Canada’s Dollar Falls as Economy Contracts, Investors Shun Risk

By Chris Fournier

Jan. 31 (Bloomberg) -- Canada’s currency fell in January as a report showed the economy shrank in November and the global recession led investors to take refuge in the U.S. dollar.

The Canadian dollar, known as the loonie, depreciated 0.8 percent this month as the U.S. economy contracted the most in the fourth quarter since 1982. The U.S. is Canada’s largest export market.

“There’s not a lot of good things out there right now for the Canadian dollar,” said Andrew Busch, a currency strategist at BMO Capital Markets in Chicago. “We’ve been getting earnings and economic data that continue to show a dire situation. It’s hard to gain any traction.”

The Canadian currency slid to C$1.2296 per U.S. dollar yesterday in Toronto, from C$1.2188 on Dec. 31. One Canadian dollar buys 81.40 U.S. cents.

The loonie will weaken to C$1.26 against the U.S. dollar by the end of March before rebounding by year-end to C$1.20, according to the median forecast of 41 economists surveyed by Bloomberg News.

Canada’s economy, the world’s eighth-largest, contracted 0.7 percent in November, Statistics Canada said yesterday in Ottawa. The drop, which was more than forecast, was the biggest since August 2003, when northeastern North America was hit by a power blackout.

“GDP numbers for Canada were horrible,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets. “Any sort of rebound in confidence in the Canadian dollar has proved elusive.”

C$40 billion Stimulus

Petro-Canada, Canada’s third-biggest oil and gas producer posted a C$691 million fourth-quarter loss on Jan. 29. Procter & Gamble Co., the world’s largest consumer-products company, posted quarterly sales yesterday that trailed estimates, and the company reduced its annual forecast.

A collapse in demand for commodities and a recession in the U.S. weakened the loonie by 18 percent last year, the currency’s worst-ever performance. It fell in seven of the last eight months. Raw materials such as crude oil generate half the country’s exports.

Canada’s dollar rose to C$1.2026 on Jan. 28, the strongest in two weeks, after the opposition Liberal Party spared the ruling Conservative Party from defeat by signaling accord with its proposed C$40 billion ($32.6 billion) package of economic revival measures.

The greenback strengthened this week against 10 of its 16 most actively traded counterparts as investors sought relative safety from global economic turmoil in the world’s reserve currency. The exceptions were the pound, South Korea’s won, the loonie, Brazil’s real, Norway’s krone and South Africa’s rand.

The yield on the two-year government bond rose 18 basis points in the week, or 0.18 percentage point, to 1.42 percent. The price of the 2.75 percent security due in December 2010 fell 35 cents to C$102.40.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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Zambia Will Scrap Windfall Tax on Mining Companies

By Geoffrey Kapembwa

Jan. 30 (Bloomberg) -- Zambia, Africa’s biggest copper producer, will scrap a windfall tax on mining companies, Finance Minister Situmbeko Musokotwane said, following opposition to the duty from miners.

The levy will be abolished with effect from April 1, Musokotwane said in his annual budget speech today in the capital, Lusaka. A variable-rate profit tax will be kept.

The government will “remove the windfall tax and retain the variable-profit tax, which will still capture any windfall gains that may arise in the sector,” Musokotwane said.

Zambia introduced the two levies last year, raising the effective tax rate on miners to 47 percent from 31 percent. Copper prices last year dropped 54 percent on the London Metal Exchange, the most since at least 1987, as recessions in the U.S., Japan and Europe curbed demand for industrial metals. Copper accounts for about 70 percent of Zambia’s export income.

On June 10, former Finance Minister Ng’Andu Magande said the country was renegotiating the new code with some mining companies in order to boost mineral production.

Fiscal revenue from the mining industry in 2008 was 319.3 billion kwacha ($62.3 million), compared with a target of 917.3 billion kwacha, according to the Economic Intelligence Unit.

