Currencies: Dollar Stays Under Fire

Daily Forex Fundamentals | Written by KBC Bank | Oct 07 09 07:44 GMT |

Sunrise Market Commentary Global bonds lose moderate ground, as equities and commodities storm ahead Bonds continued their consolidation following last week's important technical break higher, amid increased risk appetite across various 'risky' asset classes. Supply weighed, even if the US 3-year T-Note auction went well. Today, equities might consolidate, following stellar gains and the ahead of the earnings season (Alcoa), but more supply should prevent bonds from making much headway. FX: Dollar stays under fire On Tuesday, several factors (RBA rate hike, higher equities and a press article on the potential replacement of the dollar as currency for oil transactions) conspired against the dollar. EUR/USD is coming close to the recent highs. Sterling was hammered by an awful UK industrial production report The Sunrise Headlines US equities stage a broad rally ahead of the start of Q3 earnings season this evening (S&P +1.37%). Asian equities track US equities higher this morning. The energy and materials sector led the surge in stocks after commodities rallied higher. Gold set a new record high at 1043 USD/ounce. Banco Santander raised just over $8B from the listing of its Brazilian subsidiary in the largest IPO of this year, while ING sells its Swiss private banking assets to Swiss wealth manager Julius Bear for $500M. Fed's Hoenig warns that the Fed will need to remove its very accommodative policy sooner rather than later, as a rate of 1 or 2 percent is not tight, but still very accommodative. ECB's Quaden echoes comments of Trichet on the euro/dollar exchange rate, as he says that 'for the reduction of external financial imbalances of the US, the problem is not the exchange rate of the dollar vis-à-vis the euro, the problem is elsewhere'. UK consumer confidence rose to the highest since April 2008, according to Nationwide Building Society. Today, the calendar remains thin with the German factory orders, a German 30- year Bund auction and a US 10-year Note Auction as meager eye-catchers EUR/USD On Tuesday, a series of factors again conspired against the USD dollar. The rate hike of the Australian central bank supported risk taking on all markets, including the currency market. This 'automatically' implied additional dollar selling. The Independent article saying that several countries were holding secret talks to end the role of the dollar in oil trading and switch to a basket of currencies, put the dollar under additional pressure, even as several parties reportedly involved denied it. So, EUR/USD was already changing hands well above the 1.47 mark at the open of the European markets. In Europe and the US only some second tier eco data were on the agenda. However, a new up-leg on the stock markets and the commodity markets kept EUR/USD well supported and the pair reached an intraday high in the 1.4760 area when European traders were leaving their desks. The broad decline of the dollar also caused gold to reach new all time highs. US equities returned some of the early gains later in the session and this caused EUR/USD to come off the intraday. The US 3-year auction went well and had once again no lasting impact on EUR/USD trading. The pair closed the session at 1.4722, compared to 1.4648 on Monday evening EUR/USD: ST highs coming within reach Support comes in at 1.4669/55 (Break-up/Boll Midline +daily envelope), at 1.4633 (STMA), at 1.4582 (week low) and 1.4519/05 (LTMA/Bollinger bottom). Resistance stands at 1.4766 (Breakdown hourly/weekly envelop), at 1.4784/88 (Daily envelope/Bollinger top), 1.4803 (Reaction high hourly), at 1.4845/67 (Reaction high/Sep 2008 high). The pair is in neutral territory. USD/JPY Today, the eco calendar is again rather thin. In Europe, the German factory orders are on the agenda. The series is interesting, but will only have a limited impact on currency trading. In the US only some second tier eco data are on the agenda. Later in the session markets will also keep and eye on the 10-year Note auction in the US, which may go a bit less well than yesterday's (reasonably successful) 3-year auction. However, it is unlikely to have an immediate negative impact on the dollar. Markets will also look forward to the start of the earnings season with Alcoa reporting results after the bell in the US. The liquidity-driven rally on the stock markets is well in place with the question now whether earnings will live up to the recent re-pricing on the stock markets. Global context: recently, the swings in risk appetite/risk aversion were the obvious drivers on the currency markets. In this context, improving investor sentiment toward risk is still considered a good reason to sell the US dollar. On top of that, in this low yield environment, the dollar has become (or is at least perceived to have become) the preferred currency to fund carry-trade deals. Lingering uncertainty on the huge US financing needs, some international debate the status of the dollar and the Fed's intention to run an expansionary monetary policy for a prolonged period of time offer additional ammunition for carry traders to use the dollar rather than other currencies. This has put the dollar in a vulnerable position. We don't see many reasons to turn dollar positive before it becomes clear that the Fed will start tightening monetary policy. Last week's US payrolls report only reinforced the feeling that point hadn't been reached. Any correction on the stock markets might still have some impact EUR/USD. However, as we expect corrections on the liquidity driven rally on the stock markets to be limited, the downside in EUR/USD well protected. On the contrary, yesterday's price action suggests that that the pair might again go for a test of the recent highs. Fro the euro side of the story, we keep a close eye on this week's ECB meeting. The ECB may feel the need to come out ever more forceful against euro strength. The ECB press conference might offer Trichet the opportunity to make his point. When asked whether the current EUR/USD exchange rate was a concern ECB's Quaden yesterday repeated the new ECB mantra that the problem (with respect to global imbalances) is not the exchange rate of the euro against the dollar, but that the problem is elsewhere. Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 improved the picture. The pair extensively tested the key 1.4719 December high and even set a new minor high. However, there was no follow-through action on this 'break'. Longer term, we maintain a buy-on-dips approach. However, the ST picture for EUR/USD remains indecisive. Recently, we indicated that the 1.4438/50 break-up area would offer a good opportunity to step in again. We came rather close to this area at the end of last week, but a real test didn't occur. The risk is that this level won't be reached. So, we would not wait too long to cover USD long exposure. IF the stock market rebound continues, the 1.5021 target (2nd target double bottom of 1.3739) might come again in the picture On Tuesday, USD/JPY joined the global dollar decline. The drivers were not different from those that guided the price action of other USD cross rates The strong open on the US stock markets hammered the pair to new intraday lows in the 88.65 area. The pair closed the session at 88.82, compared to 89.53 on Monday evening. This morning, the Japanese leading indicator was in line with expectations improving from 82.5 to 83.3 in August. Asian stock markets joined the rally in the US yesterday and show gains on average of around 1%. USD/JPY is holding close to the recent lows. In an interview, the Japanese finance minster indicated that the current situation of the yen is not extremely abnormal. He reaffirmed his stance that governments should not intervene in the currency markets in an excessive way. However, he also said that 'if forex market movements are outrageously reckless, or acting without any order, then some measures are needed'. So, a (very) gradual rise of the yen is probably acceptable, if it goes too quickly, interventions remain likely. Global context: USD/JPY reached a reaction high in the 97.80 area early August. Despite a positive global investor sentiment, the dollar could not hold on to its gains against the yen. The link between USD/JPY and global investor risk aversion/risk appetite became less tight and sometimes it had even reversed. The dollar (and not the yen) was said to have become the preferred funding currency for carry trades. So, the price action in USD/JPY more or less joined the global dollar trend (decline). The long-term trend obviously remains USD/JPY negative. However, recently, we turned more cautious on USD/JPY shorts on technical considerations. On top of that, the change in talk from the Japanese authorities also slowed the ascent of the yen. So, the situation in USD/JPY has become a bit paralysed. We still look to sell USD/JPY in case of a more pronounced up-tick. The 87.10 (year low) area remains the next high profile target on the downside for this pair. Even as we have a longterm yen positive bias, we would not go yen long at the current levels as Japanese authorities will most probably continue to use verbal interventions to prevent a to swift rise of their currency. The 92/93 area might be a good entry point if the correction would go that far USD/JPY: Downtrend well in place, but markets are cautious as officials might try to slow the yen strengthening Support is seen at 88.62/58 (Week low/Bollinger bottom), at 88.34/23 (weekly Bollinger bottom/28 Sep low), at 88.04 (weekly envelop) and at 87.35/10 (Starc bottom/Year low). Resistance comes in at 89.27/32 (STMA/Daily envelope), at 89.98 /10 (Week high/MTMA), at 90.42/46 (30Sep high/Bollinger mid-line). The pair is in neutral conditions. EUR/GBP On Tuesday, sterling showed again quite some wild swings. Early in European trading sterling seemed able to regain some ground. A global positive environment to risk and a better than expected Halifax house prices report caused some downsizing of sterling short positions. However, the publication of the UK August industrial production data was a real shocker for markets. Production in August declined by 2.3% M/M and by 11.2% Y/Y, far worse than market expectations. EUR/GBP in two waves rose to the 0.9270 area, but the reaction high at 0.9304 was not challenged. The NIESR GDP estimate (0.0%) for September was no big help for sterling either. The pair closed the session slightly of the highs at 0.9248, compared to 0.9193 on Monday This morning, the Nationwide consumer confidence index for September came out better than expected at 71, up from 65. However, at least for now the release is failing to give the sterling any support worth mentioning. Later today, the UK calendar is empty. Markets will look forward to tomorrow's BOE policy meeting. However, we expect to Bank to maintain its wait-and-see mode until the November meeting (when a new inflation report will be available). Global context: Since early August sterling sentiment deteriorated again. The August BoE decision to raise the asset purchase program to £175B and Governor King's call for an even greater effort indicated that the Bank intended to maintain a loose policy for a prolonged period of time. This triggered a new sterling selling wave. At the September meeting, the BoE took no additional policy steps. Nevertheless, the (monetary) picture stays sterling negative and more BOE talk on the positive effects of sterling weakness for the UK economy reinforced investors' feeling that the BOE was quite happy with the course of events. We have a long-standing sterling negative view and don't feel any need to change it. However, recently we advocated some caution on the recent steep EUR/GBP rise. Last week, there was a temporary unwinding of overextended sterling short positions. Recently, we were looking for a correction to go add/reinstall EUR/GBP long positions. The 0.9080 area (previous high) has already been tested twice. So, its might become a hard nut to crack. A break above the 0.93-area could reinforce the EUR/GBP ascent EUR/GBP: sterling hammered (again) by poor UK production data Support comes 0.9237 (Reaction low hourly), at 0.9213/01 (Daily envelope/break-up hourly), at 0.9188 (STMA), at 0.9144/40 (MTMA/week low) and at 0.9113 (Weekly envelop). Resistance is seen at 0.9274 (Reaction high), at 0.9296/0.9304 (Daily envelope/ Reaction high), at 0.9318 (Weekly envelop), at 0.9350 (Daily Boll top). . The pair is moving into overbought conditions News Other: UK industrial production disappoints In the UK, industrial production unexpectedly fell by 2.5% M/M in August, as output in the manufacturing sector declined by 1.9% M/M, while mining and quarrying dropped by 7.3% M/M. The figures dashed market expectations for a third consecutive monthly increase. The sharp decline puts downward risks to Q3 GDP growth, as on a three-month basis industrial production is now down by 0.2% Download entire Sunrise Market Commentary Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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Forex Technical Update

