Forex Exchange Morning Report

Daily Forex Fundamentals | Written by Westpac Institutional Bank | Jun 18 09 01:24 GMT |

News And Views Risk soggy, but dollar sold. US equities were mixed, tech shares doing well (Nasdaq up 1.0%) but Standard & Poor's downgrades of 22 US banks hurting the bank index (3.8% lower), and the S&P500 closed unchanged. Fedex issued a gloomy outlook to late 2009, wilting some of the green shoots. US CPI was lower than expected, helping 10yr US treasuries rally around 10bp early on, the equities revival later pushing them down to close unchanged. Norway's central bank cut the policy deposit rate 25bp to 1.25%. Credit spreads were wider, Citibank's +100bp over the past two days notable. The dollar index fell around 0.6%. EUR slumped to 1.3825 early London on the weak equities opening, but then followed the reversal to reach 1.3985. GBP's parabola bottomed at 1.6220 and peaked recently at 1.6450, supporting factors including UK unemployment rising by less than consensus, and cautiously optimistic BoE minutes. The stronger yen trend continued, 96.70 to 95.50, Japanese officials raising their assessment of the economy for the second month. AUD copied the patterns of the other majors, 0.7995 to 0.7850 to 0.7985. NZD reached a low of 0.6245 before peaking an hour ago at 0.6370, the weak equities close dragging it back to 0.6340. AUD/NZD made a recent low at 1.2510. US CPI up 0.1% in May. The CPI was constrained to a 0.1% headline gain, despite a 3.1% jump in gasoline prices, by a 0.2% fall in food prices and generally subdued price gains elsewhere (hence the core rate rounding down to 0.1%). The annual CPI fell to -1.3% yr, its lowest since 1950, though the core rate was in the middle of the 1.7%-1.9% yr range that has prevailed since late last year. US current account deficit narrowed from $155bn to $102bn in Q1, much wider than expected, due to the Q4 deficit being revised up by $22bn. The known narrower goods trade deficit was partly offset by a smaller than expected investment income surplus. The Q1 deficit was the narrowest since 2001, and represents a halving of the deficit compared to 2006 and 2007, when it averaged about $200bn per quarter. Eurozone trade deficit €0.3bn in April, its narrowest since April last year, reflecting a 1.3% fall in exports, more than offset by 2.7% slump in imports. That suggests a positive contribution to the economy from net exports at the start of Q2, even though exports' 27.0% yr slump is indicative of the crisis facing the region's exporters. The Bank of England minutes to the June policy meeting showed a unanimous 9:0 vote to keep the bank rate unchanged at 0.50% and continue the quantitative easing program begun in March, and expanded by £25bn in May. The minutes had a cautiously optimistic tone: 'the news over the past month had been mostly encouraging'. On the data front, unemployment rose 39k in May, its smallest rise since July last year. Canadian wholesale sales fell 0.6% in April, their seventh consecutive monthly decline, although in the latest three months, the pace of contraction diminished significantly. Similarly, the leading index fell 0.1% in May, its ninth consecutive fall, but the trend rate of decline has pulled back sharply. These outcomes point to a economy that is still receding, but showing signs of bottoming out. Outlook The NZD has been stuck in a 0.6240 to 0.6400 range for the past three days, and there's nothing on today's horizon to suggest a breakout. Longer term, our view remains negative NZD, the initial target 0.6150. Events Today Country Release Last Forecast Aus Q2 WBC-ACCI Survey of Industrial Trends 34.0 – May Merchandise Imports AUDbn 16.2 – RBA Monthly Bulletin US Initial Jobless Claims w/e 13/6 601k 590k May Leading Index 1.00% 1.00% June Philadelphia Fed Index –22.6 –15.0 UK May Retail Sales Volumes 0.90% –0.3% May Public Sector Net Borrowing £bn 8.5 19.3 May Money Supply M4 %yr 17.40% 17.30% Jun CBI Industrial Trends Survey –56 – Can May CPI %yr 0.40% –0.2% May CPI BoC Core Ex 8 %yr 1.80% 1.60% Westpac Institutional Bank http://www.wib.westpac.co.nz/ Disclaimer All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac's financial services guide by calling +612 9284 8372, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.

