U.S.: Consumer Spending Disappoints, Again

Daily Forex Fundamentals | Written by TD Bank Financial Group | May 13 09 14:11 GMT |

U.S. retail sales declined by 0.4% M/M in April. Excluding autos, sales were also weak, falling by 0.5% M/M. On balance, the report was fairly disappointing and suggests that U.S. consumers are shying away from malls. U.S. retail sales declined for the second straight month in April, falling by 0.4% M/M, following the 1.3% M/M drop the month before (previously reported as -1.1% M/ M). This was noticeably worse than the market consensus for a flat print on the month. Excluding autos, sales were down 0.5% M/M, and were also softer than the market expectations for a 0.3% M/M rise. Core retail sales, which net out sales of autos and gasoline, declined by a more modest 0.3% M/M during the month. On a year ago basis, sales continue to be quite poor, as total retail sales have declined by a fairly big 10.1% since April last year. This is the eighth straight month in which sales have fallen below their year-ago level. The details of the report were quite weak, as the declines in sales were fairly broadly-based, with 8 of 13 spending categories down. There were big drops in the sale of electronics (down 2.8% M/M), gasoline (down 2.3% M/M), food (down 1.0% M/M) and at department stores (down 0.2% M/M). On the other hand, sales of health and personal care products (up 0.4% M/M), building materials (up 0.3% M/M), and motor vehicles (up 0.2% M/M) were higher. The crux of this report appears to be that the positive momentum seen in U.S. consumer spending in the first few months of this year has stalled. Indeed, despite the resurgence in the level of consumer confidence over the past few months, U.S. consumer spending seems to be buckling under the weight of the worsening labour market conditions and weakening economy. Nevertheless, we remain hopeful that the impact of rising equity markets plus the massive fiscal stimulus package, which is likely to start kicking in this quarter, will breathe new life into personal expenditures in the near term, thereby providing some much needed boost to U.S. economic activity. TD Bank Financial Group The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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Retail Disappointment Undermines Euro

Daily Forex Fundamentals | Written by Investica | May 13 09 13:53 GMT |

Conditions within the credit markets have continued to ease and this will tend to lessen defensive demand for the US currency. The dollar is also showing some greater vulnerability over the fears of a medium-term credit-rating downgrade due to the escalating debt burden. These fears should certainly not be ignored, but the impact will be offset by a lack of attractive alternatives. Markets have also priced in a substantial amount of good news and any sustained setback for global equities would underpin the dollar. Overall, the Euro is liable to weaken to the 1.3420 region before finding fresh support. The US trade deficit was slightly lower than expected with an increase to US$27.6bn for March from a revised US$26.1bn the previous month. There was a further decline in trade volumes for the eight successive month with exports declining by 17.4% over the year while imports registering a sharp 27%.annual decline. The US federal budget recorded a deficit of US$20.9bn for April compared with a US$159.3bn surplus for the equivalent month last year. This was the first deficit for April since 1983, reinforcing the severe underlying deterioration seen over the past year and the need for huge debt issuance over the coming year. There has been further speculation that the US AAA credit rating could be at risk and the budget data will tend to reinforce these fears. The Euro re-challenged levels above 1.37 in early Europe on Wednesday, but was again unable to sustain the move with risk appetite dampened by a reported 0.4% decline in April US retail sales which created fresh doubts over the US economic conditions. 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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FX Thoughts for the Day

Daily Forex Technicals | Written by Kshitij Consultancy Services | May 13 09 12:20 GMT |

USD-CHF @ 1.1053/55...Ranged: 1.0980 - 1.1130 R: 1.1073 / 1.1122 / 1.1184 S: 1.0980 / 1.0913 / 1.0750 Dollar-Swiss was once again Supported near the 1.0980 level as the pair dipped during the day towards the bottom of the range (1.0980-1.1130) and has since bounced towards 1.1067. The view continues to be in the range mentioned earlier. So buy low (near the bottom of the range) sell high (near the top of the range). Overall trend remains bearish with possiblility of the SUpport at 1.0980 being broken past over the next few sessions if not immediately. If it manages to break past this Support during the day, then there's the Projected Max Low for the day at 1.0913 Cable GBP-USD @ 1.5137/40...Tests Max Low for day R: 1.5207 / 1.5259 / 1.5334 S: 1.5137-27 / 1.5050 / 1.4977 Cable is seeing some sideways consolidation as the Resistance near 1.53 is managing to pressure the pair down. It has been traversing on the back of the 8-DMA at 1.5129 presently which has held over the last few days. Both these levels have been keeping the pair ranged between 1.51-1.53 over the last few days with sudden bouts of "not-so-huge" spikes on either side. Is this range at jeopardy? May be, but till the time it does not breach the 21-DMA (1.4887), we would believe that the uptrend is not over yet and there could still be chances of 1.55 over the next few days. It is presently resting on the Projected Max Low for the day. We shall have to see if it holds, else it might fall further towards 1.50 during the US session. Aussie AUD-USD @ 0.7612/22...Range: 0.7560-0.7740 R: 0.7740-52 / 0.7935 / 0.8013 S: 0.7576-51 / 0.7501 / 0.7418-15 Aussie dipped sharply during the day as it allowed us to enter into the Long at 0.7645. It is likely to now find Support near 0.7560 which is the 61.8% retracement of the fall from 0.8524 (22 Sep 08) to 0.6007 (27 Oct 08). The range of 0.7560-0.7740 looks good for the next few sessions, if not days. One may buy towards the lower end of the range and sell towards the upper end of the range. A break on downside is likely to next target 0.7415 and 0.7935 on the upside. Holding: AUD 10K Long at 0.7645, SL 0.7530, TP 0.7730 (down from 0.7750) Kshitij Consultancy Service http://www.fxthoughts.com Legal disclaimer and risk disclosure These views/ forecasts/ suggestions, though proferred with the best of intentions, are based on our reading of the market at the time of writing. They are subject to change without notice.Though the information sources are believed to be reliable, the information is not guaranteed for accuracy. Those acting in the market on the basis of these are themselves responsibly for any profits or losses that might occur, without recourse to us. World financial markets, and especially the Foreign Exchange markets, are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved.

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Retail Sales in U.S. Probably Steadied as Confidence Climbed

By Courtney Schlisserman

May 13 (Bloomberg) -- Retail sales in the U.S. probably steadied in April as consumers gained confidence the economic slump may be easing, economists said before reports today.

Purchases were unchanged after dropping 1.2 percent in March, according to the median estimate in a Bloomberg News survey. Excluding automobiles, sales probably rose 0.2 percent, after a 1 percent decrease in March, the survey showed.

Lower borrowing costs, a rebound in stocks and smaller job losses last month led to the biggest jump in sentiment in three years, making it more likely spending will see sustained gains in the second half of 2009. Even so, an unemployment rate that is projected to remain elevated for years may make for a subdued economic recovery.

“We probably have seen the very worst in terms of massive declines in retail sales and we’re probably in this period of showing very little growth,” said Michael Gregory, a senior economist at BMO Capital Markets.

