.

Education Investment

Merkel, appearing alongside Steinmeier and Horst Seehofer, leader of the Christian Social Union, the CDU’s Bavarian sister party, said the coalition agreed on infrastructure investments of 18 billion euros, most of which will be targeted at improving education facilities.

Lower taxes in the package comprise a tax-free amount that’s been raised to 8,004 euros from 7,664 euros and a reduction to 14 percent in the lowest income-tax rate from 15 percent. The government will also pay for a reduction in health- insurance contributions shared between workers and employers to 14.9 percent of gross pay from 15.5 percent. Other measures include a 2,500 euro payment for drivers who buy a new low- emission car.

Merkel said the government will use either profits from the Bundesbank or additional revenue from growth to pay for the measures and ensure there is a “brake on debt.”

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Brian Parkin in Berlin at bparkin@bloomberg.net.

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U.S. Trade Gap Narrows to 5-Year Low on Import Slump

By Courtney Schlisserman

Jan. 13 (Bloomberg) -- The U.S. trade deficit 29 percent in November, the most in 12 years, as tumbling oil prices and a slump in consumer spending slashed imports.

The gap shrank more than forecast to $40.4 billion, the smallest since November 2003, from a revised $56.7 billion in October, the Commerce Department said today in Washington. Americans bought 12 percent fewer goods and services from overseas, sending imports to the lowest level in three years.

World trade is likely to contract as commodity prices fall and the credit crunch causes consumers and businesses worldwide to pare spending, deepening the economic slump. President-elect Barack Obama faces growing fissures with trading partners as U.S. steel and textile companies seek to slow imports while automakers get government loans to avoid bankruptcy.

“The fact that this is a consumer-led recession means the U.S. trade balance is likely to continue to improve,” said Kevin Logan, a senior market economist at Dresdner Kleinwort in New York. “It will give the economy a bit of a cushion.”

Economists had forecast the deficit would narrow to $51 billion, according to the median of 66 projections in a Bloomberg News survey. Estimates ranged from gaps of $39 billion to $58 billion.

GDP Outlook

After eliminating the effect of prices, which are the numbers used when calculating gross domestic product, the deficit dropped to $39.5 billion from $45.6 billion in October. By subtracting less from growth, the improvement may prompt some economists to boost GDP forecasts for last quarter.

Trade has added to the economy since the first three months of 2007.

The world’s largest economy probably shrank 5 percent in the last three months of 2008 and will continue to contract through the first half of 2009, according to the median forecast of economists surveyed this month.

Imports fell to $183.2 billion, as demand for foreign crude oil, automobiles, computers and televisions sagged, reflecting the deepening slump in consumer and business spending.

The price of imported oil decreased by a record $25.30 a barrel to $66.72 in November, according to today’s report.

Imports from China also declined by the most on record, narrowing the politically sensitive trade deficit to $23.1 billion.

‘Sharp Slowing’

“Heightened systemic risks, falling asset values, and tightening credit have in turn taken a heavy toll on business and consumer confidence and precipitated a sharp slowing in global economic activity,” Federal Reserve Chairman Ben S. Bernanke said in a speech today in London.

U.S. companies are still pressing for more decreases. During the election campaign Obama pledged to take a harder line against China by forcing it to raise the value of its currency, and by accepting industry petitions to impose quotas, called safeguards, on Chinese imports, reversing Bush administration policy. Textile, steel and other U.S.-based manufacturers say they want Obama to make good on those pledges.

China’s economy will expand 7.5 percent this year, the slowest pace in almost two decades, as their exports slump, according to a forecast from World Bank. The lender also projects international trade will shrink this year for the first time in more than a quarter century.

Auto Bailout

Obama faces “a trans-Atlantic trade war” should his economic policies focus on preserving “outdated structures” of U.S. carmakers, a member of German Chancellor Angela Merkel’s Christian Democrats said yesterday. General Motors Corp. is to receive $13.4 billion and Chrysler LLC $4 billion in loans from the U.S. Treasury in return for restructuring to assure their long-term viability.