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USD Comes Under Pressure

Daily Forex Fundamentals | Written by Easy Forex | Jun 18 09 03:35 GMT |

U.S. Dollar Trading (USD) was unable to gain on the increase in risk aversion as multiple factors weighed. Oil jumped as US inventories dropped by 3.9M. US Current Account continued to worsen -101B vs. -85B forecast. US CPI jumped up 0.1% in May. Crude Oil closes down $0.56 to close the day at $71.03. In US share markets, the Nasdaq was up 11 points or 0.66% and the Dow Jones was down 7 points or -0.09%. Looking ahead, Philly Fed is forecast at -17 in June. The Euro (EUR) found support and grinded higher helped by Oil and USD weakness. EUR/GBP was well supported and the market continues to consolidate. Fresh Direction will be found on a break of the 1.3750-1.4150 range. EUR/JPY continues to track market sentiment. Overall the EUR/USD traded with a low of 1.3810 and a high of 1.3976 before closing at 1.3950. The Japanese Yen (JPY) tested the 96 Yen in early Asia before rebounding as stocks bounced off lows in Japan. AUD/JPY selling and GBP/JPY selling into Europe kept direction choppy. Overall the USDJPY traded with a low of 95.50 and a high of 96.80 before closing the day around 96.40 in the New York session. Looking ahead, BOJ Policy Minutes The Sterling (GBP) was buoyed off lows in Europe by better than expected UK data and optimistic MPC minutes. Unemployment increased by only 39K vs. 61K forecast. MPC minutes at 9-0 mentioned the recent improvement in data. Overall the GBP/USD traded with a low of 1.6207 and a high of 1.6510 before closing the day at 1.6400 in the New York session. Looking ahead, May Retail Sales are forecast at 0.4% vs. 0.9% previously. The Australian Dollar (AUD) was extremely choppy with both directions tested. 0.7860 supported and 0.8000 capped. Intraday volatility remained high as the market continues to debate the next move. The mood in the markets is flipping multiple times a day although the daily range is tightening. Overall the AUD/USD traded with a low of 0.7849 and a high of 0.8000 before closing the US session at 0.7940. Gold (XAU) found support at $930 and the Gold bulls will be looking for a basing and third time lucky test of the $1000 level later in the year. Overall trading with a low of USD$928 and high of USD$943 before ending the New York session at USD$940 an ounce. Easy Forex http://www.easy-forex.com Easy-Forex makes no recommendations as to the merits of any financial product referred to in this website, emails or its related websites and the information contained does not take into account your personal objectives, financial situation and needs. Therefore you should consider whether these products are appropriate in view of your objectives, financial situation and needs as well as considering the risks associated in dealing with those products

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Foreign Exchange Market Commentary

Daily Forex Technicals | Written by HY Markets | Jun 18 09 04:32 GMT |

EUR/USD closed higher due to short covering on Wednesday as it consolidated some of Monday's decline. The high-range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI remain bearish signalling that sideways to lower prices is possible near-term. If it extends this week's decline, the reaction low crossing is the next downside target. Closes above the 20-day moving average crossing are needed to confirm that a short-term low has been posted. USD/JPY closed sharply higher on Wednesday and the high-range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI are turning bullish hinting that a low might be in or is near. Closes above the 20-day moving average crossing are needed to confirm that a short-term low has been posted. If it renews last week's decline, the reaction low crossing is the next downside target. GBP/USD closed lower due to profit taking on Wednesday as it consolidates above the 10-day moving average crossing. The high-range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI are turning bearish hinting that sideways to lower prices are possible near-term. Closes below the reaction low crossing are needed to confirm that a short-term top has been posted. If it renews the rally off April's low, the 62% retracement level of the 2008-2009 decline crossing is the next upside target. USD/CHF closed higher due to short covering on Wednesday as it consolidated some of Monday's decline. The high-range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI remain bearish signalling that sideways to lower prices are possible near-term. Closes below the reaction low crossing would confirm that a short-term top has been posted. Closes above the reaction high crossing would confirm that a short-term low has been posted. HY Markets http://www.hymarkets.com

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FX Technical Commentary

Daily Forex Technicals | Written by Easy Forex | Jun 18 09 03:36 GMT |

Euro 1.3840 Initial support at 1.3728 (May 21 low) followed by 1.3584 (May 20 low). Initial resistance is now located at 1.4033 (Jun 15 high) followed by 1.4178 (Jun 11 high) Yen 96.40 Initial support is located at 95.33 (Jun 5 low) followed by 96.52 (Jun 2 low). Initial resistance is now at 97.89 (May 7 high) followed by 98.89 (Jun 5 high). Pound 1.6405 Initial support at 1.6041 (Nov 6) followed by 1.5986 (Jun 9). Initial resistance is now at 1.6662 (Jun 3 high) followed by 1.6739 (61.8% retrace). Australian Dollar 0.7940 Initial support at 0.7828 (Jun 8 low) followed by the 0.7745 (May 28 low). Initial resistance is now at 0.8108 (Jun 15 high) followed by 0.8263 (Jun 3 high). Gold 935 Initial support at 925 (May 20 low) followed by 916 (May 18 low). Initial resistance is now at 965 (Jun 5 high) followed by 983 (June 3 high). Currency Sup 2 Sup 1 Spot Res 1 Res 2 EUR/USD 1.3584 1.3728 1.3840 1.4033 1.4178 USD/JPY 94.45 95.33 96.40 97.89 98.89 GBP/USD 1.5986 1.6041 1.6405 1.6662 1.6739 AUD/USD 0.7745 0.7828 0.7940 0.8108 0.8263 XAU/USD 916.00 925.00 935.00 965.00 983.00 Easy Forex http://www.easy-forex.com Easy-Forex makes no recommendations as to the merits of any financial product referred to in this website, emails or its related websites and the information contained does not take into account your personal objectives, financial situation and needs. Therefore you should consider whether these products are appropriate in view of your objectives, financial situation and needs as well as considering the risks associated in dealing with those products

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Darling Signals Rift With Brown, Saying U.K. Must Curb Deficit

By Gonzalo Vina

June 18 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling, signaling a clash with Prime Minister Gordon Brown over spending, said the U.K. government must make tough decisions to curb the budget deficit.