The Commerce Department’s report is due at 8:30 a.m. in Washington. Sales estimates ranged from a drop of 0.8 percent to an increase of 1.1 percent.

Other reports today may show the cost of goods from abroad climbed in April for a second month as fuel prices rebounded, and companies continued to trim inventories in March, according to economists surveyed.

Auto Slump

Car dealers were among the retailers that struggled last month. Autos sales dropped to a 9.3 million annual pace from a 9.9 million rate in March.

Chrysler LLC, whose U.S. sales tumbled 48 percent in April from the same month last year as bankruptcy neared, said last week it will offer rebates of as much as $6,000 to boost demand. The incentives began May 6 and end June 1.

Even so, fewer job losses and gains in stocks are making Americans less pessimistic, helping sales at other retailers to stabilize. Consumer confidence jumped by the most since 2005 in April, according to a report last month by the Conference Board, a New York-based private research group.

Payrolls fell by 539,000 workers last month, the smallest drop since October, the Labor Department reported last week. Still, the jobless rate climbed to 8.9 percent, the highest level since 1983, and economists surveyed this month project unemployment will average 9.6 percent in 2010.

Kohl’s, Wal-Mart

Kohl’s Corp. and BJ’s Wholesale Club Inc. were among retailers last week that said first-quarter preliminary earnings exceeded their forecasts and April sales signaled shoppers are returning to stores. Wal-Mart Stores Inc., the world’s largest retailer, said sales at U.S. stores open at least a year rose 5 percent, also beating estimates.

April same-store sales rose 0.7 percent, the first gain since September, according to a report last week from the International Council of Shopping Centers, the New York-based trade group that measures sales at about 40 retail chains.

“We’re still working our way through the slowdown,” said Mike Niemira, chief economist at the ICSC. “I think it will get better as the year progresses. The month of May will still be tough and I suspect by the summer that things will be a little broader in terms of the improvement.”

                        Bloomberg Survey

================================================================
                           Import   Retail   Retail Business
                           Prices    Sales ex-autos     Inv.
                             MOM%     MOM%     MOM%     MOM%
================================================================

Date of Release              05/13    05/13    05/13    05/13
Observation Period           April    April    April    March
----------------------------------------------------------------
Median                        0.6%     0.0%     0.2%    -1.1%
Average                       0.6%     0.0%     0.3%    -1.1%
High Forecast                 2.2%     1.1%     1.2%     0.5%
Low Forecast                 -0.4%    -0.8%    -0.6%    -1.8%
Number of Participants          46       67       65       44
Previous                      0.5%    -1.2%    -1.0%    -1.3%
----------------------------------------------------------------
Action Economics             -0.1%     0.0%     0.0%    -1.2%
AIG Investments               0.0%     0.5%     1.1%    -1.7%
Aletti Gestielle SGR          ---     -0.1%     0.0%    -1.2%
Ameriprise Financial Inc      0.6%     0.2%     0.5%    -1.8%
Argus Research Corp.          0.2%    -0.6%    -0.2%    -0.6%
Bank of Tokyo- Mitsubishi     1.3%     0.3%     0.8%    -0.6%
Bantleon Bank AG              0.8%     0.0%     0.2%     ---
Barclays Capital              0.7%    -0.1%     0.4%    -1.0%
BBVA                          0.6%     0.8%     1.0%    -1.2%
BMO Capital Markets           0.4%     0.1%     0.3%    -1.1%
BNP Paribas                   0.8%    -0.4%     0.1%    -1.0%
Briefing.com                  ---     -0.2%     0.0%    -1.0%
Calyon                        ---     -0.1%     0.1%    -1.0%
CIBC World Markets            ---     -0.4%    -0.2%     ---
ClearView Economics           ---      0.0%     0.3%    -1.0%
Commerzbank AG                ---      0.3%     0.2%    -0.7%
Credit Suisse                 0.3%     0.3%     0.4%    -1.0%
Daiwa Securities America      ---      0.3%     0.3%    -1.0%
Danske Bank                   ---     -0.5%    -0.1%     ---
DekaBank                      0.8%    -0.1%     0.0%    -0.9%
Desjardins Group              1.0%    -0.2%     0.2%    -1.0%
Deutsche Postbank AG          0.4%     0.3%     0.4%     ---
DZ Bank                       0.2%     0.2%     0.4%     ---
First Trust Advisors          1.3%     0.5%     0.8%    -0.8%
Fortis                        ---     -0.3%     0.1%     ---
FTN Financial                 ---     -0.3%     0.1%     ---
Goldman, Sachs & Co.          ---      0.3%     0.5%     ---
Helaba                        ---     -0.2%     0.0%    -1.2%
Herrmann Forecasting          1.1%     0.2%     0.3%    -1.3%
High Frequency Economics      0.7%     0.3%     0.5%    -1.3%
HSBC Markets                  0.4%     0.6%     0.7%    -1.1%
IDEAglobal                    0.4%     0.3%     0.1%    -0.9%
IHS Global Insight            ---      0.3%     0.7%     ---
Informa Global Markets        0.0%    -0.3%     0.4%    -1.5%
ING Financial Markets         1.0%    -0.4%     0.2%    -1.2%
Intesa-SanPaulo               0.4%     0.5%     0.1%     ---
J.P. Morgan Chase             1.0%     0.2%     0.8%    -1.3%
Janney Montgomery Scott L     0.6%     0.1%     0.6%    -1.8%
Johnson Illington Advisor    -0.4%     0.0%     0.0%     0.5%
Landesbank Berlin             1.0%    -0.2%    -0.2%    -1.5%
Landesbank BW                 0.5%    -0.5%     ---      ---
Lloyds TSB                    0.4%    -0.1%     0.0%    -1.0%
Maria Fiorini Ramirez Inc     ---     -0.1%     0.0%     ---
Merrill Lynch                 0.7%    -0.8%    -0.6%    -1.3%
Mizuho Securities             0.3%    -0.4%    -0.1%    -0.9%
Moody’s Economy.com           0.7%     0.2%     0.2%    -1.3%
Morgan Keegan & Co.           0.1%     0.9%     0.7%    -0.9%
Morgan Stanley & Co.          ---     -0.4%    -0.3%     ---
Natixis                       ---     -0.1%     0.0%     ---
Newedge                       0.5%     0.2%     0.3%     ---
Nomura Securities Intl.       ---      0.1%     0.3%     ---
PNC Bank                      ---      0.4%     0.5%    -0.9%
Raymond James                 ---      0.0%     0.2%    -1.4%
RBS Securities Inc.           ---     -0.1%     0.1%     ---
Ried, Thunberg & Co.          1.1%     ---      ---     -1.1%
Scotia Capital                0.3%     0.2%     0.4%     ---
Societe Generale              ---      0.2%     0.3%     ---
Stone & McCarthy Research     0.5%     0.2%     0.5%    -1.2%
TD Securities                 ---      0.3%     0.7%     ---
Thomson Reuters/IFR           0.7%     0.2%     0.4%    -1.3%
UBS Securities LLC            2.2%    -0.1%     0.2%    -1.4%
Unicredit MIB                 0.2%     0.5%     ---      ---
University of Maryland        0.5%    -0.2%     0.1%    -1.1%
Wachovia Corp.                1.5%     1.1%     1.2%    -1.2%
Wells Fargo & Co.            -0.1%     0.0%     0.0%     ---
WestLB AG                     0.4%    -0.1%     0.1%     ---
Westpac Banking Co.           0.7%    -0.5%    -0.1%    -1.2%
Wrightson Associates          1.1%    -0.1%    -0.1%     ---
================================================================

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

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Spain Consumer Prices Drop by Record as Slump Deepens

By Emma Ross-Thomas

May 13 (Bloomberg) -- Spanish consumer prices fell the most on record in April as companies cut prices to spur demand amid the worst recession for 60 years.

