US OPEN - Volumes have been less than impressive overnight and are expected to get even thinner as we head into the US session of trade today on the back of the lightened holiday trade. We ended the previous week with the prospect for some short-term reversals across the board as risk appetite became more favorable and equities showed some promise. As such, we saw an outflow of the flight to safety trades in the form of the USD and Yen with both currencies selling off as investors looked to shift back into riskier and higher yielding currencies. On Monday however, this positive sentiment and risk appetite appears to have waned somewhat with EUR/USD, CHF/USD, GBP/USD and USD/JPY all falling back. Commodity currencies are also lower on the day driven on similar global macro fundamentals while also weighed down by lower gold and oil prices. Some of the specific drivers of price action come from another downgrade to an EU country credit rating with S&P slashing Spain's sovereign credit rating just one week after a similar cut to Greece's credit rating. Also seen striking some nerves has been an article titled “Help Ireland or it will Exit the Euro” from a leading Irish economist and former central banker who has imposed this threat unless Europe's big powers do more to aid Ireland's beleaguered economy. In the UK, any positive reaction from the latest government efforts to aid the banking system seems to have worn off with the release of RBS's biggest corporate loss in UK history.
EUR/USD has now given back over 50% of the move off of Thursday's 1.3025 low but is expected to find some support ahead of 1.3110, Friday's low. In the interim, key levels to watch above and below come in by 1.3390 and 1.3025 with only a break back under 1.3025 ultimately threatening the current recovery structure. USD/JPY setbacks have been well supported and the current price action looks to be more of a consolidation following Friday's gains rather than any threat of a material pullback. A short-term base looks to be in place by Thursday's 88.45 low and a fresh daily higher low is now being sought out above 89.75 ahead of the next upside extension. A break above 91.65 should accelerate gains. GBP/USD has now taken out Friday's higher low at 1.4625 and looks to be eying a retest of last Tuesday's 1.4470 low which guards against the critical trend lows at 1.4350 from December 31. However, the daily ATR for the pair stands at 320 pips which would imply that additional setbacks should be limited today. Aggressive intraday players might want to look to buy back into the current dip below 1.4600. USD/CHF continues to trade in sideways fashion with price action being defined between 1.1095 and 1.1290. A move above or below the latter would be required for clear directional bias.
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S&P Lowers Rating on Spain - Euro Drops
| Daily Forex Fundamentals | Written by GFT | Jan 19 09 12:52 GMT | | |
| Standard and Poors lowered the sovereign bond rating on the Kingdom of Spain from its highest level of AAA to AA+. S&P noted that “Current economic and financial market conditions have highlighted structural weaknesses in the Spanish economy that are inconsistent with a AAA rating.” The lowering of Spanish debt follows similar moves that cut Greek debt to A- and a waring on Portuguese debt only a week ago. The S&P also also reduced the outlook on Ireland's rating to negative from stable. The move highlights the growing tensions within the EZ as various members of the union struggle to combat the fallout from the global credit crisis that has devastated the European banking sector. Today's news also puts into focus the question of whether the euro, as a currency without a country, can withstand the stress of the current economic slowdown The EUR/USD pair declined in the immediate aftermath of the news and remains near day's lows as traders become increasingly concerned about the credit worthiness of the individual members of the union. If the credit rating gap between the Northern and Southern members of the Eurozone continues to expand the downward pressure on the euro is likely to escalate with the pair foreseeably dropping into 1.2000's region by end of this week, if those concerns are not allayed. Boris Schlossberg 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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Romanian Leu May Plunge 9% in 2009 as Economy Shrinks
By Irina Savu
Jan. 19 (Bloomberg) -- Romania’s leu, the worst performing emerging-market currency this year, may plunge about 9 percent to a record against the euro as the economy contracts, ING Groep NV said.
The leu will decline to 4.7 per euro in “coming quarters,” Nicolaie Alexandru-Chidesciuc, senior economist in Bucharest at ING Bank Romania, wrote in a note to clients today. The leu fell 0.3 percent to 4.2987 as of 4:15 p.m. in Bucharest, from 4.2873 on Jan. 16. The currency touched an all-time low of 4.3529 last week.
Romania is likely to post a budget deficit of 7.5 percent of gross domestic product, the biggest among emerging-market economies in the region, the European Union said today. Industrial output plunged in November by the most in more than eight years, while the current-account deficit widened to 16 billion euros ($21 billion).
“The biggest pressure for Romania comes from a wider budget gap, together with insufficient measures to correct this during 2009,” Alexandru-Chidesciuc wrote.
Romania’s economy may contract 3.5 percent this year, he said. While Europe, the U.S. and China are providing packages of spending and tax cuts to stimulate their economies, Prime Minister Emil Boc has pledged to cut expenditure on goods and services by 20 percent and keep consumer taxes unchanged.
The government forecast Jan. 16 that economic growth will slow to 2.5 percent this year from 7.8 percent in 2008.
Standard & Poor’s and Fitch Ratings downgraded Romania’s debt rating to junk in the final quarter of last year, citing in part increased government spending. Fitch lowered Romania two levels to BB+ from BBB while S&P cut its rating on the country to BB+ from BBB-.
The International Monetary Fund, which has already offered aid to Latvia, Hungary, Iceland, Serbia and Ukraine, is due to visit Romania at the end of this month. Romania, which has $75 billion in external debt to be refinanced, hasn’t sought IMF help to date.
“The deepening recession in developed economies is likely to increase pressure on emerging-market currencies,” Alexandru- Chidesciuc wrote. “This is indeed the case for the leu.”
To contact the reporter on this story: Irina Savu in Bucharest at isavu@bloomberg.net.
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Saudi Arabia, U.A.E., Cut Rates as Growth Slows, Oil Falls
By Arif Sharif
Jan. 19 (Bloomberg) -- Saudi Arabia and the United Arab Emirates, the two biggest Arab economies, cut their benchmark interest rates by half a percentage point after oil prices tumbled and economic growth was forecast to slow.
The Saudi Arabian Monetary Agency reduced its key repurchase rate to 2 percent and its reverse repurchase rate to 0.75 percent from 1.5 percent, the state-run Saudi Press Agency reported today. The U.A.E. central bank said in an e-mailed statement that it lowered its repurchase rate to 1 percent.
Central banks across the Persian Gulf have been cutting rates, guaranteeing deposits and lending to banks to help avert a liquidity crisis as foreign investors pulled money out of the region due to the global credit crunch and crude oil prices tumbled almost 75 percent from their July high. The Saudi rate cut is the fifth since Oct. 12
“The latest cut is a sign that SAMA will continue to ensure liquidity is available and focus on growth boosting measures at a time of falling oil prices,” Monica Malik, an economist at EFG-Hermes Holding SAE, Egypt’s biggest publicly traded investment bank, said in an e-mailed note. The U.A.E.’s economy is “far more externally exposed” than other Gulf Arab states to the global economic slowdown, she said.