Exports also plunged in November, declining for a fourth consecutive month as growth overseas slowed. Demand for American- made goods dropped 5.8 percent to $142.8 billion. Foreign purchases of automobiles were the lowest since October 2006.

Today’s report indicates international demand is no longer helping to support factories. The Institute for Supply Management said on Jan. 2 that its export gauge for manufacturers dropped to 35.5 in December, a record low.

Deliveries by Boeing Co. to buyers overseas continued to weaken in November as the world’s second-biggest airplane maker recovered from a two-month strike that was resolved Nov. 1. Boeing delivered 3 aircraft to foreign buyers during the month, down from 4 in October, 6 in September and 23 in August, according to company data.

The Chicago-based planemaker said Jan. 9 it plans to cut about 4,500 jobs, or 6.6 percent of its commercial-aircraft workforce, this year to reduce costs as the weakening global economy hurts demand for new planes.

“We are taking prudent actions to make sure Boeing remains well positioned in today’s difficult economic environment,” Scott Carson, the head of Boeing Commercial Airplanes, said in the statement.

The International Monetary Fund forecasts that advanced economies will contract simultaneously this year for the first time since World War II.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

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Total to Raise Investment in Exploration, Production

By Tara Patel

Jan. 13 (Bloomberg) -- Total SA, Europe’s third-largest petroleum company, will invest more this year in exploration and production even as oil prices fall, an executive said today.

“With a perspective on the long term we will continue to invest,” according to Laurent Maurel, vice president for business strategy at Total’s exploration and production division. “We will invest more in 2009 than in 2008 despite the drop in oil prices,” he said at an energy conference in Paris.

Spending on exploration and production will rise by about 15 percent, Maurel said in a subsequent interview, adding that the company will invest in the same “traditional geographic zones” as previous years.

Total Chief Executive Officer Christophe de Margerie has said the company will report lower earnings for the fourth quarter and the current quarter on declining oil prices, which have plunged more than $100 a barrel in the past six months. Total will announce fourth-quarter results next month.

Crude trading below $50 a barrel is a “danger” because investment by smaller companies may drop, according to the CEO.

Oil prices need to be higher for profitable investment in Canadian oil sands and deepwater fields off Angola, Maurel said today. Total requires prices of about $80 to $85 a barrel to profitably develop the oil sands and around $60 for Blocks 31 and 32 off Angola, he said.

Oil traded as low as $36.10 a barrel today in New York.

“We don’t know today whether we have seen the bottom” of the oil price, he said, adding that Total doesn’t have to make decisions on investment in Canadian projects before the end of this year, by which time development costs may have dropped.

The Paris-based company, whose European competitors include Royal Dutch Shell Plc and BP Plc, expects world crude output to “stabilize” at around 95 million barrels a day, including production of heavy oils and condensates, before 2020, he said.

To contact the reporter on this story: Tara Patel in Paris at tpatel2@bloomberg.net

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Heritage, Tullow Make ‘World-Class’ Ugandan Oil Find

By Guy Collins and Ben Farey

Jan. 13 (Bloomberg) -- Heritage Oil Plc reported a “world-class” oil discovery in Uganda with Tullow Oil Plc, which it said has “multibillion barrel potential.”

The Giraffe-1 discovery has a gross oil-bearing interval of 89 meters (292 feet), with 38 meters of net oil pay, it said in a statement today.

The Buffalo-Giraffe structure may be “substantially more extensive than currently outlined,” Heritage Chief Executive Officer Tony Buckingham said in the statement.

Heritage Oil jumped as much as 13 percent and traded 12.25 pence higher at 229.5 pence as of 11:29 a.m. in London. Tullow fell 4.1 percent to 678 pence.

The complex may extend into the Buffalo East prospect creating a structure of as many as 90 square kilometers, Heritage said. Drilling will continue at Block 1 this year.