Daily Forex Technicals | Written by India Forex | Oct 07 09 07:36 GMT |

Rupee : Rupee was expected to hold strong after breaking the crucial support of 47.80 despite the dollar not making fresh lows internationally. Stocks are not holding so strong despite which we are seeing strength in dollar rupee to hold. Until we see a break of 48.00 levels again on a closing basis the bias of rupee is quite strong. Today is the 4th day in a row when the market has broken 47.80 levels. Medium term target 46.00 levels. 46.50 would remain an important support for the week. Bias looks strong for rupee. Sell at every rally. (USD/INR 46.70) Bullish Euro : EURO had a moderate bullish momentum yesterday . The pair is now trading above the trendline resistance indicating bullish pressure still able to maintain it's momentum. Technically in nearest term the bias is bullish testing 1.4720 – 1.4850 area. However please note that in longer term perspective, the rejection to move above 1.4850 on September 23 should keep the medium term bias remains neutral. Buying close to 1.46 is recommended. (EUR/USD-1.4696) Bullish Sterling :GBP made another indecisive movement yesterday. On h4 chart the pound is still trading below the trendline resistance We still prefer a bearish scenario but we need a valid break below 1.5905 before re-testing 1.5805. Immediate resistance at 1.6022 . Break above that area should trigger further bullish momentum re-testing 1.6113 but we should not initiate buys. Look at selling opportunities between 1.61-1.6200 levels for medium term target 1.5700.(GBP/USD 1.5871) Bearish Yen : Yen continues to stay in range today and consolidation from 88.23 might extend further. Another rise to 90.42 resistance and above cannot be ruled out. But after all, upside is expected to be limited well below 92.52 resistance and bring a fall again . Below 88.59 minor support will flip intraday bias back to the downside. Break of 88.23 will target 87.12 low. (USD/JPY 88.77) Bullish. Aud : Aud maintains bullish bias and break above 0.8787. Immediate support at 0.8650. Break below that area should trigger further bearish momentum re-testing 0.8567 (Friday's low). Technically buying on dips close to important supports remains the best strategy in the current market scenario.Only a continuous move below 0.8600 would break the trendline and stand bearish for the pair. (AUD/USD -0.8895) Bullish Gold : Gold breached the peak of $1033 levels yesterday making a new record high of $1043 on the back of USD weakness. This has confirmed the Long-term uptrend in the yellow metal. Accumulating at every dip is recommended. Bullish (Gold - 1042.62) Dollar Index : The view on Dollar Index (basket against 6 currencies with EUR accounting for 57% of the basket) stays neutral. Further rise will be in favor as long as 76.50 minor support holds and above 77.47 will pave the way to key resistance level at 78.93 next. However, a break below 76.50 will put 75.83 back into focus.It could bottom close to 75.50 levels. (Dollar Index - 76.35).Neutral India Forex http://www.indiaforex.in DISCLAIMER 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 responsible 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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U.K. Consumer Confidence Index Increases to 1 1/2-Year High

By Svenja O’Donnell

Oct. 7 (Bloomberg) -- U.K. consumer confidence rose to the highest in 1 1/2 years in September as the economy showed signs of escaping the recession, Nationwide Building Society said.