The windfall tax required miners to pay a levy on sales of copper when the price rose above $2.50 per pound. A charge of 25 percent applied to the surplus amount above $2.50 to a maximum of $3.00 per pound. The rate increased to 50 percent at between $3.00 and $3.50 and 75 percent above $3.50.

Economic Growth

A tax on profits of up to 15 percent was also imposed on companies that earned a return in excess of 8 percent on their investments.

Companies including First Quantum Minerals Ltd., Vedanta Resources Plc and Glencore International AG operate in Zambia.

Zambia’s economy expanded an estimated 5.8 percent last year, down from 6.3 percent the year before, while consumer inflation accelerated to 16.6 percent from 8.9 percent, driven by higher food costs, the budget showed. The government is targeting growth of 5 percent this year and inflation of 10 percent.

“Our export receipts are expected to be significantly lower than in previous years due to the fall in world copper prices,” Musokotwane said. “This will adversely affect our balance of payments. This problem is compounded by our continued dependence on a single major export commodity.”

The government expects to spend 15.3 billion kwacha ($297 million) this year, with 17.2 percent of that allocated toward education, 11.9 percent toward health and 9.9 percent toward transport.

To contact the reporter on this story: Geoffrey Kapembwa in Lusaka via Johannesburg at pmrichardson@bloomberg.net.

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Bank Bailout Plan Will Toughen Rules on Bonuses, Axelrod Says

By Julianna Goldman

Jan. 31 (Bloomberg) -- President Barack Obama’s senior adviser, when asked whether the new administration will ban Wall Street bonuses, said “limiting some of this executive compensation” is necessary to rally public support for a financial-rescue plan.

David Axelrod, who was Obama’s chief strategist during the campaign, stopped short of embracing a ban on bonuses for companies receiving bailout funds. He left no doubt, however, that the administration will take tough steps to address the issue.

“It’s very hard for the American people to understand how a bank executive should get a multimillion dollar bonus at a time when he’s asking the government to essentially bail out his institution,” Axelrod said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” scheduled to air this weekend.

Obama, 47, expressed outrage this week after the New York state comptroller reported that Wall Street firms disbursed $18.4 billion in bonuses last year as the U.S. sank into a recession. While the figure represents a decline of 44 percent from the previous year amid record losses in the securities industry, the bonus pool was the sixth-largest ever, the comptroller said in a yearly report.

Geithner Plan

Axelrod said Treasury Secretary Timothy Geithner will “have something to say about” bonuses as early as next week when he releases guidelines for banks receiving funds from the second half of the $700 billion financial rescue package.

The administration is committed to “a strong, private financial sector” in the bank bailout, Axelrod said when asked whether there are discussions to partially nationalize U.S. banks.

“Obviously, we’re trying to help these institutions on a temporary basis, but that’s our goal,” Axelrod said. “We’re going to provide assistance to these institutions and hope that they -- hope and expect that they’ll -- get back on their feet and that credit will flow.”

Financial experts and lawmakers including Democratic Senator Chuck Schumer of New York have said the government may need to spend more than $1 trillion to help the financial markets. Axelrod declined to discuss specific numbers, though he said the administration is crafting a plan that will “set up new rules of the road” for spending the remaining $350 billion of the rescue package approved under the Bush administration.

‘Trust’

“There are a variety of things that we need to do in order to win the trust and confidence of the American people,” Axelrod said. “And we’ll address these other issues down the road, but right now, we’ve got to work with what we’ve got.”

Axelrod defended Geithner, who sparked controversy during his confirmation hearings last week by saying Obama believes China is “manipulating its currency.”

“What Tim said was akin to what the president said during the campaign, these are issues that we have to work through,” Axelrod said. “We weren’t blazing new ground there.”

Obama spoke with President Hu Jintao of China this week following Geithner’s testimony. Axelrod wouldn’t say whether Obama reassured the Chinese leader on this issue.