“We must live within our means,” Darling told bankers at the annual Mansion House dinner in London last night. “There are tough choices ahead. I will continue to do whatever is necessary to ensure sustainable public finances.”

Darling’s call came as Brown emphasized the need to lift spending and protect state-funded schools and hospitals. With an election due in the next year, the prime minister sees government support for the economy as a dividing line with the Conservative opposition, which says he can’t afford it.

Britain expects the biggest budget shortfall in the Group of Seven nations as the worst recession since World War II curbs tax receipts, forcing the Treasury to raise a record 220 billion pounds ($330 billion) from investors. Darling’s comment is aimed at appeasing Standard & Poor’s, which has threatened to scrap Britain’s top-notch credit rating without clear action on debt.

“The economics is giving the message that the deficit needs to come down, but the politics suggest they won’t be doing it,” said Philip Shaw, chief economist at Investec Securities in London. “The fiscal profile is unsustainably high despite the fact that there is a plan to bring it down.”

Dividing Lines

Brown and his Cabinet ally Ed Balls, the education secretary, are pushing for higher spending as the centerpiece of the election campaign. Brown told the GMB union earlier this week that the ruling Labour Party had to “fight as we’ve never fought before” for well-funded public services.

In Parliament yesterday, Brown said “capital expenditure will grow until the year of the Olympics” in 2012, appearing to overrule the Treasury’s budget plan. Darling in April estimated investment on capital projects including new hospitals and railroads will decline to 26 billion pounds in 2012 from 44 billion pounds in the current fiscal year.

“His statement to Parliament that capital spending will grow until 2012 is just plain dishonest,” said George Osborne, a Conservative lawmaker who speaks on finance. “The truth is that real spending will have to be cut whoever is elected.”

Further signs of a different emphasis have also come from Balls who this week told BBC Radio Five Live spending on health and schools will rise “in real terms” after 2011. Darling said he wouldn’t “set in stone detailed spending plans for individual departments five years ahead.”

Taxes for the Rich

Darling also suggested that businesses and the rich may have to pay more tax, saying that “those most able to bear the burden” will “make the greatest contribution” to stabilizing the public finances.

He said he was “fully aware” of the need to keep tax rates “competitive” after increasing the top rate of tax for high earners to 50 percent.

Money raised from selling nationalized banks and other state assets will be used to pay down debt, reducing the need for higher taxes to curb the deficit, Darling said. For now, that debt will continue to rise to protect the economy.

“To attempt to balance the books now, simply by cutting spending across the board, would choke off the recovery, he said. “It would be sheer madness.”

Slower spending and tax increases are almost unavoidable, whichever party takes office after the next election, given that the budget deficit is forecast by the Treasury at 12.4 percent of gross domestic product in the current fiscal year, the most in the G-7.

King’s View

Bank of England Governor Mervyn King added his voice to those warning the government about its debt burden, which will more than double to 1.4 trillion pounds by 2014.

“Five years from now national debt, as a proportion of national income, is expected to be more than double its level before the crisis,” King said at a speech alongside Darling. “It is also necessary to produce a clear plan to show how prospective deficits will be reduced.”

The government in April said it will reduce net investment by 40 percent over the three years starting April 2011, while increasing day-to-day spending by 0.7 percent in real terms. That compares with 3 percent gains each year between 2004 and 2008. The Conservatives say that higher debt servicing costs and inflation will mean cuts in real terms.

‘Credibility Problem’

“Darling is right that the government needs to address the deficit,” Martin Weale, director of the National Institute of Economic and Social Research. “I am not sure that the government has a credibility problem, but it may develop one.”

Earlier yesterday, two former chancellors who served in Conservative governments said Britain’s debt load may be a drag on the recovery.

Nigel Lawson, who served as chancellor under Conservative Prime Minister Margaret Thatcher from 1983 to 1989, told the BBC that “the public finances are the most appalling mess” and are “a real threat to this country.”

Norman Lamont, the finance minister from 1990 to 1993 said in a speech in London, “Unless you clean up the balance sheets completely of banks, a recovery takes a very long time and recession is more protracted.”

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net;

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SNB May Keep Interest Rate Unchanged, Maintain Asset Purchases

By Klaus Wille

June 18 (Bloomberg) -- The Swiss National Bank may keep its benchmark interest rate unchanged today as it gauges the impact of record low borrowing costs and its program of currency and bond purchases on the economy.

The central bank will leave the three-month Libor target at 0.25 percent at 9:30 a.m. in Bern today, said all 21 economists in a Bloomberg survey. The SNB in March embarked on its first solo intervention in currency markets since 1992 to put a lid on the franc’s exchange rates.

“I expect the SNB to stay its course of expansive monetary policy,” said David Marmet, an economist at Zuercher Kantonalbank in Zurich. “As we are seeing tentative signs of economic stabilization, the SNB can wait and see how their last quarter’s exceptional measures work.”

The SNB has cut borrowing costs by 250 basis points since October and expects the economy to contract the most since 1975 this year as the global slump hurts its biggest banks and dents exports. The SNB’s currency purchases have pushed the franc down by 1.7 percent against the euro since they began on March 12.