Consumer prices fell 0.2 percent from a year earlier, using the European Union’s calculation method, more than estimated in an initial reading published April 30, the Madrid-based National Statistics Institute said in an e-mailed statement today. Prices fell 0.1 percent in March, the first annual drop since 1952. Underlying prices rose 1.3 percent from a year earlier, the same as in March.

Spanish inflation, which has generally been faster than in the euro area average over the last decade, is now slowing more sharply than in the rest of the region. The dual impact of a housing market collapse and the financial crisis has pushed Spain’s unemployment rate to a European high of 17.4 percent. The economy will contract 3.2 percent this year and shrink a further 1 percent in 2010, the European Commission forecasts.

“Companies took a long time to cut prices, but now they are doing it very quickly,” said Jose Carlos Diez, chief economist at Intermoney Valores in Madrid. “We’re devaluing,” he said.

Amid global concerns about deflation, the European Central Bank cut its benchmark interest rate to a record low of 1 percent on May 7 and said it would buy 60 billion euros ($82 billion) of covered bonds as part of its effort to revive the region’s economy.

President Jean-Claude Trichet said that day that he expects “negative inflation” in the euro region for a number of months this year before accelerating again.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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Japanese Housewives Lead $125 Billion Bet Against Yen

By Ron Harui and Yasuhiko Seki

May 13 (Bloomberg) -- Individual investors in Japan increased bets to the highest in six months that the yen will weaken as the economy stabilizes, jumping back into a trade that was all but wiped out last year.

Businessmen, housewives and pensioners held 153,326 margin contracts at the end of last month that will make money if the yen declines against currencies ranging from the euro to the Australian and New Zealand dollars, according to the Tokyo Financial Exchange. All told, they may have as much as $125 billion in yen so-called short positions, RBC Capital Markets strategists said.

“Investors believe the worst of the global recession is over and higher-yielding currencies are bottoming out,” said Yoshisada Ishide, who oversees $1.8 billion as a Tokyo-based fund manager at Daiwa SB Investments Ltd., a unit of Japan’s second-biggest investment bank.

Individual investors, called housewives after the women who traditionally managed finances in Japanese families, have 1,434 trillion yen ($14.9 trillion) of savings, according to the Bank of Japan. They’re seeking higher returns after the central bank cut its benchmark interest rate to 0.1 percent. Investors who sell the yen against the euro would earn 3.4 percent by year-end, compared with 0.25 percent in one-year yen-denominated deposit accounts, data compiled by Bloomberg show.

Carry Trade

Investors are returning to the so-called carry trade, where they borrow funds in countries with low interest rates and invest the proceeds in ones with borrowing costs that are 10 percentage points higher, or more.

The strategy contributed to the yen’s 18 percent slump against the dollar between January 2005 and June 2007. Investors abandoned the trade last year as losses and writedowns on securities tied to subprime mortgages exceeded $1 trillion and the September bankruptcy of Lehman Brothers Holdings Inc. froze credit markets.

Money managers retreated from higher-yielding assets to the safety of government debt and the currencies that are easiest to trade. The yen has strengthened 19 percent against the dollar since the Federal Reserve began cutting interest rates on Sept. 18, 2007.

Now, investors are growing more optimistic. Finance ministers from the Group of Seven industrialized nations said on April 24 that they see “signs of stabilization” in the world economy and expect a recovery to take hold later this year. The U.S. Labor Department said May 8 that America’s employers cut 539,000 jobs in April, the fewest in six months.

Housewives Return

“Individual players, though they lost sizable amounts of money after Lehman went under, are beginning to reinvest in higher-yielding currencies thanks to the stabilization of global financial markets,” said Masahiro Suzuki, a businessman who has speculated in foreign-exchange markets for seven years.

Suzuki, who works for a trading company in Kobe, western Japan, said he plans to increase bets that the Australian dollar will appreciate compared with the yen.

At the end of April, individuals held the most contracts betting on a yen decline compared with those expecting gains since October. The difference as 35 times more than this year’s low on March 4, according to data from the Tokyo Financial Exchange.

The yen is this year’s worst-performer of the 16 most- traded currencies tracked by Bloomberg. It depreciated 17 percent against the South Africa rand, where the benchmark rate is 8.5 percent. Versus the Brazilian real, where the key rate is 10.25 percent, it’s down 16 percent. The bulk of the losses have come since Japan’s individual investors began increasing their bearish bets.

Currency Forecasts

Japan’s currency traded at 73.98 per Australian dollar as of 8:11 a.m. in London, from 73.78 in New York yesterday. It dropped to 76.18 on May 11, the lowest level since Oct. 6. The yen was at 58.37 versus New Zealand’s dollar from 58.44, and bought 96.49 per U.S. dollar from 96.45.

The yen will probably weaken to 100 against the greenback by year-end, according to the median estimate of 49 analysts surveyed by Bloomberg.

The Japanese currency’s advance to a 13-year high of 87.13 per dollar on Jan. 21 this year wiped out almost all of the yen short positions. The housewives remained net sellers from Aug. 18 to Dec. 30, even as Japan’s currency rallied 22 percent versus the dollar. That resulted in a 17 percent loss.

Too Small

Carry trades may fail to bring the returns investors expect because the extra yield offered over Japan is too small to compensate for possible currency losses, said Akira Takei, a fund manager in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank.

“There is almost no currency that we can call higher- yielding across the globe given the shrinking interest-rate gap between Japan and the rest of the world,” Takei said. “This is especially the case if investors have to hold these positions without any chance to hedge.”

The yen may gain to 91.50 per dollar based on recent trading patterns if ‘the green shoots of economy recovery “are not a flower but a short-lived weed,” strategists at Brown Brothers Harriman & Co. in New York said in a report yesterday.

Japan’s 0.1 percent benchmark rate compares with 3 percent in Australia, 2.5 percent in New Zealand and 1 percent in the euro region. In August 2007, New Zealand’s official rate was 8.25 percent and Australia’s was 6.5 percent.

The number of bets by individual investors against the yen started to accelerate in early April, according to data compiled by the Tokyo Financial Exchange and RBC Capital.