Heritage is the operator of Block 1 and Block 3A in Uganda with a 50 percent equity interest in the licenses. Tullow Oil has the remaining 50 percent interest.

Heritage may sell some non-core producing assets to fast- track oil production, Chief Financial Officer Paul Atherton said in a phone interview today.

“We are being approached by financiers interested in financing our development in Uganda,” he said, declining to be more specific. Heritage had $113 million of cash in the bank as of the end of September, he said.

An 800-mile pipeline to either Mombassa in Kenya or Dar-es- Salaam in Tanzania will be needed, Atherton said. First oil production in Uganda is achievable by 2011, he added.

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

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Talisman 2009 Output Will Be Little Changed; Spending to Fall

By Jim Polson

Jan. 13 (Bloomberg) -- Talisman Energy Inc., the Canadian oil and natural-gas producer with reserves in the North Sea and North America, said 2009 production will be little changed and spending will be lower because of decreased prices.

Daily output should be “broadly similar” to an estimate of 430,000 barrels of oil equivalent for 2008, Chief Executive Officer John Manzoni said today in a statement. The Calgary- based company raised C$1 billion last year by selling reserves that produced the equivalent of 12,000 barrels of oil per day.

Spending for exploration and development will be C$3.6 billion ($2.93 billion) funded from operating cash and the asset sales, Talisman said. The 2008 exploration and development budget was set at C$4.38 billion a year ago, the company has said.

“Our objective this year is to preserve financial flexibility by living within our means,” Manzoni said in today’s statement. “We have assumed what we hope to be a conservative scenario for oil and gas prices in 2009.”

The spending forecast is based on a benchmark oil price of $40 per barrel and gas at $5 per million British thermal units, Talisman said. Crude oil for February delivery fell as much as $1.49, or 4 percent, to $36.10 per barrel in electronic trading on the New York Mercantile Exchange. Gas dropped 9.5 cents to $5.447.

Talisman expects to spend C$1 billion to develop Marcellus Shale gas production in the eastern U.S. and other so-called unconventional deposits. The North Sea budget is C$1.4 billion, aimed at increasing Norway output and maintaining U.K. production levels. The company also said some planned U.K. asset sales will be delayed, without elaborating.

The statement was issued before the start of regular trading on North American markets. Talisman fell 52 cents, or 4.2 percent, to C$11.95 yesterday on the Toronto Stock Exchange. The stock has dropped 37 percent in the past year. Fourth- quarter financial results are scheduled to be released March 5, Talisman said.

(Talisman will conduct a conference call beginning at 1 p.m. New York time, accessible on the company’s Web site at http://www.talisman-energy.com.)

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net.

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Crude Oil Rises as Saudi Arabia Says It Will Make Deeper Cuts

By Mark Shenk

Jan. 13 (Bloomberg) -- Crude oil rose for the first time in six days in New York after Saudi Arabia said it will make deeper supply cuts than those announced at OPEC’s December meeting.

The country is producing 8 million barrels a day, about level with an 8.051 million barrel-a-day allocation agreed to on Dec. 17, while February production will be “lower than the target,” Saudi Oil Minister Ali al-Naimi said as he arrived for a conference in New Delhi today.

“The announcement that the Saudis are willing to make additional cuts can’t help but be supportive,” said Gene McGillian, an analyst at Tradition Energy, an energy-management company in Stamford, Connecticut. “A lot of what were are seeing is the market finding some support after falling too much.”

Crude oil for February delivery rose 14 cents, or 0.4 percent, to $37.73 a barrel at 9:46 a.m. on the New York Mercantile Exchange. Futures touched $36.10, the lowest since Dec. 26. Oil is down 59 percent from a year ago.

“The Saudi comments are giving us a bit of support but I doubt they will be enough to keep the market in positive territory,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “The economy is in terrible shape, which is putting pressure on almost all commodities.”

The U.S. economy will contract 1.5 percent this year, a half percentage point more than projected last month, according to the median of 59 forecasts in a survey taken from Jan. 5 to Jan. 12 by Bloomberg News.