The U.A.E. last cut its repo rate on Oct. 8, by half a percentage points, matching moves by the U.S. Federal Reserve.
Independent Move
Today’s Saudi cut “is not unusual or a surprise as SAMA has moved independently in the past, choosing to focus on domestic developments,” Malik said.
The Saudi cuts are “aggressive” and will help reduce borrowing costs substantially, John Sfakianakis, chief economist at Saudi British Bank, said in a phone interview from Riyadh today. Interbank interest rates should begin to come down later today, he added.
Economic growth in Saudi Arabia, the world’s biggest oil exporter, will probably slow to 1.6 percent this year from 4.8 percent in 2008, according to the median estimate of eight economists surveyed by Bloomberg News. Inflation will likely ease to 7.5 percent from 9.9 percent in 2008. U.A.E. economic growth will slow to 2.4 percent in 2009 from 6.8 percent in 2008, according to a Bloomberg survey of six economists.
The rate cuts “should help to ensure that credit is available to genuine corporate demand at lower rates,” SPA said, citing SAMA.
Saudi Arabian inflation eased to 9 percent in December from 9.5 percent in November as increases in rents and food prices slowed, SPA reported today.
To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net
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Bank of England Gains Power to Buy Assets as New Tool
By Brian Swint and Svenja O’Donnell
Jan. 19 (Bloomberg) -- The Bank of England won unprecedented powers from the British government to buy assets and expand its policy toolkit to fight the risk of deflation as interest rates approach zero.
The central bank can make initial asset purchases of up to 50 billion pounds ($74 billion), the Treasury said in a statement today. The government will indemnify the purchases against any losses in the facility, which will start on Feb. 2.
The asset program “provides a framework for the Monetary Policy Committee of the Bank of England to use asset purchases for monetary policy purposes should the MPC conclude that this would be a useful additional tool for meeting the inflation target,” the Treasury statement said.
The Bank of England this month lowered the benchmark interest rate to 1.5 percent, the lowest since the bank’s creation in 1694, as Britain faces its first recession since 1991. Today’s announcement may pave the way for the central bank to engage in so-called quantitative easing if lower interest rates fail to stimulate the economy.
Chancellor of the Exchequer Alistair Darling and Bank of England Governor Mervyn King will spell out exactly how the plan will work in an exchange of letters by the end of this month. King will give more details of the program when he delivers a speech tomorrow in Nottingham, England, Prime Minister Gordon Brown told reporters.
The bank will take its next interest-rate decision on Feb. 5, three days after the new plan takes effect. Policy makers will release their quarterly forecasts for economic growth and inflation on Feb. 11.
‘Radical Change’
“This obviously marks a radical change in the U.K.’s monetary policy framework,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “With bank rate approaching the zero bound, but the wider economy suffering a more severe deterioration, the MPC is being forced into unorthodox policy territory.”
Brown has given authority to the bank to start purchasing assets as part of a broader plan to revive lending as banks recoil in the global financial crisis. The government will also guarantee bank loans and offer capital and asset protection.
As rates approach zero, the central bank will have the authority to channel liquidity to financial institutions by buying assets. The move won’t yet allow the Bank of England to increase the money supply, a tactic recently adopted by the Federal Reserve to fight the risk of deflation, because the purchases are financed by bond sales.
Money Supply
“The money that will go in from the Bank of England will be countered by normal money market operations,” Darling told reporters in London today. In relation to the money supply, “our policy is not changed.”
“The asset purchase facility will provide an important additional tool to improve financing conditions in the economy,” King said in an e-mailed statement.
The Bank of Japan adopted quantitative easing -- the strategy of injecting more reserves into the banking system than needed to keep the target interest rate near zero -- for five years to March 2006. The funds failed to prompt lending by commercial banks, which expanded their reserves at the central bank almost nine times by early 2004.
The U.K. central bank’s Special Liquidity Scheme will expire at the end of the month as previously planned, the Treasury said.
The bank will also extend the maturity of its discount window to one year from 30 days to help banks access liquidity. The fee for using the lending facility beyond the usual 30 days will be an additional quarter-point, the central bank said in a separate statement.
The central bank said it will publish another announcement with details on the discount facility before it starts.
To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net.
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Obama Advisers Say They Will Aim TARP at Wider Credit
By Matthew Benjamin
Jan. 19 (Bloomberg) -- Top advisers to President-elect Barack Obama signaled they will emphasize getting credit to consumers and businesses rather than helping banks as the new administration deploys the second half of the $700 billion rescue fund.
“The focus isn’t going to be on the needs of banks; it’s going to be on the needs of the economy for credit,” Lawrence Summers, the president-elect’s top economic adviser, said on CBS’s “Face the Nation” program yesterday. Obama’s team will manage the Troubled Asset Relief Program “in a much different way,” David Axelrod, Obama’s chief political adviser, said on ABC’s “This Week” program.
Obama’s advisers are considering options for dealing with troubled assets still clogging banks’ balance sheets, according to people familiar with the matter. Among alternatives: Setting up a government-backed “bad” or “aggregator” bank to hold the securities, or leaving the assets on banks’ books and providing a government guarantee.
While Summers and Axelrod didn’t discuss specific proposals, they emphasized they don’t agree with Treasury Secretary Henry Paulson’s decision to commit most of the initial $350 billion of the TARP funds to capital injections in exchange for warrants and preferred equity.
“The point is to get credit flowing again to businesses and families across the country -- that hasn’t happened with the expenditure of the first $350 billion,” Axelrod said.
Swearing-In
Last week’s sell-off in financial stocks and the deepening recession put pressure on Summers and Treasury Secretary- designate Timothy Geithner to unveil a comprehensive program soon after Obama is sworn in tomorrow. Without a radical new effort, soaring credit losses could prolong and deepen a recession that is now more than a year old.
Most stocks in Europe and Asian shares today gained on speculation that U.S. and U.K. government plans to spur lending will prevent the recession from worsening.
Former Federal Deposit Insurance Corp. Chairman William Isaac today told Bloomberg Television that creating a bank for toxic assets would get credit flowing and that he is “very supportive” of creating an aggregator bank.
The TARP may be redirected to help prevent foreclosures as well as free up credit for “automobile loans, consumer credits, small business, municipalities,” Summers said. He added banks will be subject to more oversight in their use of the funds.
Bank Mergers
“There’s going to be a very different level of rigor in the evaluation of institutions, the plans that are designed, and the expectations for institutions,” Summers said. “Institutions that are healthy, that don’t need it just to survive, are going to be expected to lend above their baseline levels as part of this program.”