‘Tentative Return’

The $125 billion in net yen short positions calculated by RBC is derived by taking the U.S. dollar-equivalent amount of each margin contract, which represents 10,000 units of foreign currency. While down from the April 27 peak, the shorts still stood at 64,274 on May 11.

“A very interesting dynamic is developing,” said Sue Trinh, a senior currency strategist at RBC in Sydney. “Leveraged yen short sellers are making a tentative return.”

The favorite bet is for the Australian dollar to strengthen versus the yen. Wagers on the Aussie more than tripled to 64,293 contracts in the five weeks to April 27, while those on the kiwi -- named after a flightless bird native to New Zealand and depicted on the one dollar coin -- rose to 36,454.

Japan’s economy will shrink 6.2 percent in 2009, compared with 1.4 percent for Australia and 2 percent for New Zealand, the Washington-based International Monetary Fund said last month.

The third-biggest carry trade is to buy the euro against the yen, Tokyo Financial Exchange data show. Bets on the single European currency’s gain reached 21,598 contracts on April 27.

Bolster Earnings

A weaker yen may bolster earnings at exporters such as Toyota Motor Corp., which on May 8 reported its first annual loss in 59 years and cut dividends. Japan’s automakers sell about half of their vehicles overseas. Exporters said they can remain profitable as long as the yen trades at 97.33 per dollar or lower, a Cabinet Office survey showed on April 22.

Traders’ expectations of fluctuations in major currencies are at the lowest level in eight months, indicating a smaller risk of exchange-rate fluctuations eroding carry-trade profits.

“When the markets start calming down and volatility moves less, the Japanese will come back and start investing abroad again to earn a higher yield,” said Rajeev De Mello, the Singapore-based head of Asia investments at Western Asset Management Co., which manages $513 billion.

Implied Volatility

Implied volatility on seven major currencies has fallen to 13.8 percent from a peak of 26.6 percent in October, a month after Lehman Brothers collapsed, according to a JPMorgan Chase & Co. index. The decline from an average of 15.4 percent over the past year has encouraged investors to resume carry trades.

“We have argued for more than a month that one of the best risk-reward ratios is currently offered by carry trades, in particular long positions in high-yielding emerging-market crosses, funded in low-yielding majors,” Thomas Stolper, an economist at Goldman Sachs Group Inc. in London, wrote in a research report to clients on May 8.

“Interest has been picking up in this theme and there is good anecdotal evidence of more risk taking in this area,” he wrote in the report.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

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French Inflation Rate Falls to Lowest in 13 Years

By Sandrine Rastello and Helene Fouquet

May 13 (Bloomberg) -- France’s inflation rate fell to the lowest in at least 13 years in April as oil costs dropped amid the worst economic slump since World War II.

Consumer prices increased an annual 0.1 percent, based on European Union methodology, after a 0.4 percent advance in March, Paris-based national statistics office Insee said today. The April rate was the lowest since the data series began in 1996. Economists polled by Bloomberg News expected a reading of 0.2 percent, according to the median of 14 forecasts.

“Inflation is coming to near a low point and should be negative this summer,” said Olivier Bizimana, an economist at Credit Agricole in Paris. “Given the scope of the economic slump, it’s not impossible that oil prices may fall further in coming months.”

Crude oil is trading around $60 a barrel, less than half the price of a year ago, giving breathing space to households facing rising unemployment. France’s economy is forecast by the European Commission to shrink 3 percent this year as companies slash inventories and trim headcount, pushing the number of jobseekers to the highest in almost three years.

The price of oil products slipped 22 percent from a year earlier, while rising 2.7 percent from March, the report showed. Fresh food products declined 0.7 percent from 12 months ago.

The European Central Bank last week cut its main interest rate by a quarter point to 1 percent, a record low, and approved a plan to buy 60 billion euros ($82.1 billion) of bonds, stepping up its response to the recession.

“Inflationary pressure has been diminishing as money and credit growth have further decelerated,” ECB President Jean- Claude Trichet said on May 7.

Carrefour SA, Europe’s largest retailer, said it will extend price cuts to help revive sales growth and cope with “challenging” business conditions as cash-strapped Europeans defect to discounters.

French consumer prices rose 0.2 percent in April from March, led by the cost of clothing and services such as transportation, Insee said in today’s report, based on national methodology.

To contact the reporters on this story: Helene Fouquet in Paris at Hfouquet1@bloomberg.net; Sandrine Rastello in Paris at srastello@bloomberg.net.

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Japan’s Current-Account Surplus Falls at Slower Pace

By Keiko Ujikane

May 13 (Bloomberg) -- Japan’s current-account surplus narrowed at the slowest pace in six months in March as a decline in exports eased.

The surplus shrank 48.8 percent to 1.486 trillion yen ($15.5 billion) from a year earlier, the Ministry of Finance said in Tokyo today. Exports fell 46.5 percent after declining a record 50.4 percent in February.

Economists don’t expect shipments abroad to resume rising soon given that they have plunged at an unprecedented pace since last year. The International Monetary Fund says the global recession will be deeper and the recovery slower than earlier predicted as financial markets take longer to stabilize.

“Overseas demand is bottoming out, but the strength of its recovery is weak,” said Mitsumaru Kumagai, a senior economist at Daiwa Institute of Research Ltd. in Tokyo. “Both Japan and the world economy are unlikely to achieve a full- blown recovery until the second half of next fiscal year.”

The yen traded at 96.09 per dollar at 11:31 a.m. in Tokyo from 96.17 before the report was published.

The median estimate of economists surveyed was for the current-account surplus to narrow to 1.21 trillion yen. The gap fell every month in the year ended March, except for January, when Japan had a deficit for the first time in 13 years.

The Washington-based IMF said in April that the world economy will shrink 1.3 percent this year, compared with its January projection of 0.5 percent growth. It predicted expansion of 1.9 percent next year, slower than an earlier 3 percent estimate.

Imports Fall

Imports slid 37.8 percent, compared with an unprecedented 44.9 percent drop the previous month.

Shipments to China sank 31.6 percent in March, less than the 39.7 percent decline in the previous month, according to a separate trade report released last month. Exports to the U.S. fell 51.4 percent, moderating from 58.4 percent in February. Today’s figures don’t include regional breakdowns.

“China’s economy has started rebounding, but the emerging economies on the whole aren’t strong enough to lead the world economy,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. “Capital probably won’t flow back into the emerging nations unless the industrialized countries return to growth.”

Japan’s government last month cut its economic forecast, saying the world’s second-largest economy will shrink a record 3.3 percent this fiscal year as exports and corporate spending tumble at an unprecedented pace.

Income Surplus

The income surplus, the difference between money earned abroad and payments made to foreign investors in Japan, narrowed 13 percent to 1.7 trillion yen in March from a year earlier, today’s report showed.

On a seasonally adjusted basis, the current-account surplus widened 31.7 percent from February, today’s report showed. Exports rose 5.3 percent and imports gained 4.9 percent.