Separately, Axelrod said the president will “make an announcement shortly” on his choice to lead the Commerce Department, the only Cabinet post left unfilled.

Judd Gregg

Speaking of Republican Senator Judd Gregg, a leading candidate for the position, Axelrod said the lawmaker and Obama “haven’t agreed on all issues,” though the president has “a great respect for his ability and for his seriousness about public service.”

Axelrod also expressed confidence the Senate would confirm former South Dakota Senator Tom Daschle, Obama’s choice as Health and Human Services secretary, whose tax records have come under scrutiny by Republicans on the Finance Committee.

“I think that he’s going to be confirmed,” Axelrod said.

Obama’s economic recovery plan cleared a hurdle this week with House passage of an $819 billion stimulus measure, which now goes to the Senate for approval.

Even though Obama took the unusual step of traveling to Capitol Hill to ask for support from Republican lawmakers, not a single House Republican voted for the bill.

Senate Republicans

Axelrod said he couldn’t predict whether any Republicans would support the package in the Senate, where the bill has grown to almost $900 billion.

“We’ll see,” Axelrod said. “You know, we’re hopeful. But the important thing is that a dialogue was opened. There were good discussions back and forth.”

He also said Obama would continue to try to set the tone of bipartisanship he pledged to bring to Washington during the campaign.

“Old habits die hard in this town,” Axelrod said. “There will be many instances in which there’ll be cooperation -- maybe not with every Republican, and maybe not with every Democrat -- but we’re going to forge coalitions behind all of our initiatives.”

Karl Rove, President George W. Bush’s former adviser, wrote this week that the Obama administration is trying to consolidate more power in the White House at the expense of the Cabinet by doubling the staff.

Axelrod said the larger staff reflects a “multidisciplinary kind of approach” to coordinate issues such as health care and global warming with their related Cabinet departments.

“I appreciate any advice that Karl Rove has,” he said. “But you know, they had their eight years and now we have our chance.”

To contact the reporter on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net.

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Toyota to Cut Pay for Executives as Sales Slump, Nikkei Says

By Toru Fujioka

Jan. 31 (Bloomberg) -- Toyota Motor Corp., the world’s second-largest automaker, will cut salaries for its executives, the Nikkei newspaper reported.

The automaker hasn’t decided when and by how much it will lower compensation, the paper said without saying where it obtained the information.

Toyota already announced plans in December to skip bonuses for board members. The carmaker is forecasting its first loss in 71 years as a stronger yen and sales slump squeeze profits.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

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London Luxury-Homes Prices Have Second-Biggest Drop on Record

By Peter Woodifield

Jan. 31 (Bloomberg) -- London luxury-home prices had the second-biggest decline on record in January as would-be buyers struggled to secure mortgages from banks hurt by the global financial crisis.

The average value of homes costing more than 1 million pounds ($1.4 million) in London’s most expensive neighborhoods fell 3.7 percent from a month earlier, Knight Frank LLP said in an e-mailed statement today. In the past 12 months, prices have slumped 21 percent, the biggest annualized drop recorded by Knight Frank.

“The sudden restriction of mortgage finance” was the main cause of the market’s decline last year, Liam Bailey, head of residential research at London-based Knight Frank, said in the statement. “This factor is continuing to cause problems for the housing market and the wider economy.”

The cost of buying a luxury home in the U.K. capital has fallen for 10 straight months, declining 21 percent since the market’s peak in March. The biggest drop since the broker started the survey in 1976 was 3.9 percent, recorded in October.

Financial-services companies in London may cut as many as 60,000 jobs in London by the end of 2010, according to research firm Oxford Economics. As a result, the market won’t rebound anytime soon, Knight Frank said.

“Price falls should begin to level out towards the end of 2009, although 2010 is likely to see prices move sideways at best,” said Bailey. Knight Frank now expects prices to fall as much as 35 percent from their peak, compared with its previous estimate of 30 percent.