An index of sentiment rose six points to 71, the highest since April 2008, Britain’s biggest customer-owned lender said in an e-mailed statement today. TNS questioned 1,000 people for Nationwide from Aug. 24 to Sept. 20.

The Bank of England will tomorrow keep its asset-buying program capped at 175 billion pounds ($280 billion) as policy makers assess the strength of the recovery, economists say. Reports this week showed house prices have recovered to the level of a year ago and that the economy is no longer shrinking.

News that the recession has abated “may have helped to improve sentiment in September, which may have also been boosted by continued positive news about the housing market and the strong rally seen in the equity markets in recent months,” Mark Saddleton, Nationwide’s head of economic and market analysis, said in the statement.

An index measuring expectations for the economy rose 9 points to 106, the highest since December 2005, Nationwide said. The gauge of spending increased by 3 points to 103.

Britain’s economy stagnated in the third quarter after shrinking 0.6 percent in the three months through June, the National Institute of Economic and Social Research said yesterday.

The labor market, where unemployment rose to a 14-year high last month, may be improving, according to a separate report today by KPMG and the Recruitment and Employment Federation. Their measure of hiring for permanent jobs rose to an 18-month high of 51.3 in September, from 50.6 the previous month.

Printing Money

The Bank of England is buying bonds with newly printed money to ward off the threat of deflation after the financial crisis plunged the U.K. economy into its sharpest recession since World War II.

Average U.K. shop prices fell 0.1 percent in September from a year earlier, declining for a second consecutive month, the British Retail Consortium said in a report today.

The central bank will probably keep the size of its asset- purchase plan unchanged at its decision tomorrow, according to all 42 economists in a Bloomberg News survey. The benchmark interest rate is at a record low of 0.5 percent.

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

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RBS Faced Risk of Full Seizure by Brown in Crisis, Gieve Says

By Brian Swint and David Tweed

Oct. 7 (Bloomberg) -- Royal Bank of Scotland Group Plc posed such a threat to the British and global financial systems at the height of the crisis last year that Prime Minister Gordon Brown could have ended up fully seizing the bank, former Bank of England official John Gieve said.

Brown didn’t need to go that far because Fred Goodwin, then RBS chief executive officer, conceded to government rescue aid on the weekend of Oct. 11-12, Gieve said. Other officials were scrambling from London to Washington and Paris at the time to coordinate the response to the panic sparked by Lehman Brothers Holdings Inc.’s collapse four weeks earlier.

“If Royal Bank of Scotland hadn’t been propped up as it was, in practice it would have been nationalized the following week,” Gieve, who was the bank’s deputy governor at the time of the 2008 crisis, said in a Bloomberg Television interview yesterday. “If RBS, HBOS, Lloyds had gone down, that would have had huge contagious effects throughout the rest of the world.”

Brown’s government took stakes in RBS, Europe’s biggest bank by assets at the time, and Lloyds Banking Group Plc, the bank formed in the merger of Lloyds TSB Group Plc and HBOS Plc, as the financial crisis intensified. Gieve said some bank chiefs resisted aid before realizing that “the game was up” and accepting the full rescue package unveiled on Oct. 13, 2008.

‘Crashing’ Dreams

“For the boards and chief executives, particularly of RBS and HBOS, this was a terrible day,” Gieve said. “All their dreams were crashing to the ground, but there wasn’t a great deal of arguing. In truth, both RBS and HBOS knew they needed government support and they were being told the terms they had to accept.”

Goodwin and Andy Hornby, who was chief executive officer of HBOS, then resigned as their banks ceded majority control to Brown’s government. HBOS, the country’s biggest mortgage lender at the time, is based in Edinburgh, as is RBS.

The two banks were not “confident they could get to the end of the day,” on Oct. 6 and Oct. 7, 2008, Bank of England Governor Mervyn King told the BBC in an interview broadcast last month. On Oct. 8, the government offered to take stakes in British banks to shore up their capital.

Gieve said that he spent much of the following weekend in negotiations with the banks, the U.K. Treasury and the Financial Services Authority to prepare the rescue package.