The surplus narrowed 50.2 percent to 12.2 trillion yen in the year ended March 31, today’s report showed, the most since comparable data were made available in 1985. Exports tumbled a record 16.3 percent and imports fell 3.9 percent.

The current account tracks the flow of goods, services and investment income between Japan and its trading partners. It includes trade not shown in the customs-cleared balance.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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Fed Views Jump in Treasury Yields as Sign of Better Outlook

By Scott Lanman and Steve Matthews

May 13 (Bloomberg) -- The Federal Reserve considers the recent jump in Treasury yields more as a reflection of a better economic outlook than a signal it needs to step up purchases of U.S. government debt, according to central bank officials who declined to be identified.

It’s too early to judge the effectiveness of the Fed’s $300 billion plan to buy Treasuries even after 10-year yields climbed 0.65 percentage point since the initiative began in March, the officials said. They added that the goal is to stimulate private lending, rather than to target government- bond rates.

The Fed officials’ stance contradicts the view of firms including BlackRock Inc. that have predicted the rise in yields will prompt the central bank to announce an increase in the size of the program as soon as next month.

“It would be very different if the economy still appeared to be in freefall and yields were backing up, but it’s not,” said John Ryding, founder of RDQ Economics LLC in New York and a former Fed researcher. Increasing Treasury purchases would “fight against what is in my opinion a recovery signal, or a signal that the recession is drawing to a close.”

Chairman Ben S. Bernanke said May 11 that the danger of deflation, or prolonged declines in consumer prices, is “receding” and earlier this month cited evidence the economy’s contraction is easing. The Treasuries market, along with stocks and some commodities, have reflected those shifts.

Inflation Expectations

Ten-year note yields closed at 3.18 percent late yesterday, up from as low as 2.46 percent after the March 18 announcement of the plan to buy long-term government debt. The gap in yields between the notes and 10-year Treasury Inflation Protected Securities, a gauge of the inflation rate expected by investors, hit a seven-month high of 1.64 percentage points last week.

The Standard & Poor’s 500 Stock Index closed at 908.35 yesterday in New York, up 21 percent from two months before. Crude-oil futures reached $60.08 yesterday, the highest level since November.

Fed policy makers committed to buy as much as $300 billion of Treasuries over a six-month period in their March 18 Open Market Committee statement. The aim was “to help improve conditions in private credit markets,” the FOMC said.

“The statement is pretty clear,” Richmond Fed President Jeffrey Lacker, who was the first FOMC member to vote for buying Treasuries this year, told reporters May 8. “It doesn’t say anything about a U.S. Treasury yield” as a target, he said after a Washington speech. “I would urge people to take it at face value.”

Fed’s Campaign

The Fed has bought $101.7 billion under the initiative so far, part of its campaign to cut borrowing costs by purchasing assets with the benchmark interest rate near zero. Policy makers in March also decided to boost purchases of mortgage securities this year to $1.25 trillion from $500 billion and buy $200 billion, double the previous amount, of federal agency debt.

Stuart Spodek, BlackRock’s co-head of U.S. bonds in New York, said in an interview last week the Fed “needs to consider increasing its purchases of Treasuries” to “stabilize” long-term yields. He told Bloomberg Television May 11 officials may announce an increase as soon as the June 23-24 meeting. Spokeswoman Melissa Garville declined to comment further.

Another fund manager, James Platz of Mountain View, California-based American Century Investments, expects the Fed to announce further purchases “at some point.”

Mortgage Impact

Should the rise in yields cause mortgage rates to surge, that may prove to be a trigger for a stronger Fed response, said Richard Clarida, a strategic adviser at Pacific Investment Management Co., the world’s biggest bond-fund manager. “That’s going to really, really, really hurt the economy,” Clarida said in a Bloomberg Television interview this week.

Last week, fixed mortgage rates rose for the first time in four weeks, with the average cost of a 30-year home loan climbing to 4.84 percent from 4.78 percent, which was the lowest level in Freddie Mac data going back to 1970.

The increase in Treasury yields, coupled with a drop in consumer prices, is increasing real interest rates for companies. Real investment-grade corporate borrowing costs climbed to 8.34 percent in March, the highest level since 1985, according to data compiled by Bloomberg and Merrill Lynch & Co.

Rising real yields may deter companies from borrowing to invest in new products or factories, delaying an economic recovery, said John Lonski, chief economist at Moody’s Capital Markets Group in New York.

No Specific Target

Bernanke and other Fed officials have said they’re trying to lower mortgage rates and other private borrowing costs without aiming for any specific levels.

“We’re not trying to target a particular interest rate,” Bernanke said in May 5 congressional testimony. “Our objective is to provide more liquidity to the system and to help private credit markets, and I think that it has had some benefit.”

Janet Yellen, president of the San Francisco Fed, said May 5 that higher yields are related to the “bit of optimistic news, good signs in the last several weeks that are reflected in the stock market.”

The situation poses a “dilemma” for the Fed, because if the rise in yields reflects “erroneous market views” about the economy, it will hold back growth, said former Fed Governor Lyle Gramley.

“The Fed is probably scratching its head at the moment and will wait and not react until the smoke clears,” said Gramley, who is now a senior economic adviser with New York- based Soleil Securities Corp.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Steve Matthews in Jekyll Island, Georgia, at smatthews@bloomberg.net.

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China’s Factory Output Grows Less-Than-Estimated 7.3%

By Kevin Hamlin

May 13 (Bloomberg) -- China’s industrial production grew less than economists estimated in April as electricity output fell and exports tumbled. Retail sales climbed.

Output rose 7.3 percent from a year earlier, the statistics bureau said today, after gaining 8.3 percent in March. That was less than the 8.6 percent median estimate of 20 economists surveyed by Bloomberg News. Retail sales grew 14.8 percent from a year earlier.

The data adds to evidence that a 4 trillion yuan ($586 billion) stimulus plan is buoying domestic growth, while the global recession takes a toll on exports and related industries. Urban fixed-asset investment grew a more-than-expected 30.5 percent in the first four months of this year, while a slump in overseas shipments deepened in April, reports showed yesterday.

“The recovery is still quite fragile -- exports are still very weak,” said Isaac Meng,” a senior economist at BNP Paribas SA in Beijing. “Domestic demand is resilient.”

Retail sales grew more than the economists’ median estimate of 14.5 percent, after climbing 14.7 percent in March.

The yuan traded at 6.8223 against the dollar as of 12:05 p.m. in Shanghai, from 6.8226 before the data was released. The Shanghai Composite Index of stocks rose 0.5 percent.

A decline in power output accelerated to 3.5 percent in April from 1.3 percent in March, the statistics bureau said. Growth slowed in the production of computers, mobile phones, iron, steel and 10 non-ferrous metals.

Cement, Automobiles

Output of automobiles, cement, air-conditioners and oil products grew more strongly.

Shanghai’s stock index has climbed 44 percent this year on optimism that the government can engineer an economic revival. New lending is already higher than the government’s targeted minimum of 5 trillion yuan for the year and money supply surged by a record last month, central bank data showed this week.