Geithner and his advisers will be “carefully” monitoring Wall Street bonuses of banks that have participated in the TARP, Summers said.
“What’s not going to happen is the funds that could be supporting increased lending are going to be used to finance acquisitions that may serve a bank but don’t serve the country,” Summers said. The new administration will also prevent banks that accept government funds from pursuing acquisitions to the detriment of increased lending, he said.
Summers said he is confident Congress will pass a spending plan, coupled with tax cuts, similar to the $825 billion package that Obama has offered. Such a stimulus has been forecast to create 3 million to 4 million jobs, he said.
“I expect the program will pass within in a month,” Summers said. “He is going to do what is necessary to get us out of this economic hole.”
Economic Reports
The U.S. economy showed further signs of buckling, according to reports last week. Consumer prices fell 0.7 percent in December, capping the smallest annual increase since 1954, the Labor Department said. Industrial output shrank 2 percent, and the capacity-utilization rate slid to 73.6 percent, according to the Fed. A private survey showed consumer sentiment was little changed in January.
“There’s almost no question that the economy is going to decline for some time to come,” said Summers, who served as Bill Clinton’s last Treasury secretary. “Our errors are not going to be of standing back.”
To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net
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Trichet Says 2009 Will Be ‘Substantially’ Worse Than Forecast
By Francois de Beaupuy and Simon Kennedy
Jan. 19 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said the outlook for the euro-region economy is “substantially” worse than the bank predicted a month ago.
“The year 2009 will be very difficult,” Trichet said today in a speech in Paris. “Growth in the world and Europe will be substantially below what” most institutions projected at the start of December, he said.
The ECB last month forecast the euro-region economy would contract about 0.5 percent this year. Since then, data suggest Europe has slipped deeper into recession. The European Commission today projected the 16-nation economy will shrink 1.9 percent in 2009.
While the ECB is not scheduled to revise its forecasts before March, Trichet said the bank’s 22-member Governing Council took account of the deteriorating outlook in deciding to cut its benchmark interest rate to 2 percent last week. That matched a record low last seen in 2005.
European confidence has plunged to the lowest on record, industrial production posted its biggest annual drop in 18 years in November and unemployment rose to 7.8 percent, a two-year high.
Still, the ECB President said there are reasons to expect the economy to rebound. Investors have underestimated how fast authorities have responded to the crisis, emerging markets will remain sources of growth after a “temporary” slowdown, and the price of oil has fallen, he said.
“I consider that 2010 will be the year of recovery,” Trichet said. The ECB will continue to provide an “anchor of stability,” he added.
Trichet blamed the financial crisis on a mispricing of risk and said “we must put an end to the priority that’s given to the short term, in other words to the excessive focus on short-term gain in the financial sector, what we often call the ‘bonus culture’.” This attitude “tends by essence to encourage excessive risk taking,” he said.
To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net; Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.
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EU Sees Euro Area in Deepest Slump in 10-Year History
By Brian Swint and Fergal O’Brien
Jan. 19 (Bloomberg) -- The euro-area economy will contract this year for the first time since the currency was introduced a decade ago, the European Commission forecast, cutting its outlook for the region amid the worst financial crisis since World War II.
The economy of the 16 countries sharing the euro will shrink 1.9 percent in 2009, the Brussels-based commission said today, revising a November estimate for growth of 0.1 percent. European Central Bank President Jean-Claude Trichet today said economic prospects are “substantially” worse than the ECB predicted just last month.
“The overall outlook is grim,” European Union Monetary Affairs Commissioner Joaquin Almunia told reporters in Brussels today. “In 2009, we are forecasting negative growth for 11 out of the 16 euro-area members.”
European companies are slashing spending and jobs as they grapple with a global slump that’s eroding demand for everything from chemicals and automobiles to luxury goods. As growth contracts, the ECB has cut its key interest rate to match the lowest since the euro’s launch in 1999, while European governments have orchestrated bank rescues and fiscal-stimulus packages to bolster their economies.
Governments in the U.S., Japan and China are pushing stimulus plans for their own economies, which are also mired in the fallout from the global financial crisis. The commission forecast that the U.S., the world’s biggest economy, will contract by 1.6 percent this year, while Japan’s economy will shrink 2.4 percent.
Obama Plan
U.S. President-elect Barack Obama, who will be inaugurated in Washington tomorrow, proposed an $850 billion, two-year package of tax cuts and increased spending. In China, the government has reduced taxes and unveiled a 4 trillion yuan ($585 million) package.
In Europe, the slump deepened in the fourth quarter, according to the commission, which estimates that gross domestic product shrank by 1.5 percent in the final three months of the year after a 0.2 percent contraction in the previous two quarters. The economy will continue to contract in the first two quarters of this year, it said.
Spain, the euro area’s fourth-largest economy, had its AAA sovereign credit rating removed by Standard & Poor’s today as its budget deficit swells. It was the second downgrade of a euro- region government in five days, after Greece last week
Extended Declines
The euro extended declines against the dollar after the downgrade and the commission’s forecasts, falling 0.7 percent to $1.3173 at 1:45 p.m. in London.
As the euro-area economy slumps, unemployment will rise and the region’s budget deficit may breach the EU limit of 3 percent of GDP for the first time since 2003, according to the commission. It sees the region’s unemployment rate increasing to 9.3 percent this year from 7.5 percent in 2008. The budget deficit will probably swell to 4 percent this year and 4.4 percent in 2010 from 1.7 percent in 2008, it said.
“The year 2009 will be very difficult,” Trichet said today in a speech in Paris. “Growth in the world and Europe will be substantially below what” most institutions projected at the start of December, he said.
The ECB last month forecast the euro-region economy would contract about 0.5 percent this year. Since then, data suggest Europe has slipped deeper into a recession, with economic confidence plunging to a record low and services and manufacturing activity contracting for a seventh month.
Demand Falters
Companies from Siemens AG, Europe’s largest engineering company, to retailer Carrefour SA, the region’s biggest retailer, have reported waning demand. Germany’s BASF SE, said today it may cut more jobs after its global business “declined significantly.”
The ECB has offered additional funds to banks as they nurse losses from the global financial turmoil. German Chancellor Angela Merkel this month prepared a second stimulus plan of as much as 50 billion euros ($66 billion) that includes tax cuts and aid to the country’s automobile industry. France has approved a 26 billion-euro stimulus program.
The measures will help to “put a floor” under the deterioration and “create the conditions for a gradual recovery in the second part of 2009,” Almunia said.
The euro region will return to growth next year with an expansion of 0.4 percent, today’s forecasts show. This year, Ireland will contract 5 percent, Germany 2.3 percent and economic output in Spain will drop 2 percent. The economy of the 27 countries in the EU will shrink 1.8 percent this year, according to the commission forecasts.