Prior to the move, the franc had risen almost 8 percent in six months, neutralizing rate cuts and hurting foreign exports. Foreign sales account for more than half of gross domestic product.

The SNB may assess the success of asset purchases at a press conference at 10:00 a.m. in Bern. SNB Vice Chairman Philipp Hildebrand, who takes over as head of the central bank in January, said in April that “you have to have patience to let the medicine work.”

Deflation

The franc was at 1.5054 per euro late yesterday compared with 1.4802 on March 11. Bank Sarasin & Co Ltd. said on June 16 that the currency will not strengthen past 1.50 per euro because of concern the SNB will act to check any appreciation.

The franc’s strength also lowered prices of imported products, adding to deflationary pressures. Swiss consumer prices dropped an annual 1 percent in May, the most in five decades. The SNB forecasts that prices may fall an average 0.5 percent this year and remain around zero in 2010 and 2011.

SNB Chairman Jean-Pierre Roth said last month that a further appreciation of the franc “builds the danger of a prolonged deflationary dynamic.”

The central bank will also release its latest economic and inflation forecasts. The economy shrank at the fastest pace in 15 years in the first quarter and the SNB expects it to contract as much as 3 percent this year.

Libor

With financial services accounting for about 12 percent of GDP, Switzerland is more vulnerable to the global credit crisis than some others. Zurich-based UBS AG, the European bank with the largest losses from the financial turmoil, has announced job cuts equal to almost 20 percent of its workforce.

Banks are still lending at a higher rate than the SNB wants, money markets suggest. The spread between the SNB target rate and the three-month Libor rate averaged 15.1 basis points since the central bank’s decision in March.

“The fact that the Libor rate is still above the target rate still shows banks’ reluctance to lend money,” said Daniel Kalt, senior economist at UBS in Zurich. “They still require a risk premium when lending. We are not yet back at pre-crisis modes of market functioning.”

Some economists have downplayed the threat of falling prices. Jan Amrit Poser, chief economist at Bank Sarasin, said the economy may only experience “benign” deflation due to falling oil prices rather than a “typical” scenario where consumers anticipate a prolonged period of declines and postpone purchases. While the cost of crude has jumped 75 percent since February, it’s still down nearly 50 percent in the past year.

Deepest Recession

The global economy is nevertheless showing signs that the worst of the deepest recession since World War II has passed. Switzerland’s manufacturing industry contracted at the slowest pace in seven months in May, while similar gauges in the euro area and the U.S. also improved.

While that means the next challenge for officials may be timing the reversal of expansionary policies, Group of Eight finance ministers said at the weekend that governments and central banks shouldn’t withdraw their stimulus too soon.

John Lipsky, first deputy managing director at the International Monetary Fund, said on June 15 that risks to the global economy are still “real and significant.”

To contact the reporter on this story: Klaus Wille in Zurich at kwille@bloomberg.net.

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Korea Bond Market ‘Wrong’ to Price in Shift, Hur Says

By Kim Kyoungwha and Sangim Han

June 18 (Bloomberg) -- South Korea’s bond investors made a wrong bet that policy makers would switch their focus to tackling inflation while the economy remains weak, Vice Finance Minister Hur Kyung Wook said.

“There was confusion in the market as the message from policy makers has been taken in a wrong way,” Hur said in an interview in Seoul yesterday. “A change in macroeconomic policy risks choking off an economic recovery in an anemic stage. The job market is still very bad, despite some upward potential on the economy.”

The yield on five-year government debt soared to the highest since November last week after Bank of Korea Governor Lee Seong Tae said the downturn for the $929 billion economy has probably ended, raising the prospect of an increase in interest rates. The central bank noted after keeping the seven-day repo rate steady at 2 percent on June 11 that the “mild upward trend” of home prices has continued.

Data from Asia’s fourth-largest economy have been mixed, with exports sliding at the fastest pace in four months in May and industrial output rising for a fourth month. The jobless rate climbed to a four-year high of 3.9 percent.

The yield on the 4.75 percent note due March 2014 has risen 102 basis points since touching a four-year low of 3.72 percent on Jan. 8, according to data compiled by Bloomberg. The yield touched 4.97 percent on June 11, the highest since Nov. 28 and fell four basis points to 4.74 percent today.

Bonds Rally

“Concerns about a rate hike were overblown and the bond market is regaining lost ground with some interest in hard-hit longer maturities from banks and insurance firms,” said Kim Taek Hoi, a fund manager at Hana Bank in Seoul. Korea’s fourth- largest lender holds about 14 trillion won ($11 billion) of bonds.

Economic growth in the second quarter will probably be better than the first quarter’s 0.1 percent expansion, Hur said. Rising oil prices and tensions linked to North Korea remain risks to the economy in the second half, he added.

“We should maintain an expansionary policy until the recovery is assured,” Hur said. “We can’t find any sign of inflation anywhere. Consumption has to improve and investment also has to recover. There are a lot of unsold apartments and home price gains are limited.”

On April 30, lawmakers approved a 17.2 trillion-won ($13.8 billion) package of cash handouts, cheap loans, labor-market aid and infrastructure spending. That added to the 50 trillion won in relief measures already allocated.