Country-Wide Slump

House prices across the U.K. fell 1.3 percent in January from the previous month and about 17 percent on an annual basis, Nationwide Building Society, the U.K.’s largest customer-owned mortgage lender, said Jan. 29. The report covered all types of homes.

London isn’t the only prime residential property market to lose value because of the credit crisis. In the Hamptons, the New York seaside resort favored by financiers and celebrities, median prices were 14 percent lower at $690,000 in January than a year earlier according to New York property appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate.

London-based Knight Frank compiles its monthly index from estimated values of properties in the Mayfair, St John’s Wood, Regent’s Park, Kensington, Notting Hill, Chelsea, Knightsbridge, Belgravia and the South Bank neighborhoods of London.

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

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Asian Currencies Post Monthly Loss as Global Recession Deepens

By Kim Kyoungwha and David Yong

Jan. 31 (Bloomberg) -- South Korea’s won led a decline in Asian currencies this month as a deepening global recession hurt regional exports and sapped demand for emerging-market assets.

The Korean currency dropped 8.7 percent versus the dollar, its worst start to a year since at least 1991, as the government announced the steepest drop in gross domestic product in a decade. Asian shares tumbled yesterday after reports showed U.S. orders for durable goods and new home sales slumped in December, while Japanese manufacturers cut production at a record pace.

“The data suggests recession in Asia intensified in December and probably got significantly uglier this quarter,” said Kit Wei Zheng, an economist in Singapore at Citigroup Inc. “There’s room for downside surprises for Asian currencies. Risk appetite is still going to be quite poor.”

The won traded at 1,379.50 per dollar in Seoul versus 1,259.50 at end-December, according to Seoul Money Brokerages Ltd. Malaysia’s ringgit slumped 4.3 percent over the same period to 3.6077, its worst January performance in a decade, according to data compiled by Bloomberg News.

The MSCI Asia Pacific Index of regional equities declined 1.7 percent yesterday, extending its January slide to 7.1 percent. The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies excluding the yen, was poised for a 2.4 percent drop.

U.S. durable goods orders fell for a fifth month in December while new home sales reached a record low, according to Commerce Department reports on Jan. 29. Japan said yesterday industrial production fell by a record 9.6 percent last month from November. The two nations are the world’s biggest economies.

Dollar Shortage

South Korea’s won traded near a seven-week low of 1,399.10 on Jan. 28 on concern tighter global credit markets and sliding exports will curb the supply of dollars the nation needs to meet payments on imports and foreign debt.

Asia’s fourth-largest economy contracted by a larger-than- expected 5.6 percent in the fourth quarter, the most since the Asian financial crisis a decade earlier, the Bank of Korea said on Jan. 22.

The central bank yesterday reported a current-account deficit of $6.41 billion for 2008, the first shortfall in 11 years, as higher oil prices and a weaker won drove up the cost of imported goods. “More active measures” may be used to improve to ease the credit crunch, Governor Lee Seong Tae said.

Demand for Dollars

“There’s a general feeling that demand for dollars is outweighing supplies given concern that January may see a trade deficit,” said Jeff Kim, a currency dealer with Korea Exchange Bank in Seoul. “The decline in stocks is also unnerving currency players.”

The Philippine peso declined 0.4 percent yesterday to 47.38 per dollar after the central bank slashed interest rates and signaled more cuts to help spur economic growth. The currency rose 0.3 percent in January, making it the sole gainer among the 10 most-traded regional currencies excluding the yen.

Bangko Sentral ng Pilipinas on Jan. 29 cut its overnight borrowing rate by half a percentage point to 5 percent, the second reduction in six weeks. Governor Amando Tetangco told reporters that cooling inflation provides the central bank “room for further easing.”

Sliding Support

“The more you cut rates, the more you take the fundamental support for the currency,” said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. “Even if inflation is falling, you need some premium for holding the peso. If they overdo the cutting, the peso could get hurt.”