The U.K., a member of the EU that doesn’t use the euro, today announced the second bank rescue in three months, proposing insurance to underwrite mortgage-backed debt and toxic assts. The government also gave the Bank of England authority to buy assets as a tool of monetary policy as the benchmark U.K. interest rate approaches zero.
To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.
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Brown Tightens Grip on Banks as Recession Worsens
By Gonzalo Vina and John Fraher
Jan. 19 (Bloomberg) -- Prime Minister Gordon Brown’s government tightened its grip on Britain’s financial system, guaranteeing toxic assets and giving the Bank of England unprecedented power to buy securities.
The Treasury authorized the central bank to buy 50 billion pounds ($73 billion) of assets and plans to raise its stake in Royal Bank of Scotland Group Plc to spur 6 billion pounds of lending. Its backing for securities hurt by market turmoil will expose taxpayers to more than 100 billion pounds of liabilities.
“In return for access to any government support, there will have to be an increase in lending, and that will be legally binding,” Brown said at a press conference in London today. “I will not sit idly by and let people and businesses go to the wall.”
The measures extend the U.K. government’s October rescue plan, which included 50 billion pounds to recapitalize banks and a 250 billion-pound credit line for banks. Brown said he is “angry” institutions are rationing loans, pushing the economy deeper into its worst recession since World War II.
Governments in the U.S. and Europe are stepping up measures to underwrite bank lending after a recapitalization efforts failed to restore credit. President-elect Barack Obama is focusing the second half of the $700 billion rescue fund in the U.S. to underwrite loans to consumers and businesses. Spain and Denmark took action prop up their banking industries.
‘More And More’
“This is aiming to once and for all underpin faith in the banking system,” said Alan Clarke, an economist at BNP Paribas SA. “We’re breaking all conventions. The availability of credit is going down, and the economic outlook is getting worse. So the government is having to throw more and more at it.”
Britain’s banks approved the fewest new mortgages in November since 1999 and told the central bank they would restrain credit in the coming months. RBS today announced a 28 billion pound loss, the biggest in U.K. corporate history.
Institutions worldwide are struggling to cope with $1.04 trillion in credit losses and writedowns since the collapse of the U.S. subprime mortgage market in 2007. Concerns about these toxic holdings have crippled lending and helped trigger a drop in global stocks last week.
Recession Deepens
The U.K. economy may contract 2.7 percent this year, the most since 1946, and house prices may plunge 22 percent in the next 1 1/2 years, the Ernst & Young Item Club said today. Brown’s popularity, buoyed in the weeks following his October bank rescue plan, has ebbed further behind the Conservative opposition as concern about the economy mounted.
“There will be public anger that even more taxpayer money has had to be put into the banking system, particularly among those who face losing their jobs or homes because of the irresponsible policies pursued by the banks,” said Brendan Barber, general secretary of the Trades Union Congress, whose 7 million members help fund Brown’s ruling Labour Party.
The yield on the U.K. 10-year government bond rose 9 basis points to 3.381 percent. The pound was little changed at $1.4797 at 1 p.m. in London. Business lobby groups and banks praised Brown’s measures.
“The government needed to be bold as it has been,” said Richard Lambert, director general of the Confederation of British Industry. “These measures are not silver bullets that will turn the economy around overnight. They should stem a further downward recessionary spiral.”
Parliamentary Concerns
Opposition lawmakers grumbled about Brown’s new plans, saying the government hasn’t explained how the funds authorized since October have been used.
“It is very difficult to sign up to a fresh package of government money when it is very clear that the previous massive injection has not been properly accounted for,” said Vince Cable, a Liberal Democrat lawmaker who speaks on Treasury matters. Conservative lawmaker George Osborne said, “We’ve run out of options” and the old package “isn’t working.”
Under Darling’s insurance plan, the government will charge a fee to guarantee about 90 percent of banks’ potential losses on assets hurt most by market turmoil, including securities backed by mortgages and loans to consumers.
The Treasury will implement the recommendations of James Crosby, the former chairman of mortgage lender HBOS Plc, who called on the government to back at least 100 billion pounds in home loans. The program also will be extended to other types of lending, potentially leaving the taxpayers’ exposure in the hundreds of billions of pounds. Treasury officials are talking with banks about how big the facility should be.
Credit Guarantees
The government also is extending the 250 billion-pound Credit Guarantee Scheme it opened in October as part of the first round of the bailout. That program allows banks to issue bonds backed by the government and will now run until the end of this year instead of April 9 as originally planned.
“It looks to us as though this scheme, this insurance where you can put a floor under valuations, is very important,” said Angela Knight, chief executive of the British Bankers’ Association. “We favor this from the government.”
Also today, the government said it would raise its stake in Royal Bank of Scotland to 70 percent from 50 percent by swapping preference shares the Treasury took in the bank in October for ordinary shares. That will save RBS 600 million pounds in annual dividends owed to the Treasury, allowing the bank to increase its U.K. lending volume by 10 times that amount.
‘Something in Return’
“This is basically making sure that the government gets something in return for all this money,” said Vicky Redwood, an economist at Capital Economics Ltd. who formerly worked at the Bank of England. “It will be a commitment to increase lending by a certain percentage.”
Financial institutions have refused to pass on Bank of England interest rate cuts by as much as the government wanted. While the central bank this month took its benchmark rate to 1.5 percent, the lowest since its foundation in 1694, U.K. banks haven’t matched those reductions in loan costs.
As rates approach zero, the central bank will have the authority to channel liquidity to financial institutions by buying assets. Chancellor of the Exchequer Alistair Darling said that for now the bank’s asset purchases will be paid for by gilt sales, keeping money supply steady.
“The money that will go in from the Bank of England will be countered by normal money market operations,” Darling said at a press conference with Brown. “Interest rates in this country, although low, are still at 1.5 percent.”
Central Bank Authority
Bank of England Governor Mervyn King will give more details about the plans in a speech tomorrow and in an exchange of letters that he and Darling will publish by the end of this month. The purchases may begin on Feb. 2, three days before the next rate decision. The bank also publishes quarterly forecasts on Feb. 11, signaling the direction of monetary policy.
“This is not quantitative easing in the strictest sense,” said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd., who used to work at the central bank. “But that may come later. The Treasury’s statement that the scale of the scheme could be expanded suggests that funding for the scheme could also change.”
The Bank of England will buy assets including corporate bonds, commercial paper and syndicated loans, a tactic that can be used should officials decide “that this would be a useful additional tool for meeting the inflation target,” the Treasury said.
Lending Facility
The central bank’s Special Liquidity Scheme, a 200 billion- pound facility designed to give financial institutions access to credit, will be closed at the end of this month as the new government programs begin to work.
Two more minor measures may have an impact on lending. Darling ordered Northern Rock Plc, the lender nationalized in February 2008, to repay government loans more slowly so that it can continue writing new mortgages. Before today’s announcement, Northern Rock had been winding down its lending book.