The talks took place amid an “intensive diplomatic effort” to press for other governments to recapitalize their banks, Gieve said. Alistair Darling, the finance minister, was with King at the International Monetary Fund meetings in Washington and Brown was in Paris to discuss the crisis with European Union leaders.

‘We Pulled it Off’

“This was something that has never been done before, an attempt to recapitalize the heart of the British banking system in two days flat, and at the same time persuade the rest of the world and the rest of Europe that this was the model which they should adopt,” Gieve said. “We pulled it off.”

The deal wasn’t perfect and had to be tweaked in January to adjust the terms of the RBS bailout, Gieve said. The government now owns stakes of 70 percent in RBS and 43 percent in Lloyds Banking Group.

“We had to convince the markets that this was enough, that they didn’t need to worry that any of these banks were going to fail,” he said. “It did that trick. It was a reestablishment of confidence that was key, not the actual fine print of the numbers.”

Gieve, who left the central bank at the end of February, also participated in the global coordinated interest-rate cut on Oct. 8, 2008.

‘Real Tsunami’

“The coordinated cut wasn’t as important as the recapitalization of the banks,” he said. “Everyone was focused on the fact there was a real risk of total financial meltdown, and a real risk of another Great Depression. In the summer, we’d been in a storm which was severe. We were now facing a real tsunami which could sweep away all we’d worked for, for years.”

Asked to identify his biggest mistakes during the three years he spent as deputy governor, Gieve said that he wished he had spoken out more about the risks to the financial system before the crisis. He also said that interest rates should have been higher in the U.K. from 2005.

“We did identify vulnerabilities in the financial system in 2006, including things like wholesale funding exposure and so on,” Gieve, 59, said. “But we didn’t make enough noise about them. Personally, I just wish that I’d beaten the drum a bit more than I did.”

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; David Tweed in London at dtweed@bloomberg.net.

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Australia's Stevens Backs History of Being First, Right on Rates

By Jacob Greber and Rebecca Keenan

Oct. 7 (Bloomberg) -- Australian central bank Governor Glenn Stevens has a reputation for doing the unexpected -- and getting it right.

His gamble yesterday, when he became the first central bank chief among the Group of 20 nations to raise interest rates since the height of the global financial crisis, could make or break that reputation. Get it right and Australia will extend its 18 years of economic growth. Get it wrong and he could nip the nation’s rebound in the bud.

“Stevens is doing what he thinks is the right thing for the broader community -- if that means flying in the face of convention, he’ll do it,” said Warren Hogan, chief economist at Australia & New Zealand Banking Group Ltd. in Sydney. “If Australia receives another shock from the global economy, this will look like a misguided policy move.”

Stevens, a 51-year-old amateur pilot who was promoted to governor from his role as deputy in 2006, is not new to controversy. In 2007, he raised interest rates during an election campaign, destroying then Prime Minister John Howard’s boast about his government’s record of keeping borrowing costs low. In April last year, he was criticized by politicians, retailers, one of his predecessors and newspapers for raising interest rates too far too fast and risking a recession.

Instead, Australia was one of the few nations to skirt the global recession, prompting former Reserve Bank Governor Bernie Fraser in June to reverse his earlier criticism of Stevens, telling Bloomberg: “Glenn Stevens has been first class. When we look at what has happened around the world, he has proved to be one of its best central bank governors.”

Murdoch Newspaper Mellows

Even Rupert Murdoch’s Sydney tabloid the Daily Telegraph has toned down its criticism. On April 5 last year, it led its front page with a picture of Stevens and the headline: “Is This The Most Useless Man in Australia” after he raised rates to a 12-year high of 7.25 percent. Today, it was more circumspect, saying in an editorial of yesterday’s decision that Stevens “could well be right, in which case the decision to increase interest rates will be seen as practically clairvoyant.”

Demand for Australian minerals from China, the nation’s second-largest trading partner in 2008, plus a surge in consumer and business confidence, will help economic growth accelerate in coming months, the central bank says.

Governor Stevens said yesterday that gross domestic product will expand “close to trend” next year, which economists including Citigroup Inc.’s Josh Williamson say is currently between 2.75 percent and 3 percent.

By contrast, the International Monetary Fund forecast last week that the U.S. economy will expand 1.5 percent, Japan by 1.7 percent and the euro region by 0.3 percent.

November Increase

Surging domestic growth will prompt Stevens to raise rates by another quarter percentage point on Nov. 2, according to 21 of 23 economists surveyed by Bloomberg News today.

The central bank’s track record also suggests Stevens may raise rates by more than a quarter point if further evidence emerges of an economic rebound or faster gains in property prices.