China’s vehicle sales have topped those in the U.S. this year. General Motors Corp. said its Chinese sales jumped last month to a record as government subsidies spurred demand.

“Data released this week displayed a vivid picture of a tug of war between sluggish external demand and robust domestic demand,” said Lu Ting, an economist with Merrill Lynch & Co. in Hong Kong. Inventory reductions may have played a role in weaker output growth, Lu said.

Money-supply growth tends to precede output gains by two quarters, suggesting production will strengthen in coming months, said Jing Ulrich, Hong Kong-based chairwoman of China equities at JPMorgan Chase & Co.

‘Solid Recovery’

The People’s Bank of China cautioned last week that the foundations for a recovery were not “solid,” with small businesses still lacking credit.

Economists were overly optimistic about April’s production because of gains in an official manufacturing index, which doesn’t adequately reflect small businesses, said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong.

“Unless the corporate sector picks up steam, the economy as a whole cannot be recovering on a sustainable basis,” Ma said.

China is battling a global recession that choked off export demand, dragging economic growth to 6.1 percent in the first quarter, the slowest pace in almost a decade. Overseas shipments declined 22.6 percent in April from a year earlier, the customs bureau said yesterday.

Today’s industrial-production number compares with a collapse in output growth to 3.8 percent in January and February combined and a 15.7 percent increase a year earlier.

To contact the reporters on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

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Democratic Climate Plan Would Cut Greenhouse Emissions by 17%

By Lorraine Woellert and Daniel Whitten

May 13 (Bloomberg) -- Democrats on the House Energy and Commerce Committee agreed on a compromise measure to cut greenhouse gas emissions by 17 percent by 2020, Chairman Henry Waxman said.

The agreement, reached yesterday, exceeds the target sought by President Barack Obama.

Waxman, a California Democrat who is leading the effort in Congress to craft legislation addressing climate change, in March proposed a 20 percent reduction in emissions from 2005 levels. He called the agreed-upon figure “smack in the middle” of the 14 percent to 20 percent range recommended by an industry and environmental coalition, the U.S. Climate Action Partnership.

Obama had recommended a 14 percent reduction target.

The energy committee will release more details of the agreement today and begin considering the legislation on May 18, Waxman said.

“We will have the votes” for passage, Waxman told reporters in Washington last night. “We have resolved a good number of the issues.”

Obama plans to meet with Waxman and House Democratic leaders today at the White House.

Committee Democrats also agreed to a provision in the climate-change bill requiring that one-fifth of all electricity come from renewable sources and improved efficiencies by 2020, said Representative Bart Gordon, a Tennessee Democrat.

Utilities in each state would be required to obtain 15 percent of their electricity from renewable sources and demonstrate annual energy savings of 5 percent. Governors of states unable to reach the renewable goal could lower it to 12 percent if their utilities demonstrate an 8 percent reduction in energy use.

Free Credits

Lawmakers spoke outside a closed meeting where Democrats on the committee worked on the legislation to create a cap-and- trade system to limit greenhouse gas emissions. As part of the bill, free pollution credits would be provided to cut business costs while companies find ways to reduce their emissions. The free permits would be phased out and eventually they would be sold at auction.

The Democratic plan would give free permits to heavy manufacturers, the automobile industry, research and development, utilities and others. Allocations for refineries “have yet to be worked out,” Waxman said, and the total number of allocations hasn’t been decided.

Buying Permits

Utilities would get 35 percent of the program’s allocations free. That should cover “90 percent of their needs,” said Representative G.K. Butterfield, a North Carolina Democrat. “They will still have to purchase a portion” of the permits they would need to comply with the law, he said.

The free pollution allowances are meant to ease the transition to a system that eventually would require polluters to buy a limited number of emissions permits. The giveaways were necessary to win support from a key bloc of committee Democrats. They are at odds with Obama’s goal of selling permits to raise an estimated $646 billion to fund middle-class tax cuts.

The 59-member energy committee requires 30 votes to pass legislation, and 14 Democrats on the panel come from states that generate more than half of their electricity from coal, according to the U.S. Energy Information Administration.

Representative Gene Green, a Texas Democrat who represents an oil-refining area, said he was concerned about a provision to require oil companies to pay for allowances if they haven’t developed carbon-free car and truck fuel by 2014.

Unrealistic Deadline

That deadline is unrealistic “if we don’t have the technology” to produce non-carbon fuel,” Green said. If oil companies can’t produce the fuel, “all they are going to do is pass that on” to consumers in higher gasoline prices, he said.

Green said yesterday that lawmakers were considering giving oil refineries free credits worth 1 percent to 5 percent of all emissions that would be regulated under the program.

An additional percentage of allowances may go to a strategic reserve that could be used to increase the supply of pollution credits if prices get too high.

Republicans on the committee also held a strategy session. Their leader, Representative Joe Barton of Texas, said he plans to offer amendments to the “economic disaster plan” Democrats were negotiating. He didn’t provide details.

To contact the reporters on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net; Daniel Whitten in Washington at dwhitten2@bloomberg.net

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Ospraie’s Anderson to Give Commodities Hedge Funds Another Try

By Katherine Burton

May 13 (Bloomberg) -- Dwight Anderson, the commodities investor who liquidated his main Ospraie Fund last year after losing 39 percent, is planning a comeback with two new hedge funds set to open July 1.

The Ospraie Equity Fund will buy and sell stocks of commodity and basic-materials companies in industries such as chemicals, mining, paper and natural resources, Anderson said in a May 12 letter to investors. The Ospraie Commodity Fund will invest in commodities and related derivatives, according to the letter, a copy of which was obtained by Bloomberg News.

“After much reflection and with a number of lessons learned, we see a set of opportunities today that we believe could create significant value for investors in the coming years,” the New York-based manager wrote. “That opportunity set is as compelling as I have seen in my 15 plus years of investing in the basic industry space.”

Anderson’s former fund invested in commodities and related stocks. It was the world’s largest such hedge fund at its peak, with more than $3.5 billion in assets after averaging annual gains of about 15 percent from 2000 through 2007. He decided in September to shutter the eight-year-old fund and sell assets after losses of more than 30 percent triggered a clause enabling investors to withdraw their money by the month’s end. About 1,441 funds, or 15 percent of those worldwide, closed last year, according to Chicago-based Hedge Fund Research Inc.

Ospraie’s clients have gotten 82 percent of their money back. The remaining portion, invested in private companies, might take as long as three years to return, Anderson told investors at the time of the closure. Anderson also runs a $1 billion Special Opportunities Fund, which holds private-equity stakes.

Fee Discount

Jonathan Gasthalter, a spokesman for Ospraie Management LLC, declined to comment.

Ospraie Fund clients who invest in either new fund will pay reduced fees of 1 percent of assets and 10 percent of any gain, the letter said. Funds typically charge 2 percent of assets and 20 percent of gains.