U.S. Stockpiles

U.S. crude stockpiles probably gained 2.5 million barrels in the week ended Jan. 9, according to the median of 13 responses by analysts in a Bloomberg News survey. Inventories of gasoline and distillate fuel, a category that includes heating oil and diesel, rose, the survey showed. The department will release its weekly petroleum supply report tomorrow.

“This month prices haven’t been able to break out of a $35- to-$50 range,” McGillian said. “We will have to wait and see if the expected inventory builds tomorrow coupled with further dismal economic news will cause us to break lower.”

Brent crude oil for February settlement rose $1.32, or 3.1 percent, to $44.23 a barrel on London’s ICE Futures Europe exchange.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

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Saudi Arabia Will Pump Less Oil Than OPEC Quota in February

By Ayesha Daya

Jan. 13 (Bloomberg) -- Saudi Arabia, the world’s largest oil exporter, said it will take the lead among OPEC oil producers in trying to halt a six-month slide in prices.

Ali al-Naimi, the kingdom’s oil minister, said Saudi Arabia’s crude production in February will be “lower than the target” set by the Organization of Petroleum Exporting Countries. The pledge follows supply reductions that started in November and this month that have failed to arrest a 71 percent decline in prices from July’s record, as a slowing world economy eats into demand for oil.

“We are working hard to bring the market in balance,” al- Naimi said as he arrived at his hotel in New Delhi today. “We will do what it takes to bring the market in balance.”

The kingdom is currently producing 8 million barrels a day, the minister said, declining to say how much lower February’s level will be. OPEC agreed at its Dec. 17 meeting in Oran, Algeria, to reduce production targets for 11 members that have quotas, excluding Iraq, to 24.845 million barrels a day.

Saudi Arabia, OPEC’s de facto leader, had its target cut 5.1 percent to 8.051 million barrels a day, starting this year. Its daily production averaged 8.4 million barrels in December, according to Bloomberg estimates.

“It’s political, it’s trying to put pressure on others who are not complying so well,” said Leo Drollas, deputy director of the Centre for Global Energy Studies, a London-based consulting company. “All announcements like this give some traders a reason to buy.”

Deepest Cuts

OPEC needs to make the deepest supply cuts in its history to comply with the new target that started Jan. 1. Collectively, 11 OPEC nations produced an average of 27.45 million barrels a day last month, according to Bloomberg estimates, or 2.6 million barrels a day more than the new ceiling.

February Brent crude futures rose as much as 1.5 percent to $43.35 a barrel on London’s ICE Futures Europe exchange after al- Naimi spoke, before paring gains to trade at $43.18.

Crude for February delivery on the New York Mercantile Exchange was down 86 cents, or 2.3 percent, at $36.73 a barrel at 1:19 p.m. London time, on speculation falling demand caused U.S. crude inventories to accumulate.

Saudi Arabia had ignored its OPEC quota last summer to stem soaring prices. It decided to unilaterally raise output by 500,000 barrels a day during June and July as investors bought into commodities as a hedge against a weakening dollar and falling equity markets. Record fuel prices caused some consumers such as trans-Atlantic carrier Zoom Airlines, based in Ottawa and London, to declare bankruptcy.

Falling Prices

As the economy worsened and prices began to fall after August, the country led efforts to rein back production, and agreed to lower its surplus production and to two group-wide production reductions, the latest of which took effect this month.

OPEC member Qatar, which is currently producing 735,000 barrels a day of oil, will lower production to meet its 730,000 barrel-a-day quota next month, Qatari Oil Minister Abdullah bin Hamad al-Attiyah said in New Delhi today.

OPEC, which supplies more than 40 percent of the world’s oil and met every month from September to December in an attempt to stem the plummeting oil price, doesn’t plan to hold an emergency meeting before its scheduled gathering in Vienna in March, al- Attiyah said.