The governor slashed the benchmark rate by one percentage point in October 2008 when the global credit crisis was at its worst, the biggest cut since 1992.

“Stevens was one of the first to move rates by a sizeable amount last October and others followed” around the world, said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney, who was the only analyst among 20 surveyed by Bloomberg to tip yesterday’s move. “He can take a lot of credit for those aggressive moves” as they helped the economy shrug off the global recession.

Australia’s central bank also moved ahead of other central banks in May 2002, beginning a tightening cycle when economic growth was still slowing after the Sept. 11, 2001, terrorist attacks.

‘Moved Too Soon’

Investors have a 66 percent expectation Stevens will raise borrowing costs by a quarter point next month, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 11:58 a.m.

Australia’s currency hit a 14-month high after yesterday’s rate increase, taking its gain this year against the U.S. dollar to 27 percent. The nation’s benchmark S&P/ASX 200 stock index is headed for its steepest annual gain since 1993, beating equity gauges for the U.S. and the world.

Still, some say Stevens moved too soon.

“We would have liked to have seen the Reserve Bank hold off on this decision” for a few more months, said Margy Osmond, chief executive officer of the Australian National Retailers Association. “Even sniffs of an interest-rate increase makes a difference in terms of people’s attitudes towards spending.”

Cash Handouts

Spending by consumers, whose confidence jumped to a two- year high this month, has been buoyed by the government’s decision to distribute A$20 billion ($18 billion) in cash to households following last year’s collapse of Lehman Brothers Holdings Inc. Rate gains may prompt shoppers to cut back.

“That is a real danger” if Stevens raises rates “too quickly or by too much,” said ANZ Bank’s Hogan. “Australia is still an economy where economic growth is below trend, inflation is falling and expansionary policy is still warranted.”

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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Peru’s Central Bank Will Probably Keep Rate at Record Low 1.25%

By Alex Emery and John Quigley

Oct. 7 (Bloomberg) -- Peru’s central bank will probably keep its benchmark lending rate at a record low as policy makers evaluate signs that an economic recovery has taken hold.

The seven-member board, led by bank President Julio Velarde, will keep its reference rate at 1.25 percent, according to 11 of 12 economists surveyed by Bloomberg. The bank is scheduled to announce its decision after 7 p.m. New York time.

Velarde will pause for a second month, after seven straight cuts earlier this year, to measure the effect of lower borrowing costs on the country’s economy, said Pablo Secada, an economist at the Peruvian Economy Institute. Growth is showing signs of rebounding after the economy stalled in the first half of the year on falling export demand and weaker domestic spending.

“The central bank is aware that the economic recovery has begun, even if it’s moderate,” Secada said in an interview from Lima. “We’re seeing growth in consumer demand, so they have cause not to be pessimistic.”

Brazil, Mexico and Chile have all held their benchmark rates unchanged since August, citing improving economic growth. Peru cut the overnight rate by 5.25 points this year to spur consumer spending after six increases in 2008 pushed borrowing costs up to the highest since 2001.

Peru’s metals output, agriculture and cement sales all increased in August, and unemployment was 8.3 percent that month, down from an almost two-year high of 9.3 percent in March. The improved numbers came after the economy shrank for the first time in eight years in the second quarter.

Metals Pricing

Prices of copper, zinc, lead, tin and silver, which account for 60 percent of Peru’s export revenue, have all gained at least 35 percent this year as increases in U.S. and Chinese manufacturing signal rising demand for industrial materials.

“The market is very promising for business in general,” said Norberto Lassner, president of Neogas Peru, a compressed natural gas distributor that inaugurated a $5 million filling station outside Lima last week. “There’s a great deal of repressed demand.”

Bank loans grew 15 percent this year through September from a year earlier spurred by mortgages and car loans, according to Peru’s banking regulator. Corporate debt offerings totaled 400 million soles ($140 million) in September, the highest monthly figure in two years, securities regulator Conasev said.

Peru’s foreign debt rating was put on review for an increase to investment grade by Moody’s Investors Service last week, citing the country’s “stable” economic policies.

Slowing inflation

The bank may cut the rate by 0.25 point as inflation hovers at a two-year low and Peru’s currency strengthens, said Kathryn Rooney, an emerging-market analyst at Bulltick Securities Corp. The Peruvian sol has advanced 9.5 percent this year, the seventh-best performance against the dollar among 26 emerging- market currencies tracked by Bloomberg.

The country’s annual inflation rate fell in September to 1.2 percent from 1.87 percent through August as food and transport costs declined.