The Financial Services Authority also slashed the amount of capital that it tells bank to hold in reserve if they participate in the government bailout.
The industry regulator said the Tier 1 Capital Ratio that it requires of banks taking advantage of the government’s initial rescue plan in October could now be reduced to between 6 percent and 7 percent, from 8 percent.
Lloyds Banking Group, which completed its takeover of HBOS Plc today and sold a combined 4 billion of preferred shares to the U.K. last year, indicated it won’t swap them for common stock as RBS did.
The London-based bank said it is sticking to plans announced last November to repay the preferred shares, which pay the government a dividend of 12 percent a year, by the end of this year. Lloyds’s business has been “satisfactory” since December, and HBOS’s position hasn’t “significantly” deteriorated, it said in a statement.
To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net; John Fraher at jfraher@bloomberg.net
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Spain’s Debt Downgraded by S&P as Slump Swells Budget
By Emma Ross-Thomas
Jan. 19 (Bloomberg) -- Spain had its AAA sovereign credit rating removed by Standard & Poor’s in the second downgrade of a euro-region government in five days, as the country’s first recession in 15 years swelled the budget deficit.
The risk of losses on Spanish government debt rose to a record, credit-default swaps showed, after S&P lowered the rating one step to AA+ and assigned it a “stable” outlook. It was S&P’s first reduction in Spain’s rating and puts it on the same level as Belgium and Hong Kong.
The cost of economic stimulus packages and bank bailouts is boosting budget deficits around the euro-region, fueling concern governments will have difficulty paying their debt. S&P cut Greece’s rating one step to A- on Jan. 14. A day earlier, it threatened to downgrade Portugal’s debt. S&P also reduced the outlook on Ireland’s rating to negative from stable.
“The only country that should be able to keep its AAA rating is Germany,” said Jose Carlos Diez, chief economist in Madrid at Intermoney SA, Spain’s largest bond dealer. “There should be a question mark over the rest.”
Spain’s economy, whose growth outpaced the euro region for more than a decade, entered a recession in the second half of last year as the credit crisis fueled the collapse of a debt- fueled housing boom, sending the unemployment rate to the highest in Europe. The government has announced about 90 billion euros ($119 billion) of stimulus measures and steps to support banks amid a decline in tax revenue.
Rising Risk
Credit-default swaps on Spain’s debt rose 5 basis points to a record 137 today, BNP Paribas SA prices at 11:30 a.m. in London showed. Credit-default swaps, conceived to protect investors from default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase signals a deterioration in the perception of credit quality.
“Current economic and financial market conditions have highlighted structural weaknesses in the Spanish economy that are inconsistent with a AAA rating,” a team of analysts at S&P led by Trevor Cullinan in London wrote in a statement today.
The extra yields, or spreads, between some European countries’ debt and that of Germany have widened to records amid the fallout from the global economic turmoil. The spread between 10-year Spanish notes and German bunds narrowed 4 basis points after today’s S&P announcement to 1.15 percentage points.
Debt to GDP
The European Commission expects Spain’s economy to shrink 2 percent this year and another 0.2 percent in 2010.
Spain’s debt was equivalent to 36 percent of gross domestic product in 2007, compared with 66 percent for the euro zone and 95 percent for Greece, according to data compiled by Bloomberg. It will amount to 47 percent of GDP this year, rising to around 51 percent next year and between 53 percent and 54 percent in 2011, Finance Minister Pedro Solbes said on Jan. 16.
The government should reduce its debt-to-GDP ratio and liberalize labor and product markets to improve competitiveness, S&P said today. The rating may be cut again if budget deficits remain in place too long, it said. The downgrade also affects the debt of government-controlled companies including Instituto de Credito Oficial, according to S&P.
Nations that have been downgraded from AAA before include Japan, Sweden, Finland and Denmark, according to S&P.
To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net.
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Enel Jumps After Acciona Says Offer for Endesa Stake Certain
By Adam L. Freeman
Jan. 19 (Bloomberg) -- Enel SpA, Italy’s largest utility, rose the most in six weeks after Acciona SA’s chairman said his company expects a bid for its 25 percent stake in Spain’s largest power generator, Endesa SA.
Enel rose as much as 4.5 percent, the steepest intra-day advance since Dec. 8. The stock added 3.5 percent, or 15 cents, to 4.46 euros at 13:53 a.m. in Milan.
“It looks like it’s undisputable that Enel will make an offer given that they have been talking to the banks,” Acciona Chairman Jose Manuel Entrecanales said in Abu Dhabi today.
Enel is in talks to buy Acciona’s 25 percent stake in Endesa and may make an offer by Jan. 26, Expansion newspaper reported last week, without saying where it got the information.
The Italian utility would own 92 percent of Madrid-based Endesa if the proposed purchase takes place. It’s not clear whether it would be obliged to make a public offer for the remaining shares or how much it would have to pay for them.
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Goldman Sees ‘Swift, Violent’ Oil Rally Later in Year
By Grant Smith
Jan. 19 (Bloomberg) -- Goldman Sachs Group Inc. commodity analyst Jeffrey Currie said he expects a “swift and violent rebound” in energy prices in the second half of the year.
Oil prices may have reached their lowest point already, after falling to $32.40 in mid-December, and are expected to rise to $65 by the end of this year, the analyst said. There is scope for a “new bull market” in oil, Currie said.
World oil demand is likely to fall by about 1.6 million barrels a day this year, the Goldman analyst said today at a conference in London. That’s bigger than the reduction expected by the International Energy Agency, which last week forecast a decrease of about 500,000 barrels a day, or 0.6 percent, this year.
A recent tactic of using supertankers to store crude oil to take advantage of higher prices later this year is “difficult” to profit from and is “near the end of this process” anyway, the Goldman analyst said.
New York crude futures for delivery in December, trading near $56 a barrel, currently cost some $15 a barrel more than March futures, a market situation known as contango, where prices are higher for later delivery.
The contango is likely to flatten as supply cuts by OPEC and other producers take effect, reducing the availability of oil for immediate delivery, Currie said.
The Organization of Petroleum Exporting Countries started another round of supply cutbacks at the start of this month. The group’s compliance with its overall efforts to cut production will probably peak at 75 percent, or a reduction of about 3 million barrels a day out of an announced aim of 4.2 million barrels a day, Goldman Sachs said.
In several steps, 10 OPEC members have pledged to reduce production to 24.845 million barrels a day, a cut of 4.2 million barrels a day from September’s level.
Morgan Stanley hired an oil tanker to store crude oil in the Gulf of Mexico, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from the contango, two shipbrokers said in reports earlier today.