The Bank of Korea cut borrowing costs by 3.25 percentage points since October. The consumer price index climbed 2.7 percent in May from a year earlier, the slowest pace in 20 months, and the statistics office said on June 1.

Won Reasonable

Hur said the currency market is behaving “reasonably.” The won has rallied 27 percent versus the dollar from an 11-year low on March 3 and was little changed at 1,259.05 today.

Financial markets, roiled by concern that Korean banks and companies may face a debt default, have regained “stability” as the current-account surplus reached $17 billion in the first five months of 2009, Hur said. Korea posted a $6.4 billion deficit last year.

The government “feels comfortable” with its $227 billion in currency reserves and may even seek a larger amount that can help shield the nation against external shocks, he said.

“The currency market was oversensitive in March and the exchange rate was overshooting,” Hur said. “The currency is now moving reasonably based on economic fundamentals.”

To contact the reporters on this story: Kim Kyoungwha in Seoul at kkim19@bloomberg.net; Sangim Han at sihan@bloomberg.net

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World Bank Raises China Growth Forecast, Market News Says

By Bloomberg News

June 18 (Bloomberg) -- The World Bank raised its China growth forecast to 7.2 percent for 2009, up from a previous estimate of 6.5 percent, Market News International reported, citing the bank. The lender’s quarterly report on China is embargoed for release at 11 a.m. local time.

To contact the reporter on this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net

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Japan’s Government, Central Bank Agree Worst of Recession Over

By Toru Fujioka and Mayumi Otsuma

June 18 (Bloomberg) -- Japan’s government and central bank agree that the worst of the deepest postwar recession is over.

Demand is picking up even though “the economy is in a difficult situation,” the Cabinet Office said in Tokyo yesterday. The Bank of Japan said the world’s second-largest economy has “begun to stop worsening.”

Evidence the economy has turned a corner has mounted as companies bolstered industrial output at the fastest pace in 56 years in April and exports recovered from unprecedented declines. Central bank Governor Masaaki Shirakawa said this week he is “cautious” about the rebound because renewed demand may only be temporary.

“Policy makers are raising their economic assessments to reflect recent improvements, but they remain pretty cautious about the outlook,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “Exports are starting to turn around, but that doesn’t guarantee production will keep rebounding and support employment.”

The Nikkei 225 Stock Average rose above 10,000 for the first time in eight months last week and consumer sentiment climbed to a 14-month high in May. Stocks have retreated 2.9 percent this week and the yen has strengthened against the dollar on concern a recovery in the U.S., Japan’s largest export market, isn’t a sure thing.

“It seems clear the economy bottomed out between January and March,” Japan’s Finance Minister Kaoru Yosano told reporters at a press briefing yesterday. “There are signs the decline in personal spending on some items is ending.”

‘Engines Turn’

It may take some time before Americans start spending again. President Barack Obama said in an interview that unemployment may climb to 10 percent from the current 25-year high of 9.4 percent.

“You’re starting to see the engines of the economy turn,” Obama said. Still, he added that “it’s going to take a long time” for a full-fledged recovery as households work off the debt accumulated during the real-estate boom.

Japan’s export dependence has caused it to suffer the most from the global recession. Gross domestic product fell at an annual 14.2 percent pace in the three months ended March 31, the steepest contraction since records began half a century ago. Analysts surveyed by Bloomberg expect the economy to grow this quarter, which would be the first expansion in a year.

“The upgrades by the BOJ and the government just mean the worst is over,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “The U.S. recovery will be postponed until the middle of next year so it’ll be impossible for Japan to have a solid recovery.”

‘Delicate Stage’

Economists say the economy may stutter after recovering from its worst contraction on record as Prime Minister Taro Aso’s 25 trillion-yen ($260 billion) stimulus plans wear off. The government said in yesterday’s report that rising unemployment may also discourage consumer spending and damp growth in the coming months.

“The Japanese economy is still at a delicate stage,” said David Cohen, head of Asian forecasting at Action Economics in Singapore. “At the end of the day, much will remain dependent upon the outlook for global export demand.”

Optimism that the worst is over doesn’t mean the Bank of Japan is preparing to raise the key overnight lending rate, which has stayed at 0.1 percent since being cut in December.

“Given that employment and wages are deteriorating and deflation risk is rising, it’s difficult to expect a rate hike anytime soon,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The central bank won’t likely raise rates until fiscal 2011 at the earliest,” he said, referring to the year ending March 2012.

Job Shortage

Deteriorating prospects for consumers are also a risk, the Cabinet Office said in yesterday’s report. The unemployment rate rose to a five-year high of 5 percent in April and economists surveyed by Bloomberg expect it to climb to a record 5.8 percent next year. About two work seekers are competing for a single spot, the most severe job shortage on record.

“We aren’t in a recovery phase,” said Fumihira Nishizaki, director of macroeconomic analysis at the Cabinet Office. “There is a risk that Japan’s economy will deteriorate again.”

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

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King Says U.K. Banks May Need More Capital to Finance Recovery

By Svenja O’Donnell and Jennifer Ryan

June 18 (Bloomberg) -- Bank of England Governor Mervyn King said Britain’s banking system may need to raise more capital to finance the economic recovery as officials keep printing money.