The inflation rate will be lower than policy makers’ target of 1 percent to 3 percent this year on declining consumer demand, Velarde said last month.

Still, after expanding 9.8 percent in 2008, the fastest pace in 14 years, Peru’s economic growth may slow to 1.8 percent in 2009, the slowest pace since 2001, Velarde told reporters in Lima on Sept. 18.

“Domestic demand is taking longer to pick up than expected,” Rooney said in a telephone interview from Miami. “Data shows growth woefully below potential.”

To contact the reporters on this story: Alex Emery in Lima at aemery1@bloomberg.net; John Quigley in Lima at aemery1@bloomberg.net.

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U.K. Conservatives Gamble on Hit to 4 Million Workers

By Gonzalo Vina and Robert Hutton

Oct. 7 (Bloomberg) -- The Conservative Party’s ambition to freeze pay for 4 million workers and abolish tax breaks for wealthy families is a gamble that voters will reward the opposition for specifics about curbing Britain’s budget deficit.

George Osborne, the party’s lawmaker in charge of finance policy, said yesterday he’d cut government spending by 7 billion pounds ($11 billion) a year if the Conservatives win the next election. About 3.2 billion pounds of the savings comes from leaving unchanged the wages of all except the lowest-paid government workers, including teachers, nurses and police.

After leading in the polls for almost two years, David Cameron’s party is responding to criticism from Prime Minister Gordon Brown that the opposition lacks substance. Osborne, 39, argues that his candour about the scale of the pain to come shows he’s up to the job.

“He’s got to the point where he needs people to take him seriously,” said Andrew Cooper, founder of Populus Ltd., a polling company. “Their feeling was that part of the softness about their support is down to lack of clarity about what they’re going to do.”

The proposed tightening, outlined at the Conservatives’ annual conference in Manchester, represents the first steps in an austerity program needed to slash Britain’s deficit, which according to the Treasury will peak next year at 175 billion pounds, the largest in the Group of 20 nations.

Difference in Emphasis

The Treasury extended 1.4 trillion pounds of support to the economy and banks since Lehman Brothers Holdings Inc. filed for bankruptcy last year. The pound has lost almost 30 percent of its value against the euro since the beginning of 2007. The British currency was little changed yesterday.

While both of Britain’s two main political parties take a similar approach to reducing debt, Cameron and Osborne have emphasized cutting the size of state while Brown says bankers and the rich should feel most pain. Osborne argues his plan spread the pain evenly across society.

“We’re all in this together,” Osborne said on BBC radio today, repeating one of the themes of his speech. “We want to protect the most vulnerable. The country has run out of money. If you don’t get on top of that problem, long term interest rates go up, jobs are lost and you get into a debt spiral.”

More to Come

Economists said any government must go much further to close the budget gap. Osborne’s package would save about 7 billion pounds a year by 2015, which would add to 33 billion pounds of cuts already earmarked by Labour.

That would leave Cameron’s team needing 26 billion pounds worth of further savings needed to balance the budget, according to the Institute for Fiscal Studies, a non-partisan researcher examining the public finances.

Osborne said yesterday he will “root out waste, eliminate failing programs, review procurement and increase productivity,” though he didn’t estimate how much more could be saved.

“This will require a lot of squeezing, but the big question is if such inefficiency exists why hasn’t it been addressed already,” said Gemma Tetlow, an economist at the IFS, which is based in London.

Labour Chief Secretary to the Treasury Liam Byrne said Osborne’s reductions will hurt middle earners the most.

“George Osborne comprehensively failed the economic credibility test,” Byrne said in an e-mailed statement. “He said ‘we’re all in this together’ but then attacked the mainstream middle.”

Tax on the Rich

Osborne promised to stop giving tax breaks to wealthier families. He also aims to lift the retirement age as early as 2016, a decade before the government plans, to save money on state pension payments.

“Osborne has in effect guaranteed that these policies will pave the way for a return to traditional Tory politics -- hitting the public sector now to pay for tax cuts for millionaires later,” said Vince Cable, who speaks on the economy for the Liberal Democrats, the third-biggest party. “The total amounts to nothing more than a drop in the ocean.”

Under Osborne’s plan, families earning more than 50,000 pounds a year will get fewer tax breaks. Those claiming welfare benefits face tighter checks to remain classified as too sick to work. He also will keep Labour’s planned tax increases on those earning more than 150,000 pounds for as long as public sector pay is frozen.

Squeezed Hardest

State workers will feel the hardest squeeze, with all except the bottom 20 percent, who earn less than 18,000 pounds a year, having their pay frozen in 2011.