To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net
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Crude Falls on Forecasts Global Recession Will Cut Fuel Demand
By Grant Smith and Alexander Kwiatkowski
Jan. 19 (Bloomberg) -- Crude oil futures fell, approaching $35 a barrel in New York, on forecasts faltering global economic growth will drive down fuel consumption for a second year.
Goldman Sachs Group Inc., while forecasting a recovery in prices later this year, said demand will decline by 1.6 million barrels a day. That’s more than three times the drop forecast by the International Energy Agency last week. OPEC may have to cut output again should prices fall further, Algerian Oil Minister Chakib Khelil said over the weekend.
“The world recession is continuing to dampen demand,” said Christopher Bellew, a senior broker at Bache Commodities Ltd. in London. “Cuts by OPEC members will probably stabilize the market, but it may take some time before they translate into any upward price move.”
Crude oil for February delivery fell as low as $35.10 a barrel in electronic trading on the New York Mercantile Exchange, and was $1.21 down at $35.30 at 1:50 p.m. London time. There will be no floor trading in New York today because of the Martin Luther King Day holiday.
The Nymex February contract will expire at the end of trading tomorrow. The more-actively traded March contract dropped $1.05 to $41.52 at 1:50 p.m. London time.
Rising U.S. stockpiles and forecasts from the IEA and OPEC for declining world demand contributed to an 11 percent decline in Nymex crude prices last week. Prices are down 20 percent so far this year, after tumbling 54 percent in 2008.
Prices may have reached their lowest point already and there is likely to be a “swift and violent rebound” in the second half of the year, Goldman Sachs analyst Jeffrey Currie said at a conference in London today.
Cushing Stockpiles
Brent crude oil for March settlement was down $1.11 at $45.46 a barrel on London’s ICE Futures Europe exchange, as of 1:50 p.m. local time.
Record crude stockpiles in Cushing, Oklahoma, the delivery point for Nymex futures are causing the New York contract to be cheaper than North Sea Brent crude, analysts have said.
The difference between the two exchanges’ March futures is about $4 a barrel today. On the last day of trading of February Brent futures on Jan. 15, the premium for Brent prices over Nymex was $9.29.
The Organization of Petroleum Exporting Countries, which produces about 40 percent of the world’s oil, agreed last month to cut output by 9 percent starting Jan. 1 to prevent a glut and stem a six-month decline in prices.
OPEC Cuts
Saudi Arabia, the group’s biggest producer, last week said it will reduce output further in February. Ministers should agree fresh cuts at the group’s March 15 meeting if prices continue to slide, Algeria’s Khelil said on Jan. 17.
The IEA’s latest forecast assumes global economic growth of 1.2 percent in 2009, half its previous estimate. It lowered projected daily demand in industrial nations by 530,000 barrels and consumption in developing nations by 480,000, including a 300,000 barrel-a-day reduction in China.
Chinese gross domestic product grew 6.8 percent from a year earlier, according to the median estimate of 12 economists by Bloomberg News, down from 9 percent in the previous three months. The data is due to be released this week.
To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.netAlexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net
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Canada’s Dollar Weakens as Commodities Including Oil Decline
By Chris Fournier
Jan. 19 (Bloomberg) -- Canada’s dollar depreciated against its U.S. counterpart as commodities such as crude oil, natural gas and gold fell and as investors remained jittery over a deteriorating global economy.
“I think the Canadian dollar is a little vulnerable,” said Steven Butler, director of foreign-exchange trading in Toronto at Scotia Capital, a unit of Canada’s third-largest bank. “It seems at the moment the only news is bad news.”
The Canadian currency weakened 0.5 percent to C$1.2503 per U.S. dollar at 8:18 a.m. in Toronto, from C$1.2431 on Jan. 16. One Canadian dollar buys 79.98 U.S. cents.
Canada’s dollar will strengthen to C$1.19 by the end of 2009, according to the median estimate of 33 economists surveyed by Bloomberg News. Scotia Capital also predicts the currency will rise to that level by the end of next year.
Crude oil futures, which have lost more than $100 a barrel since reaching a peak in July, fell $1.37, or 3.8 percent, to $35.25 a barrel. Natural gas for February delivery fell 2.3 percent to $4.69 per million British thermal units.
Gold for immediate delivery lost as much as $6.41, or 0.8 percent, to $836.74 an ounce.
“The loonie will still be reacting to overall confidence issues,” said Firas Askari, head currency trader in Toronto at BMO Nesbitt Burns, a unit of Bank of Montreal. The currency will move with commodities and global equity markets, he said.
The euro-area economy will contract this year for the first time since the currency was introduced a decade ago, the European Commission forecast. Royal Bank of Scotland Group Plc said it may post a loss of as much as 28 billion pounds ($41 billion), the biggest ever reported by a U.K. company. Spain had its AAA sovereign credit rating cut by Standard & Poor’s in the second downgrade of a euro-region government in five days.
Canadian Rates
The Bank of Canada will cut the target rate for overnight loans between commercial banks by a half-percentage point to 1 percent when it meets tomorrow, according to the median estimate of 20 economists in a Bloomberg News survey. The central bank reduced the benchmark by 0.75 percentage point to 1.5 percent at its last meeting on Dec. 9.
Financial markets in the U.S. are closed for the Martin Luther King Jr. holiday.
To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
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Pound Falls Versus Euro, Dollar on U.K. Bank Plan; Ruble Drops
By Lukanyo Mnyanda
Jan. 19 (Bloomberg) -- The pound fell against the euro and the dollar after British Chancellor of the Exchequer Alistair Darling announced the second bank rescue in three months.
The U.K. currency also dropped against the yen after Darling said the government will extend a Bank of England program to inject money into the financial system and proposed insurance to underwrite mortgage-backed debt and toxic assets. The ruble fell below the weakest level since before the 1998 Russian crisis after the central bank devalued the currency for the sixth time in seven days to protect foreign cash reserves.
“It’s all about the banks again, and the market has clearly not reacted positively to the news,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International, the third-largest Dutch lender. “We’re going to see more pressure on sterling.”
The U.K. currency weakened 0.4 percent to 90.36 pence per euro as of 7:27 a.m. in New York, from 90.03 pence on Jan. 16. Against the dollar, it lost 0.7 percent to $1.4636. The pound bought 132.61 yen, from 133.63. The ruble slid to as low as 33.0455 per dollar today, the weakest since early 1998, before the government defaulted on $40 billion of debt.
The Japanese yen snapped two days of losses versus the euro and the dollar as Russia’s devaluation prompted investors to reduce holdings of emerging-markets assets.
The yen rose to 90.59 against the dollar, from 90.72. It earlier touched 91.30, the lowest level since Jan. 9. The currency was at 119.79 per euro, after touching 122.17, the lowest level since Jan. 9.
The euro traded at $1.3218, from $1.3267, and the Swiss franc was little changed at 1.1212.