Early Meeting Unlikely

“So far I don’t think so,” he told reporters as he arrived at his hotel. “We are only starting our new cut. February is a testing month - we will see in February how this cut is impacting the market.”

Oil futures in New York for the nearest monthly delivery contract have fallen 61 percent from a year ago, and yesterday closed at $37.59 a barrel, the lowest settlement since Dec. 24. Contracts for delivery later this year, in December, are more than 50 percent higher, a market situation known as contango that shows traders expect prices to recover in later months.

“It will take time for the cuts to go through, but if they’re implemented we should see Brent rebound to average $74.50 in the fourth quarter,” said Drollas, the CGES analyst.

To contact the reporter on this story: Ayesha Daya in Dubai at adaya1@bloomberg.net

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Gazprom Says Ukraine Blocking Russian Gas Transit

By Stephen Bierman and Eduard Gismatullin

Jan. 13 (Bloomberg) -- OAO Gazprom Deputy Chief Executive Officer Alexander Medvedev said Ukraine is blocking Russian gas flows to Europe, just hours after supplies were resumed.

Gazprom notified the European Commission of Ukraine’s “unreasonable” actions and may declare force majeure on shipments, Medvedev said today in a conference call with reporters. NAK Naftogaz Ukrainy, the state energy company, said there wasn’t enough pressure in the pipelines to pump gas.

Gas prices in the U.K., Europe’s biggest market, rebounded on concern that supply disruptions to at least 20 nations won’t be eased anytime soon. Gazprom, the Russian supplier of a quarter of the continent’s natural gas, had attempted to resume deliveries suspended for a week after European Union observers began monitoring transit at metering stations in Russia and Ukraine under an accord signed yesterday.

“It’s not a surprise that the agreement has already fallen apart,” Moscow-based Alfa Bank Chief Strategist Ronald Smith said. “This morning we were already getting signals that there was no agreement on who would provide the gas to power the turbines” in the Ukrainian pipeline network, he said.

The EU said “little or no” gas is currently flowing to the 27-nation bloc through Ukraine. “This situation is obviously very serious and needs to improve rapidly,” EU spokeswoman Pia Ahrenkilde-Hansen told reporters in Brussels.

Halted Flows

Gazprom halted transit flows through Ukraine on Jan. 7 after accusing Ukraine of taking gas for its own use, a charge the country denies. The cutoff has renewed calls for the EU to diversify its sources of energy away from Russia. Negotiations between Russia and Ukraine over gas prices and transit fees in the former Soviet republic remained stalled even after yesterday’s EU-brokered agreement.

Gazprom accused Ukraine of diverting some of the restored supplies for its own domestic use and shutting down an export corridor.

“The door is closed as before,” Medvedev said. “We did not close the door. We are doing our utmost to resume flows to our customers. Unfortunately we can’t transit gas physically through Ukraine.”

The Ukrainians may be “dancing to the music which is being orchestrated not in Kiev but outside the country,” Medvedev said, referring to the U.S.

‘Too Low’

Naftogaz said it hasn’t been able to “technically” pump Russian gas to Europe. “The pressure in the pipeline is too low,” company spokesman Valentyn Zemlyanskyi said in a phone interview.

U.K. gas for delivery next month advanced 1.7 percent to 56.65 pence a them as of 12:49 p.m., according to broker Spectron Group Ltd. Prices surged 24 percent last week after Gazprom turned off the taps.

“The EU monitors are in place but Russia and Ukraine have yet to agree on how compressor stations powering the Ukrainian pipeline network will be fueled,” Maria Radina, an oil and gas analyst with UBS AG, said by telephone from Moscow earlier today. “This will likely be the next issue in Russia and Ukraine negotiations.”

The Russian order to pump about 76 million cubic meters of fuel today toward the Balkans, Turkey and Moldova was earlier broadcast on state television.

‘Blackout’ Warning

Gazprom’s overall deliveries to Europe fell by about 60 percent when it halted transit flows via Ukraine and supplies to Ukraine’s domestic market were suspended Jan. 1. Slovakia warned yesterday it was “on the brink of blackout,” prompting the government to consider restarting a nuclear power plant in violation of EU rules.