Unlike Anderson’s previous offering, which normally locked up investors for three to five years, the new funds will allow them to exit quarterly. Assets will be capped, the letter said, without providing details.

The Hedge Fund Research Energy/Basic Materials Index jumped 13 percent this year through April 30. The Reuters/Jefferies CRB Index of commodity-futures prices climbed 6 percent this year through yesterday.

Personal Investment

Anderson, 42, said in the letter that he and his partners will invest “significant capital” in both funds. Anderson also said he recently repurchased the 20 percent stake in Ospraie Management that now-bankrupt Lehman Brothers Holdings Inc. bought from him in 2005.

Anderson graduated from Princeton University with a degree in history and earned a master’s in business administration at the University of North Carolina at Chapel Hill. He joined Julian Robertson’s Tiger Management LLC in 1994 and soon took over the New York-based hedge fund’s basic-industries group.

He moved to Tudor Investment Corp., the Greenwich, Connecticut-based hedge-fund firm run by Paul Tudor Jones, five years later. Anderson started the Ospraie Fund, named for the marine bird of prey, the osprey, while at Tudor, and spun it out at the end of 2003.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net

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Santos Says Share Sale to Institutions Oversubscribed

By Ben Sharples

May 13 (Bloomberg) -- Santos Ltd., Australia’s third- biggest oil and gas producer, said it raised A$1.75 billion ($1.3 billion) in the “heavily oversubscribed” institutional portion of its A$3 billion share sale.

The allocation to institutions was expanded from A$1.65 billion to meet demand, while the component for individual investors of A$1.25 billion is now fully underwritten, Santos said today. The sale is the country’s largest since National Australia Bank Ltd. raised A$3 billion in November.

Santos plans to use A$1.05 billion of the proceeds to help fund spending at the $12.5 billion Exxon Mobil Corp.-led Papua New Guinea liquefied natural gas project, in which it has a 17.7 percent stake. The Adelaide-based company expects a “step-change” increase in production in 2014 once the venture and a proposed gas-export project in Queensland with Petroliam Nasional Bhd. come online.

“The PNG project is a pretty solid one and I think investors see it as a good reason to take up the offer,” said David Taylor, market analyst at CMC Markets in Sydney. “Everyone realizes that LNG is the way to go.”

Santos offered investors two shares for every five they own at A$12.50 apiece. Santos dropped 6.6 percent to $14.74 at 11:29 a.m. in Sydney trading, poised for the biggest decline since Dec. 5. The market’s benchmark index dropped 0.7 percent.

Project Costs

The retail component of the offer opens on May 15 and closes on June 5. The new shares issued under this portion of the sale will start trading June 17, Santos said today in a statement to the Australian stock exchange.

Exxon and its partners aim to give the go-ahead to build the project, Papua New Guinea’s largest investment, by the year- end.

Oil Search Ltd., the second-biggest partner in project, said yesterday speculation it will raise capital to help fund its portion of venture costs was “inaccurate.” Discussions with lenders are advanced and there has been no indication from potential lenders that Oil Search requires cash to cover debt, the Port Moresby-based company said.

Oil Search expects its funding requirements for the project to be about $4.8 billion, Managing Director Peter Botten said yesterday. Future equity needs at year-end are expected to be about $1.2 billion, depending on final capital costs, he said.

The capital cost estimate for the venture doesn’t include $2.6 billion for financing, a debt service reserve and start-up cash of $1.4 billion, or spending on LNG tanker ships, Santos said May 11.

LNG is natural gas that has been chilled to liquid form for transportation by ship to destinations not connected by pipeline. Exxon owns 41.5 percent of the Papua New Guinea project. Nippon Oil Corp. has a 5.4 percent stake.

To contact the reporter on this story: Ben Sharples in Melbourne bsharples@bloomberg.net

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Cnooc Parent Agrees to Buy Australian LNG From BG for 20 Years

By John Duce and Ben Sharples

May 13 (Bloomberg) -- China National Offshore Oil Corp. agreed to buy liquefied natural gas from BG Group Plc’s planned $6 billion Australian project as demand for cleaner fuels rises in the second-largest energy-consuming nation.

China National will buy 3.6 million metric tons annually from the Queensland Curtis LNG project for 20 years, the companies said in statements today. Beijing-based China National will acquire 5 percent of BG’s reserves in Queensland’s Surat Basin, the U.K.’s third-biggest gas producer said.

BG’s first accord to sell Queensland LNG may be worth as much as $600 million a year, or $12 billion over two decades, said Gordon Kwan, an energy analyst at Mirae Asset Securities. Oil prices have slumped almost 60 percent from the July record of $147.27 a barrel, cutting the cost of gas in supply contracts.

“The move by China National reflects its ambition to secure reserves overseas at the bottom of the price cycle,” Hong Kong-based Kwan said in e-mailed comments.

Cnooc Ltd., China National’s listed unit, rose as much as 9 percent to HK$10.56 in Hong Kong after the agreement was announced, the highest since Sept. 8. The benchmark Hang Seng index gained 0.7 percent. BG, which has gained 29 percent in London in the last six months, fell 0.6 percent to 1,097 pence yesterday.

China wants to boost the use of gas to 10 percent of total energy consumption by 2020 from about 3 percent to reduce reliance on more-polluting coal. State-controlled China National has signed term contracts to buy LNG from Australia, Malaysia and Indonesia for terminals in Dapeng, Putian and Shanghai on Chinese coast.

LNG Tankers

PetroChina Co. signed a 25-year agreement in April last year to buy 3 million tons of LNG from Qatar starting 2011.

China National will acquire a 10 percent stake in one of the two liquefaction trains, or units, that will form the first phase of the Queensland Curtis project, said BG.

The companies will be part of a group to build two LNG tankers to transport the fuel, BG said, without giving any figures for the transaction.

Australia’s coal-seam gas industry attracted about A$22 billion ($17 billion) in investment last year and BG, Santos Ltd. and ConocoPhillips are among companies with stakes in rival ventures aiming to convert gas extracted from coal beds in Queensland into LNG for export.

“It is a really good result, it underpins the project, and we’re really glad to have brought it out,” said Hedley Thomas, a spokesman for BG in Australia. “The terms for the Cnooc deal, when they’re executed, will be highly attractive.”

Environmental Impact

BG will submit a draft environmental impact statement on the project, near the central Queensland coastal city of Gladstone, to the state government “in the coming weeks,” he said. Santos and Petroliam Nasional Bhd. submitted the draft environmental report on their Gladstone LNG project during the first quarter.

Arrow Energy Ltd. said April 16 that the Queensland government approved the environmental impact statement for its proposed coal-seam gas to LNG plant at Gladstone. Queensland may export about 20 million tons a year of LNG by 2020, equal to Australia’s total existing output, according to Brisbane-based Bow Energy Ltd.

Asia’s LNG demand may drop by as much as 10 percent this year because of reduced energy consumption, New York-based consultant Poten & Partners said on March 27.