“It may take further additions to equity capital before the banking system will be able to supply credit at a price and on a scale to finance a sustained recovery,” King said in a speech at the Mansion House in London yesterday. “It is too soon to reverse the extraordinary policy stimulus that has been injected into the U.K. economy through monetary policy.”

The Bank of England plans to spend 125 billion pounds ($204 billion) of new money on assets to kick-start economic growth, and Gordon Brown’s government has propped up some of the nation’s biggest banks with taxpayer funds. King, speaking alongside finance minister Alistair Darling, said both monetary and fiscal policy will have to change as the economy stabilizes.

“When appropriate the Monetary Policy Committee will raise bank rate” from the current 0.5 percent “and gradually run down its portfolio of assets in a manner consistent with maintaining orderly markets,” King said. “It is also necessary to produce a clear plan to show how prospective deficits will be reduced during the next Parliament.”

Dividing lines for the next election, which must be held within a year, sharpened this month. The opposition Conservatives have accused Brown of misleading voters after the prime minister denied most ministries face deep spending cuts. A mix of spending restraint and tax increases is inevitable, whichever party takes office, economists say.

‘Tough Choices’

“Support for the economy now must be matched by action to ensure we live within our means,” Darling said in his speech. “There are tough choices ahead. I will continue to do whatever is necessary to ensure sustainable public finances.”

The government has nationalized banks and invested billions of pounds in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. U.K. banks have already raised $158 billion in capital to shore up their balance sheets, Bloomberg data show.

While the current crisis still has “some way to run” and banks have more work to do in reducing leverage, investors have continued to perceive greater risk in the industry, King said.

“Put bluntly, market data on credit spreads imply that some banks are viewed as a worse credit risk than some of their customers,” he said. “Companies that can bypass the banks to access capital markets directly are doing so.”

Investors are demanding extra returns to hold bonds issued by banks. The spread between the yields of sterling-denominated bonds issued by financial companies and benchmark government debt averages 619 basis points, according to Merrill Lynch & Co. data. That compares to an average spread of 289 basis points for non-financial companies. A basis point is 0.01 percentage point.

Money Supply

King said there are “tentative signs” the central bank’s asset purchase program is starting to work as money supply is “picking up.” Policy makers this month reiterated their plan to keep buying government and corporate bonds.

While full economic recovery may be “protracted,” King said “there are some signs that the British economy is beginning to stabilize, and financial markets have improved markedly.”

The British Chambers of Commerce today cut its forecast for U.K. economic growth, saying the outlook “remains very precarious.” Gross domestic product will shrink 3.8 percent this year, compared with a forecast in March for a contraction of 2.8 percent, the BCC said. Unemployment will rise to a peak of 3.2 million in the second half of next year, the group said.

King said new regulation on the banking sector should eliminate an implicit state guarantee for firms that combine household services with risky investment banking or funding strategies. He suggested banks which pose greater risks to taxpayers should face higher capital requirements or be prevented from offering services to consumers.

Any regulated bank should also be required to produce a plan for it to be wound down in the event of failure.

“Making a will should be as much a part of good housekeeping for banks as it is for the rest of us,” he said.

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net.

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Copper Advances in Asia, Halting Longest Slide in Six Months

By Glenys Sim

June 18 (Bloomberg) -- Copper gained for the first time in five days in Asia, halting the longest slide in six months, as the dollar weakened, boosting demand for commodities as alternative investments.

The dollar was little changed against a basket of six major currencies after falling 1.1 percent in the past two days, making the metal cheaper for holders of other currencies.

“The gains are dollar driven, however the mood of the market is still cautious, which is likely to cap any rally,” Wang Zhouyi, an analyst at China International Futures (Shanghai) Co., said today.

Three-month delivery copper on the London Metal Exchange rose as much as 0.8 percent to $4,997 a metric ton, and traded at $4,970 a ton at 9:44 a.m. Singapore time. The metal declined for the past four days, the longest retreat since a five-day fall up to Dec. 18.

September-delivery copper on the Shanghai Futures Exchange fell as much as 0.6 percent to 39,140 yuan ($5,727) a ton, before trading at 39,200 yuan. Copper for September delivery in New York gained 0.3 percent to $2.2765 a pound.

The negative arbitrage between the London and Shanghai markets will put a lid on prices as well, according to Wang. Some investors in China buy the metal in London and sell in Shanghai to profit from the difference between the two markets.

Futures in China are trading at a discount to those on the London Metal Exchange, with prices yesterday over 700 yuan ($102) a ton lower than London, after accounting for China’s 17 percent value-added tax.

Among other LME-traded metals, aluminum rose 0.8 percent to $1,635 a ton, and zinc gained 1.1 percent to $1,568.25 a ton. Lead, nickel and tin hadn’t traded as of 9:50 a.m. in Singapore.

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net

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Oil Pares Gains, Trades Near $71 a Barrel on Demand Concern

By Christian Schmollinger

June 18 (Bloomberg) -- Crude oil pared gains, trading near $71 a barrel in New York, as concern that demand is falling outweighed potential supply disruptions in Nigeria.