Obama Hopes
Investors should sell the U.K. currency against both the yen and the dollar on speculation more than $1 trillion of asset writedowns worldwide and rising credit losses will damp demand for riskier assets, pushing it to $1.40 and 1.285 yen in the “next couple of weeks,” Stretch said. Losses against the euro may be capped as the region’s economy contracts, Stretch said.
The yen’s gains were limited as investors bet President- elect Barack Obama will step up efforts to recapitalize U.S. banks. Stock markets rose across Europe and U.S. stock futures also traded higher.
“Hopes over the Obama administration are improving risk- taking appetite,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank by market value.
Currency movements may be exaggerated today because U.S. financial markets are shut for the Martin Luther King Day holiday, said Saito.
Ruble’s Tumble
The yen slid the most against the Brazilian real, falling 1.1 percent to 39.1334. It lost as much as 1.8 percent to 50.52 against New Zealand’s dollar. It was 0.2 percent lower at 61.23 versus Australia’s dollar, after trading as low as 62.19.
Russia’s ruble dropped as the quickened pace of devaluations encouraged investors to place so-called short positions on the ruble-basket rate, said Lars Rasmussen, an emerging-markets analyst in Copenhagen at Danske Bank A/S, which rates itself among the five biggest traders of the ruble. A short position is a bet an asset price will decline.
The Russian currency has dropped 6.8 percent against the basket this year. It fell to 43.8880 per euro, the lowest since the common currency’s introduction in 1999, pushing its decline this year to 6.1 percent.
U.K. Plan
The British government said in a statement today that it will increase its stake in Royal Bank of Scotland Group Plc as it converts the 5 billion pounds ($7.4 billion) of preferred shares it bought last year to ordinary stock.
The new U.K. measures would add at least 100 billion pounds to the 250 billion pounds committed by Prime Minister Gordon Brown in October to underwrite a financial system choked with bad debt and reeling under the first recession in two decades. They increase the government’s grip on consumer and corporate banking and expose taxpayers to hundreds of billions in losses.
“Any positive pound reaction to today’s bailout news may provide a good opportunity to short the pound,” Emma Lawson, a currency strategist in London at Merrill Lynch & Co., wrote in a client note today. “We remain short pound-dollar.
The pound may drop to as low as $1.20, Michael Klawitter, a Frankfurt-based currency strategist at Dresdner Kleinwort, said in a Bloomberg Television interview today.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
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Aluminum Falls to Five-Year Low on Supplies; Copper Also Drops
By Claudia Carpenter
Jan. 19 (Bloomberg) -- Aluminum dropped to a five-year low in London as cheaper oil prices reduced production costs, spurring speculation that supply will expand. Copper and other metals erased gains.
Energy accounts for about 40 percent of aluminum’s production costs, and New York oil futures dropped 3.4 percent today. Inventories of the metal used in beverage cans and cars exceeded 2.5 million metric tons today for the first time since July 1994, according to the London Metal Exchange.
“Energy costs are low,” said James Roberts, a London-based broker at Sucden Financial Ltd., one of 12 traders on the floor of the London Metal Exchange. “It wouldn’t surprise me to see inventories go to 3 million plus.”
Aluminum for delivery in three months fell $46, or 3.1 percent, to $1,419 a metric ton as of 12:39 p.m. on the LME and earlier dropped to $1,415, the lowest since Sept. 30, 2003.
The decline accelerated after prices fell below $1,435, the low in mid-December, triggering selling by traders who follow charts and graphs, said Dhiren Sarin, an analyst at Barclays Capital in London.
Production gained 4.4 percent last year to 39.7 million tons, exceeding consumption and leaving a supply surplus of 2.6 million tons, Macquarie Group’s London-based analyst Jim Lennon wrote in a report today. “We are grappling with the issue that our supply/demand forecasts continue to throw out surpluses in 2010 even with a strong recovery in demand.”
Aluminum makers in China, the world’s biggest producer, are returning to profit after aluminum futures in China rose and raw material costs declined, analysts said last week.
Copper fell $15 to $3,340 a ton, erasing an earlier gain to a one-week high of $3,475 a ton. The contract fell 1.3 percent last week. Lead dropped $29 to $1,140 a ton, nickel declined $55 to $10,800 a ton and zinc decreased $17 to $1,234. Tin fell $150 to $10,750 a ton.
To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net
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Gold Falls as Crude Oil Slips, Investors Sell After Price Gain
By Nicholas Larkin
Jan. 19 (Bloomberg) -- Gold fell in London as prices at a one-week high spurred some investors to sell, and as a decline in crude oil reduced the metal’s appeal as an inflation hedge.
Bullion climbed 3.1 percent on Jan. 16, the biggest gain in more than a month, as a weaker dollar boosted demand for gold as an alternative investment. Oil declined today on forecasts faltering global economic growth will drive down fuel demand.
Gold is “still moving with oil and the dollar and it depends on what’s going on in these markets,” Wolfgang Wrzesniok-Rossbach, head of marketing and sales at Hanau, Germany-based Heraeus Metallhandels GmbH, said by phone. Trading volume will be low today because of the Martin Luther King Day holiday in the U.S., he said.
Gold for immediate delivery lost as much as $6.41, or 0.8 percent, to $836.74 an ounce and traded at $838.81 an ounce by 12:04 a.m. in London. February futures were 0.2 percent lower at $838.60 in electronic trading on the Comex division of the New York Mercantile Exchange.
The metal rose to $842.50 an ounce in the morning “fixing” in London, used by some mining companies to sell production, from $833.75 at the afternoon fixing on Jan. 16.
Crude oil slipped as much as 3.5 percent to $35.22 a barrel in New York. The dollar added 0.2 percent against the euro after earlier falling as much as 0.9 percent.
“Some profit taking has been evident this morning,” James Moore, an analyst at TheBullionDesk.com in London, wrote today in a note. “We remain bullish towards gold from both a fundamental view and belief investors will look to further diversify their portfolios, again turning towards the safe-haven assets.”
Gold Survey
Prices may rise this week on speculation that the dollar will slide, according to 18 of 32 traders, investors and analysts surveyed from Mumbai to Chicago last week. Ten said to sell, and four were neutral.
Standard Bank Ltd. forecast gold may drop to $750 an ounce this quarter as jewelry demand falls and the dollar remains strong against other currencies. The commodity will then rebound and average $910 an ounce for the year as the U.S. currency weakens, the bank said.
Investment in Zuercher Kantonalbank’s gold exchange-traded fund rose to a record 3.264 million ounces last week, from 3.217 million, the bank said today. ETF Securities Ltd. said it has $4.8 billion in gold assets under management, up 55 percent in the past year. Bullion trading more than tripled last year to $14.5 billion, it said.