The China National deal will allay concerns in Australia over whether there is a viable market for the country’s LNG, John Wilson, an analyst at Wilson HTM Investment Group, said by telephone from Melbourne.

‘Buyers Market’

“It shows that people are willing to sign up,” he said. “There has been concern about whether it is going to become a buyers market again and whether there’s going to be too much LNG around.”

BG and China National aim to complete negotiations for the transaction, which needs government and regulatory approval, next year, the Reading, England-based gas producer said in its statement. The companies signed a memorandum of understanding in 2008 under which they agreed to explore opportunities for strategic cooperation.

LNG is natural gas chilled to liquid form, reducing it to one-six-hundredth of its original volume at minus 161 degrees Celsius (minus 258 degrees Fahrenheit) for transportation by ships to destinations not connected by pipeline.

To contact the reporter on this story: John Duce in Hong Kong at jduce1@bloomberg.net; Ben Sharples in Melbourne bsharples@bloomberg.net

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Dollar May Depreciate to 95 Yen on ‘Nervous’ Market, RBC Says

By Justin Carrigan

May 13 (Bloomberg) -- The dollar may weaken to 95 yen after first strengthening to 97 yen, RBC Capital Markets said.

“The market is getting very nervous about a breakdown to the downside with 95 barriers in focus,” Sue Trinh, senior currency strategist at RBC in Sydney, wrote in an e-mailed report today. “In the near term however, the deviation from the U.S. 10-year yield, which has been a very good intraday directional cue for dollar-yen, has blown out sharply. Based on a 10-year yield of 3.20 percent, we estimate dollar-yen could correct back to 97 first.”

The dollar was little changed at 96.50 yen as of 7:06 a.m. in London. The 10-year Treasury note yielded 3.20 percent.

To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net

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Dollar Declines to 7-Week Low on Optimism Global Slump Easing

By Yasuhiko Seki and Ron Harui

May 13 (Bloomberg) -- The dollar fell to a seven-week low against the euro and the yen weakened after Chinese reports added to signs the worst of the global economic slump is over, sapping demand for the U.S. and Japanese currencies as a refuge.

The Dollar Index declined to a four-month low after former U.S. comptroller general David Walker wrote in a Financial Times opinion piece that the nation’s AAA credit rating may be cut because the government can’t control spending. Australia’s dollar strengthened after better-than-expected Chinese retail sales data spurred optimism the world’s third-largest economy is improving, boosting demand for higher-yielding assets.

“Euphoria-driven price action is at work as economic data at home and abroad support the view that the worst of the global recession may be over,” said Kengo Suzuki, manager of the foreign bond trading department at Mizuho Securities Co., a unit of Japan’s second-largest banking group. “Safe-haven currencies will stay out of favor, reflecting an improvement in risk appetite.”

The dollar fell to $1.3679 per euro at 7:19 a.m. in London from $1.3648 yesterday in New York. It earlier touched $1.3722, the weakest level since March 23. The yen dropped to 132.02 per euro from 131.63. The U.S. currency traded at 96.52 yen from 96.45. It earlier weakened to 95.79, the lowest since April 28.

China’s retail sales rose 14.8 percent in April from a year earlier, after climbing 14.7 percent in March. That compared with economists’ median estimate of a 14.5 percent gain. Industrial output rose 7.3 percent from a year earlier after gaining 8.3 percent in March.

The Nikkei 225 Stock Average gained 0.5 percent and the MSCI Asia Pacific index of regional shares added 0.5 percent.

‘Crucial’

Australian dollar rose for a second day against the U.S. currency, climbing to 76.87 U.S. cents from 76.50 cents yesterday. It advanced to 74.19 yen from 73.78 yen.

Developments in emerging Asia “will be crucial” for the Australian dollar, analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy for BNP Paribas SA, wrote in a note to clients yesterday. “The Australian dollar is likely to remain an outperformer.”

Australia’s currency rose more than 20 percent against the yen in the past three months on speculation investors resumed carry trades, in which they get funds in countries with low borrowing costs and buy assets where rates are higher. The risk is that currency fluctuations can wipe out gains. Japan’s 0.1 percent target lending rate compares with 3 percent in Australia.

The U.S. government should create a “fiscal future commission” to rein in the country’s finances because its AAA credit rating may be lowered, Walker wrote in the Financial Times today. The commission should consider every option including budget controls and tax hikes, he said.

‘Underlying Risk’

“The FT article came as a reminder of the biggest underlying risk for the dollar,” said Osamu Takashima, chief foreign exchange analyst at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s biggest bank. “If people start to question seriously the U.S.’s ability to sell swelling debt smoothly, the dollar may be sold to 90 yen and $1.40 per euro.”

The Dollar Index, which the ICE uses to track the U.S. currency against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, fell to 82.096 from 82.306 yesterday. It earlier reached 81.871, the lowest since Jan. 9.

“There’s a developing backlash against the dollar,” said Greg Gibbs, a strategist at Royal Bank of Scotland Group Plc in Sydney. “There has been some chatter about its fundamentals with a Financial Times editorial talking about it maybe losing its AAA rating. That’s set people off on a negative bent.”

When the Daily Telegraph on April 24 carried an article warning of the downgrade risk for U.K.’s sovereign debt rating, Britain’s pound slumped more than 1 percent against the dollar and the yen.

Standard & Poor’s

Standard & Poor’s cut Ireland’s credit rating to AA+ from AAA in March as financial turmoil drove up borrowing costs and swelled the nation’s budget deficit. S&P lowered the ratings of Spain, Portugal and Greece in January. Moody’s placed Ireland’s Aaa rated government bonds on review for a possible downgrade on April 17, citing the nation’s “severe economic adjustment.”

The euro gained for a second day against the dollar before a European Union report today that may show the contraction in industrial production slowed in March, adding to signs the recession in the 16-nation region is easing.

European Central Bank governing council member Nout Wellink said in an interview with Dutch public television VARA yesterday the deterioration of the European economy seems to be slowing.

‘Slump Is Waning’

“Investors are putting funds in higher-yielding, emerging- market assets including those in Europe amid the view that the worldwide slump is waning,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This is why the euro and the Australian dollar are being bought.”

Industrial output in the euro area fell 17.6 percent in March from a year earlier, after a 18.4 percent decrease in February, according to a Bloomberg survey of economists. The report is due at 11 a.m. in Luxembourg.

Individual investors in Japan increased bets to the highest in six months that the yen will weaken as the economy stabilizes, jumping back into a trade that was all but wiped out last year.

Businessmen, housewives and pensioners held 153,326 margin contracts at the end of last month that will make money if the yen declines against currencies ranging from the euro to the Australian and New Zealand dollars, according to the Tokyo Financial Exchange. All told, they may have as much as $125 billion in yen so-called short positions, RBC Capital Markets strategists said.

“Investors believe the worst of the global recession is over and higher-yielding currencies are bottoming out,” said Yoshisada Ishide, who oversees $1.8 billion as a Tokyo-based fund manager at Daiwa SB Investments Ltd., a unit of Japan’s second-biggest investment bank.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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