Crude oil for July delivery was at $70.99 a barrel, down 4 cents, in electronic trading on the New York Mercantile Exchange at 12:20 p.m. Singapore time. The contract earlier rose as much as 55 cents, or 0.8 percent, to $71.58 a barrel. Prices are up 59 percent this year.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net.

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Kurnia Setia Has Biggest Gain in Seven Months on Takeover Offer

By Tien Hin Chan

June 18 (Bloomberg) -- Kurnia Setia Bhd., a Malaysian oil palm planter, jumped the most in more than seven months in Kuala Lumpur trading, after saying Kreatif Selaras Sdn. raised its offer to acquire the company’s entire business, including assets and liabilities.

The stock surged 10 percent to 2.65 ringgit at 9:04 a.m. local time, set for the steepest gain since Nov. 3.

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Chalco May Surge on Metal Price Catch-up, Shenyin & Wanguo Says

By Bloomberg News

June 18 (Bloomberg) -- Shares of Aluminum Corp. of China Ltd., the country’s largest producer, may jump by more than 40 percent as the metal rallies to match gains in other commodities, said Shenyin & Wanguo Securities Co.

Chalco, as the Beijing-based company is known, may surge to HK$11.5 a share, or 2.5 times its price-to-book ratio, analyst Peggy Ye wrote in an e-mailed report. That’s 45 percent higher than yesterday’s closing price of HK$7.93 in Hong Kong.

Aluminum, used in buildings and car parts, is the worst performer on the London Metal Exchange this year, missing out on a rally that has seen copper surge 62 percent on optimism the worst of the global recession is over. Copper is about 3.2 times the price of aluminum, compared with a historical average of 1.8 times, Shenyin & Wanguo said.

“Aluminum price may rally in the short term as money flows into this relatively cheap metal,” Ye said by phone from Shanghai. “By comparison, other metals and their equities have become very expensive.”

Lead has gained 66 percent and zinc 28 percent this year on the London Metal Exchange. Shenyin & Wanguo was voted the country’s best brokerage for research last year by the national pension fund.

The price of aluminum has increased 13 percent this month in London. The gain “was more an interplay of liquidity and valuation rather than a fundamental shift” in demand and supply, Ye said.

Shenyin & Wanguo remains “cautious” about aluminum demand fundamentals, Ye said.

“Chinese aluminum producers would like to restart their spare capacity when the Chinese aluminum price is above 13,000 yuan ($1,902) a ton,” Ye wrote in the report. “Another round of overcapacity would weigh on aluminum one or two months later.”

Chalco dropped 2.5 percent to HK$7.73 at 11:38 a.m. in Hong Kong trading.

--Li Xiaowei. Editors: Tan Hwee Ann, Indranil Ghosh.

To contact the Bloomberg News staff on this story: Li Xiaowei in Shanghai at Xli12@bloomberg.net

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Japanese Stocks Drop on Yen, Metals; Mitsubishi Motors Rises

By Masaki Kondo

June 18 (Bloomberg) -- Japanese stocks fell for the third time in four days as the local currency strengthened to a two- week high, diminishing the earnings prospects for makers of cars and electronics.

Honda Motor Co., which gets more than half its sales in North America, dropped 3.7 percent, while electronics maker Sony Corp. declined 2.9 percent. Mitsubishi Corp., a trading company that gets more than half its profit from commodities, slid 5 percent as metals prices had the longest streak of losses in a half year. Mitsubishi Motors Corp. added 1.1 percent on a newspaper report it plans to develop a cheaper electric vehicle.

“Optimism that the yen will weaken to beyond 100 is evaporating,” said Mitsushige Akino, who oversees about $574 million at Ichiyoshi Investment Management Co. in Tokyo. “The economy has clearly hit bottom, but that’s been priced in.”

The Nikkei 225 Stock Average declined 170.04, or 1.7 percent, to 9,670.81 as of 12:40 p.m. in Tokyo. The broader Topix index fell 14.89, or 1.6 percent, to 908.14, with three stocks retreating for each that advanced.

The Nikkei recovered to 10,000 on June 12 for the first time in eight months as improved economic indicators boosted investor confidence in the outlook for equities. Merrill Lynch & Co. said yesterday fewer investors were underweight in Japanese equities this month than in May.

The yen strengthened versus the dollar yesterday to the 95 level for the first time since June 4. The Japanese currency appreciated to as much as 95.52 from 96.16 at the close of stock trading in Tokyo.

Honda, Sony

Honda declined 3.7 percent to 2,575 yen, extending its drop to a sixth day, and Sony, maker of the PlayStation 3 game machine, sank 2.9 percent to 2,480 yen. Electronics makers were the biggest drag on the Topix.

Mitsubishi Corp., Japan’s largest trading house by value, lost 5 percent to 1,779 yen, and closest rival Mitsui & Co. retreated 4.4 percent to 1,130 yen. A gauge of six metals in London fell yesterday for a fourth session, the longest losing streak since a seven-day slump ending Dec. 5.

“After the Nikkei hit 10,000, people’s focus is going back to the patchy state of the global economy,” said Koji Toda, chief fund manager at Resona Bank Ltd. “Investors are taking profit because they know they can’t expect to see a V-shaped economic recovery.”