Gazprom has lost $800 million in the dispute, according to Russian Prime Minister Vladimir Putin.

Medvedev said yesterday that Gazprom is “open to discussions” to find a solution to the pricing issue for Ukraine this year. Oleh Dubina, the Naftogaz head, said on the weekend talks had failed to produce a result. Gazprom offered a price of $450 per 1,000 cubic meters after it said Ukraine rejected an offer, subsequently withdrawn, of $250. Medvedev said $450 was for the first quarter.

Gazprom’s prices to European customers under long-term contracts typically lag behind prices for crude and oil products by about six to nine months. Crude has fallen by more than 70 percent since reaching a record in July. Ukraine paid Russia $179.50 per 1,000 cubic meters for gas last year under a separate arrangement.

Market Prices

The Russian company maintains it has a transit contract with Ukraine through the end of 2010 at $1.70 per 1,000 cubic meters per 100 kilometers (62 miles). Putin has said Russia would consider an increase in the price to European market levels of $3.40 should Ukraine accept European prices for gas supply. Russia isn’t paying for transit now, Ukrainian Energy Minister Yuriy Prodan said.

Relations between Ukraine and Russia have become strained over efforts by the former Soviet republic to join the EU and the North Atlantic Treaty Organization. The gas dispute has come as Timoshenko and Yushchenko, who have clashed over economic policy, are facing a financial crisis that has forced them to seek a $16.4 billion International Monetary Fund bailout.

In 2006, Russia turned off all gas exports to Ukraine for three days, causing volumes to fall in the EU, and also cut shipments by 50 percent last March during a debt spat.

To contact the reporters on this story: Stephen Bierman in Moscow sbierman1@bloomberg.net

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Russia Quickens Ruble Defense as Oil Drops, MDM Says

By Emma O’Brien

Jan. 13 (Bloomberg) -- Russia’s central bank sold about $7 billion to stem the ruble’s decline against the dollar and the euro yesterday, the most since it started devaluing the currency in November, according to Moscow’s MDM Bank.

Bank Rossii, which controls the ruble against a basket of dollars and euros to limit swings that hurt exporters, sold $6 billion and 700 million euros ($929 million) in the market yesterday, said Mikhail Galkin, head of MDM’s fixed-income research, citing the bank’s traders. It was the most sold since the central bank started letting the ruble fall on Nov. 11, he said.

Policy makers devalued the ruble twice in the past two days, in the first official trading this year, extending the currency’s slump to 18 percent against the basket since mid-November as the price of oil, Russia’s chief export earner, retreated. Citigroup Inc., Troika Dialog and Renaissance Capital expect the ruble to drop at least 11 percent this quarter as Urals crude trades at $41.45 a barrel, below the $70 average needed to balance the 2009 budget.

“The oil price is edging lower and the speed of weakening is going up, so the trades against the ruble are becoming more profitable,” Galkin said.

The more than 70 percent drop in Urals crude from a July record has deepened concern that the country’s current account will slip into deficit. It was $90.8 billion in surplus in the first nine months of the year, the latest data available.

Investors and citizens have taken more than $200 billion out of Russia since the start of August, according to BNP Paribas SA, deterred by the nation’s worst financial crisis since it defaulted on $40 billion of debt in 1998.

Pent-Up Demand

The currency has lost 13 percent against the dollar since the central bank began devaluing the currency in mid-November, and fell to as low as 31.3725 today, the weakest since March 2003. Russia’s foreign-currency reserves have been reduced by 27 percent, or $160 billion, since August as Bank Rossii uses the funds to support the currency, according to central bank data as of Dec. 26. The ruble has fallen 17 percent versus the euro in the past two months. It rose 0.3 percent to 41.4699 per euro today.