Among other metals for immediate delivery in London, silver declined 0.7 percent to $11.1925 an ounce. Platinum gained $14.50, or 1.5 percent, to $963.50 an ounce, and palladium was 1.2 percent higher at $187.75 an ounce.
To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net
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Ruble Drops to Pre-1998 Crisis Low on 6th Devaluation This Year
By Emma O’Brien
Jan. 19 (Bloomberg) -- The ruble fell below the weakest level seen in the 1998 Russian crisis after the central bank devalued for the sixth time in seven days to protect reserves.
The currency slid to as little as 33.1080 per dollar today, the lowest since early 1998, before the government defaulted on $40 billion of debt. The ruble has lost 7.3 percent since official trading resumed this year, extending the decline to 29 percent since August.
Prime Minister Vladimir Putin pledged last month to use the nation’s foreign-exchange reserves to avoid “sharp” currency swings, after a 71 percent decline against the dollar in 1998 caused investors to flee and savers to pull bank deposits. Investors have withdrawn $245 billion from Russia since August as a 63 percent drop in oil, Russia’s war with Georgia and the disruption to gas exports exacerbated the effect of the global financial crisis, according to BNP Paribas SA data.
“Fear of another devaluation means nobody wants to buy rubles right now,” said Lars Rasmussen, an emerging markets analyst in Copenhagen at Danske Bank A/S, which rates itself among the five biggest traders of ruble in the world through Finnish subsidiary Sampo Bank Plc. “The ruble has begun to look more and more overvalued because of the fall in the oil price.”
Russia’s reserves, the world’s third-largest, have dropped by $171.6 billion to $426.5 billion since August, as policy makers sold foreign currency.
The ruble weakened 1.3 percent to 37.8013 against the dollar-euro basket by 1:58 p.m. in Moscow, extending this year’s drop to 6.8 percent.
Danske Bank lowered its forecast for the ruble today, seeing a further 15 percent depreciation versus the basket to 44.45 in three months, down from a prediction of 38.6 in December.
Ruble to Stabilize
Mark Mobius said he expects Russia’s currency will begin to stabilize and the central bank may slow devaluations as the ruble approaches fair value.
“It’s not as overvalued as it was,” Mobius, who manages more than $24 billion in emerging-market assets as executive chairman at Templeton Asset Management Ltd., said in an interview today. “I know some commentators think further devaluations can be expected, but I’m not too sure about that.”
Non-deliverable forwards predict an 11 percent decline in the ruble to 37.04 per dollar in the next three months. NDFs fix a currency at a particular level at a future date and are used by companies to protect against foreign-exchange fluctuations.
Bank Rossii, which manages the currency against a basket of about 55 percent dollars and the rest euros, widened the ruble’s target range today, a bank official said. The currency has fallen 29 percent versus the basket since Aug. 1 and is now able to decline about 22 percent from a target rate, from about 3.6 percent on Nov. 11, the start of the current round of devaluations.
Short Positions
The quickened pace of devaluations is encouraging investors to place so-called short positions on the ruble-basket rate, said Rasmussen of Danske Bank. A short is a wager a security is going to decline.
The strategy of shorting the ruble has now spread from the major banks to the smaller firms, said Peter Rosenstreich, chief market analyst at Geneva-based currency-trading firm ACM Advanced Currency Markets.
Economy Minister Elvira Nabiullina said the ruble will average 35.1 per dollar this year, 6 percent above its current price, Interfax reported today. Economic growth will probably shrink to 0.3 percent in 2009 as Urals crude averages $41 a barrel, she added, according to the Moscow-based newswire. The ruble fell to the low of the day after the comments were released.
Quickened Pace
The ruble dropped to 43.8880 per euro, the lowest since the common currency’s introduction in 1999, and is down 6 percent this year.
Urals crude, Russia’s main export blend, has declined 69 percent to $44.43 a barrel from a record in July, below the $70 a barrel needed to balance the budget this year. Policy makers devalued the ruble every trading day last week except for Jan. 13, letting it fall an average 1.7 percent a day versus the basket. That compares with the average two devaluations a week in November and December, at a mean rate of about 0.6 percent a day, according to Bloomberg data.
Russia is trying to avoid the one-day declines of as much as 27 percent in August 1998 that spurred people to withdraw their savings. Bank Rossii First Deputy Chairman Alexei Ulyukayev said last month the bank has a policy of “gradual” devaluation.
Dollar-ruble rates at currency kiosks around Russia are likely to surge through 33 per dollar today, said Alexei Moiseev, head of fixed-income research at Moscow investment bank Renaissance Capital.
‘Avoiding Panic’
“They would have been much better off with a large, one-off devaluation this time but their focus is on avoiding panic,” Moiseev said.
Bank Rossii has increased the pace of the depreciation to minimize the damage from speculators betting on the ruble’s decline, he said. The bank is aiming to complete the devaluation by the end of this month after letting the ruble drop to about 37 per dollar, said Moiseev, who used to work at the central bank.
“They’re doing it quicker to avoid the fallout from speculators,” he said. “They’ll keep up this pace until the end of the month and then stop, maybe not every day of the week though because that is too obvious.”
Expensive Cash
The ruble weakened 5.3 percent against the dollar and 9.8 percent versus the euro last week, the most since 1999. That compares with a record 71 percent slide in the week to Aug. 28, 1998, and a 42 percent slump the week after.
Russia saw a record capital flight of $129.9 billion last year as investors liquidated their positions and locals converted rubles into foreign currency. Outflows of capital from Russia may climb to $160 billion this year should the oil price remain below $40 a barrel, according to Renaissance.
The falling ruble is causing banks, companies and individuals to hoard foreign currency, said Evgeny Nadorshin, senior economist at Moscow’s Trust Investment Bank.
“All the attention of the people is focused on the forex market,” Nadorshin said. “Companies aren’t buying supplies, they’re investing their rubles in dollars instead because the play is too attractive.”
The cost of money is rising as supply tightens and will force policy makers to halt the ruble devaluation “soon,” Nadorshin said. Russia’s MosPrime rate, the average interest-rate banks charge to lend money to each other, rose to a two-month high of 12.5 percent today, according to the central bank.
Sliding Economy
The ruble will probably rise to near 40 against the basket before the central bank stops devaluing it some time around the end of January, he said.
Russia redenominated the ruble on Jan. 1, 1998, effectively replacing the currency by taking three zeros off the currency. The 1,000-ruble note became the 1-ruble note.
Declining oil revenue contributed to a 8.7 percent contraction in Russian industrial output in November, the most for 10 years. Wage arrears at Moscow-based companies tripled to 213 million rubles ($7 million) in December, according to Rossiiskaya Gazeta, the government’s newspaper of record. Unemployment rose to 6.6 percent last year.
To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net
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