Mitsubishi Motors advanced 1.1 percent to 183 yen. The automaker plans to develop an electric vehicle priced at 3 million yen ($31,000) by 2012, cheaper than its current model, the Nikkei newspaper said today. Meidensha Corp., which supplies parts for Mitsubishi Motors’ electric cars, added 6.1 percent to 612 yen, extending yesterday’s 16 percent jump.

“Investors feel environment-related shares will stay solid even if the market enters a downward trend,” said Ichiyoshi’s Akino. “As people become more convinced this rally is coming to a close, they are more eager to buy these shares.”

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

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Asian Stocks Fall on Valuation Concern; Honda, Rio Tinto Drop

By Jonathan Burgos

June 18 (Bloomberg) -- Asian stocks declined, dragging the MSCI Asia Pacific Index to a three-week low, as concerns about the strength of the U.S. economy weighed on the dollar, denting prospects for export earnings.

Honda Motor Co., which gets more than half its sales in North America, dropped 3.7 percent as the dollar traded near a two-week low against the yen. Mitsubishi UFJ Financial Group Inc. sank 3.2 percent, pacing declines among banks, after Standard & Poor’s cut credit ratings on 18 U.S. lenders. Rio Tinto Group, the world’s third-largest mining company, slumped 8.2 percent as it began a $15.2 billion share sale.

The MSCI Asia Pacific Index lost 1.3 percent to 100.74 as of 1:07 p.m. in Tokyo, set to close at its lowest since May 28. A 43 percent rally from a five-year low on March 9 has taken valuations of the gauge’s stocks to the highest since September.

“Investors are using the weaker dollar as an excuse to take profit as valuations look stretched following the recent rally,” said Michiya Tomita, who helps manage $51 billion at Mitsubishi UFS Asset Management Co. in Hong Kong. “Any correction will be short-lived as long-term fund managers are still sitting on the sidelines with their cash.”

Japan’s Nikkei 225 Stock Average fell 1.7 percent to 9,670.11. Australia’s S&P/ASX 200 Index lost 0.6 percent. The Shanghai Composite Index gained 0.9 percent after the World Bank raised its 2009 growth forecast for China.

Sweeping Overhaul

Futures on the Standard & Poor’s 500 Index gained 0.2 percent. The gauge dropped 0.1 percent yesterday as President Barack Obama proposed the most sweeping overhaul of the U.S. financial regulatory system in 75 years. The plan includes an agency for monitoring consumer financial products and bringing hedge and private equity funds under federal scrutiny.

Japanese exporters fell after the yen strengthened versus the dollar yesterday to the 95 level for the first time since June 4. The Japanese currency appreciated to as much as 95.52 from 96.16 at the close of stock trading in Tokyo. The dollar also fell against currencies in Australia, Singapore and Malaysia.

Honda declined 3.7 percent to 2,575 yen. Sony Corp., maker of the PlayStation 3 game machine, sank 3.5 percent to 2,465 yen. Makers of electronics and cars accounted for 38 percent of the Topix Index’s 1.6 percent drop today, Bloomberg data show.

“There’s no clear momentum to buy or sell right now,” said Mitsushige Akino, who oversees about $574 million at Ichiyoshi Investment Management Co. in Tokyo. “The economy has clearly hit bottom, but that’s been priced in.”

Equity Stake

The rally since March drove the average valuation of companies in the MSCI Asia Pacific Index to 1.5 times the book value of assets as of the end of last week, according to Bloomberg data. That was the highest level since Sept. 26.

Fund managers were “overweight” stocks for the first time in 18 months as optimism on economic growth and corporate profits surged to a five-year high, a Merrill Lynch & Co. survey showed.

“Over the last couple of months we’ve seen a rapid rise in confidence reflected in high share market levels,” said Jason Teh, who helps manage more than $2.5 billion at Investors Mutual Ltd. in Sydney. “What we really require to underpin prices is confirmation that the economic statistics can catch up.”

Financial stocks were the biggest drag on the MSCI Asia Pacific Index after S&P said the business environment for U.S. banks will become “less favorable.” The agency cut the credit ratings of five lenders to “junk” status.

Mitsubishi UFJ, which invested $9 billion in Morgan Stanley last year, fell 3.2 percent to 585 yen. HSBC Holdings Plc, which gets 24 percent of its revenue in North America, lost 1.6 percent to HK$65.70 in Hong Kong.

Balance-Sheet Risk

Finance companies worldwide have recorded more than $1.4 trillion in writedowns and credit losses since 2007 as the U.S. housing market collapsed and the global economy sank into recession.

“Financial institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace’s new reality,” S&P analyst Rodrigo Quintanilla said in a statement yesterday. “Such a transition period justifies lower ratings as industry players implement changes.”

Rio slumped 8.2 percent to A$52.95. The company’s stock sale, offering 21 shares for every 40 held at a price of A$28.29, began yesterday. Rio is selling equity and has also agreed to an iron ore joint venture with BHP Billiton Ltd. to reduce debt.

“There might be a bit of position adjustment on the back of” the share sale, said James Foulsham, a Sydney-based senior dealer at CMC Markets. With “such a major corporate action, sometimes you get the price moving about a bit after it’s gone through.”

To contact the reporter on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net.

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