Pressure on the ruble was exacerbated yesterday by pent-up demand for foreign currency, said Evgeny Nadorshin, senior economist at Trust Investment Bank in Moscow. Companies and investors were unable to convert rubles from Jan. 1 to 10 because official trading on the Micex stock exchange was closed for the Russian Christmas holidays, he added.

Investors Deterred

“Everyone’s been expecting the ruble to depreciate so there was excessive currency built up at the end of last year that they needed to exchange once markets opened,” said Nadorshin, who also put yesterday’s currency sales at about $7 billion. “It was a case of postponed demand.”

Russia, which is aiming to free float the ruble by 2011, has managed the currency against the dollar-euro basket since 2005. After surging to a record 29.2843 against the mechanism on Aug. 4, the currency has been allowed to weaken 22 percent as the crisis in global credit markets and Russia’s war with neighboring Georgia deterred investors.

Prime Minister Vladimir Putin pledged to avoid a “sharp” decline in the currency last month and both he and President Dmitry Medvedev have urged citizens to keep their savings in local currency. Continually declining oil prices will ensure “more depreciation of the ruble is required,” Arkady Dvorkovich, Medvedev’s economic adviser, said in an interview Dec. 19.

Russian Gas

Russians withdrew 6 percent of ruble-denominated deposits in October, the most since Bank Rossii started collating the data two years ago. Deposits held in dollars had an average return of 12 percent in 2008, while the profitability on ruble accounts fell 5.2 percent, Moscow-based auditing and consulting company BDO Unicon said in an e-mailed report yesterday.

Russia resumed pumping gas into pipes through Ukraine today, after a six-day supply halt that disrupted flows to at least 20 European nations. OAO Gazprom, the Russian natural-gas exporter that provides a quarter of Europe’s gas, suspended shipments through Ukraine Jan. 7 amid disputes over pricing and allegations the former Soviet republic was siphoning gas.

The resolution “should improve market sentiment somewhat and relieve some pressure on the ruble,” BNP Paribas emerging- market currency analysts Shahin Vallee and Elisabeth Gruie wrote in a note to clients today. BNP advises placing so-called short positions on the ruble against the basket. A short is a bet that an asset or security it is going to decline.

Blocking Supplies

Ukraine’s currency, the hryvnia, was little changed at 8.80 per dollar today, according to traders at Galt & Taggart Holdings Ltd. in Kiev. Less than four hours after the resumption of supplies, Gazprom Deputy Chief Executive Officer Alexander Medvedev said Ukraine is blocking supplies and that it may declare force majeure.

Bank Rossii widened the range it allows the ruble to trade against the basket in the previous two days, an official unable to be identified on bank policy said. The currency can now fall about 17 percent from a target basket rate, from 2.6 percent on Nov. 10. The central bank has devalued the currency 14 times in the past two months.

The Russian currency was little changed at 35.8064 against the basket by 1:55 p.m. in Moscow, after weakening 1.5 percent yesterday and 1.7 percent on Jan. 11. The basket is made up of about 55 percent dollars and the rest euros.

Step-By-Step Devaluation

The central bank probably refrained from devaluation today to maintain a sense of “unpredictability” and wrong-foot speculators betting on the ruble’s decline, said Nadorshin. “They’ve always said this will not be a quick devaluation and that they’re committed to doing this step by step.”

Non-deliverable forwards put the ruble 8.2 percent lower against the dollar at 33.98 in three months time. The decline expected over 12 months is 19 percent. NDFs are contracts used to fix a currency at a particular level at a future date and companies use them to protect against foreign-exchange fluctuations.

Bank Rossii sold $3.4 billion on Jan. 11, according to MDM estimates. Trust Investment puts the amount sold in December at about $75 billion, with $20 billion alone between Dec. 26 to 30, Nadorshin said.

The depletion of Russia’s reserves, the world’s third largest, prompted Standard & Poor’s to lower the credit rating of Russian debt last month. Dvorkovich said last month a recession may be possible in Russia this year, after industrial output sank the most for 10 years in November and unemployment rose to 6.6 percent.

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

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