Indonesia’s rupiah fell 1.1 percent to 11,440 yesterday, capping a 4.7 percent slide for the month. Overseas investors sold a net $128 million worth of Indonesian stocks in the four weeks of January, contributing to this month’s 1.7 percent drop in the Jakarta Composite Index.

“The global stock market kept declining as well as the Jakarta stock exchange and this is spurring fund outflows,” said Lindawati Susanto, head of currency trading at PT Bank Resona Perdania in Jakarta. “In addition, there is month-end corporate demand for dollars.”

Elsewhere, the Singapore dollar fell 4.2 percent for the month to S$1.5076 versus the greenback, the Thai baht dropped 0.7 percent to 34.94 and India’s rupee declined 0.2 percent to 48.875 per dollar.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net.

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Japan’s Bonds Complete Worst Month Since May on Supply Outlook

By Yasuhiko Seki and Nate Hosoda

Jan. 31 (Bloomberg) -- Japan’s 10-year bonds completed their worst month since May on concern the government will increase debt sales as it seeks to spend its way out of the deepest recession in the postwar period.

Benchmark yields extended this month’s advance to 12 basis points as government reports yesterday showed factory output slumped a record 9.6 percent in December, unemployment surged the most in 41 years and households cut spending for a 10th month. The Ministry of Finance may need to sell a record 38.1 trillion yen ($426 billion) of new bonds in the fiscal year starting April 2011, official calculations show.

“As governments across the globe scramble to address the deepening recession, the market is shifting its attention to the supply problem,” said Ryutaro Matsuyama, a strategist in Tokyo at Mizuho Investors Securities Ltd., the brokerage arm of Japan’s second-largest banking group. “The market has already priced in an acceleration of the economic slump.”

The yield on the 1.3 percent bond due in December 2018 touched a three-week high of 1.29 percent yesterday in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. A basis point is 0.01 percentage point.

Ten-year bond futures for March delivery fell 0.90 to 138.91 during the week in Tokyo, the biggest slump since the five days ended Jan. 9.

Production Slides

Japan’s drop in production eclipsed the previous record of 8.5 percent set only a month earlier, the Trade Ministry said yesterday in Tokyo. The jobless rate climbed to 4.4 percent from 3.9 percent and household spending slid 4.6 percent.

Bond declines were limited after a statistics bureau report yesterday showed consumer prices excluding fresh food rose 0.2 percent from a year earlier in December, less than the previous month’s 1 percent increase. Slower inflation helps preserve the purchasing power of fixed-income securities.

“If Japan’s economy falls into a deflationary spiral, I wouldn’t be surprised if the 10-year yield falls below 1 percent,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute. The “data suggest the economy is now on the verge of returning back to deflation.”

Demand for Japanese debt weakened after yields on 10-year Treasuries on Jan. 29 rose the most since Nov. 21, after the U.S. government sold a record $30 billion of five-year notes at a higher yield than analysts forecast, indicating weak demand.

Supply Concerns

The auction results may signal investors will have trouble absorbing debt issued to pay for a $1 trillion U.S. budget deficit and programs to spur growth. The U.S. will probably borrow a record $2.5 trillion this fiscal year ending Sept. 30, versus $892 billion in notes and bonds sold in the prior 12 months, according to Goldman Sachs Group Inc.

“The supply concerns are more pronounced in the U.S. and Europe than in Japan,” said Akitsugu Bandou, a senior economist at Okasan Securities in Tokyo.

The Ministry of Finance will sell 1.9 trillion yen of 10- year securities bearing a coupon of 1.3 percent on Feb. 3. The prior sale on Jan. 8 drew bids for 2.33 times the amount on offer, compared with a so-called bid-to-cover ratio of 2.9 at the December auction.

“There is emerging uncertainty about whether the Bank of Japan alone can absorb the swelling debt issuance,” said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $54 billion in assets.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net; Nate Hosoda in Tokyo at nhosoda@bloomberg.net.

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