“Do they have a clue what it’s like to live on 18,000 pounds a year?” asked Mark Serwotka, head of the Public and Commercial Services Union, which represents civil servants. “They are targeting people who can ill afford to pay.”

Osborne also proposed to cap pension payouts for government workers at 50,000 pounds a year. He plans to cut 3 billion pounds in costs by eliminating state-sponsored advisory groups, known as quangos.

“At least he’s being honest,” said Jonathan Baume, general secretary of the First Division Association, which represents 19,000 senior civil servants. “But it’s a bit hard to make sense of the financial and jobs implications until we see the details. Potentially it’ going to be very hard.”

Osborne this morning defended his decisions, suggesting that Brown’s government will have to make the same decisions if remains in office.

“I don’t think of it as a gamble,” Osborne said on BBC radio. “Whoever wins the election is going to have to take these decisions. Anyone who tells you otherwise is frankly lying. I will have a mandate to put the public finances back on a sound footing.”

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net

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Taiwan’s Exports Fall Least in 11 Months in September

By Janet Ong

Oct. 7 (Bloomberg) -- Taiwan’s exports fell at the slowest pace in 11 months in September on improved demand for telephones, computers and electronic goods from China.

Overseas shipments dropped 12.7 percent from a year earlier, after a 24.6 percent decline in August, the Ministry of Finance said in Taipei today. That was the least since an 8.3 percent fall last October and lower than the median estimate of nine economists surveyed by Bloomberg for a 15.6 percent decline. The island posted a trade surplus of $2.55 billion last month as imports slid 21.1 percent.

Taiwan joins other export-driven economies in Asia including Singapore and South Korea in reporting an easing in the decline of overseas shipments as the global economy recovers. Increased Chinese demand for electronic goods from companies including Nanya Technology Corp. and AU Optronics Corp. was partly offset by a fall in sales to the U.S. and Europe.

“Demand from the U.S. and Europe is likely to remain sluggish until November and December when companies start to replenish inventory,” said Tony Phoo, a Taipei-based economist at Standard Chartered Plc. “China is still the main supporter for Asian exporters such as Taiwan, Korea and Singapore.”

Exports, which account for more than two-thirds of the island’s economy, may turn positive in the fourth quarter, Lin Lee-jen, director of the Finance Ministry’s statistics bureau, said in July. South Korea’s exports fell at the slowest pace in 11 months in September, while Singapore’s dropped the least since September 2008 in August.

IMF Forecasts

Asia’s developing economies will expand 7.3 percent in 2010 after growing 6.2 percent this year, the International Monetary Fund said last week. Advanced economies including the U.S., Germany and Japan will shrink 3.4 percent in 2009, it forecast.

Today’s figures were released after the close of trading on the stock exchange. The Taiex index rose 1 percent to close at 7,608.66. The Taiwan dollar closed unchanged at NT$32.18 versus the U.S. dollar as of 4 p.m. local time, according to Taipei Forex Inc.

China’s 4 trillion yuan ($586 billion) stimulus package and subsidies for rural electronics are spurring domestic consumption. The nation’s manufacturing expanded at the fastest pace in 17 months in September on stimulus spending and record growth in new loans in August.

China Exports

Exports to China, Taiwan’s biggest overseas market, rose 2.1 percent from a year earlier, after an 18.5 percent drop in August, the ministry said. Shipments to the U.S. declined 28.2 percent, from a drop of 34.4 percent in August, while sales to Europe fell 20.4 percent compared with a decline of 28.3 percent.

Nanya Technology, Taiwan’s biggest computer-memory chipmaker, reported sales in September rose 38.6 percent from a year ago. The Taoyuan-based company, whose customers include Hewlett-Packard Co. and Dell Inc., on Sept. 21 said it plans to raise prices by as much as 20 percent in the first half of October because of a shortage.

AU Optronics, the island’s largest maker of liquid-crystal display panels used in televisions and computers, reported August sales climbed 15.9 percent from the previous month to NT$36.9 billion ($1.2 billion).

Central bank Governor Perng Fai-nan said last week he plans to maintain low borrowing costs because of the slow pace of economic recovery. The central bank left borrowing costs unchanged on Sept. 24 after cutting the benchmark rate seven times since late September 2008 to a record 1.25 percent.

Exports of electronic products including semiconductors slid 3.7 percent last month after falling 13.4 percent in August, today’s report showed. Shipments of information technology and communication products including mobile phones, fell 17.5 percent, less than August’s 27.7 percent decline.

To contact the reporter on this story: Janet Ong in Taipei at jong3@bloomberg.net.

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Fed Should Tighten Rates Sooner Rather Than Later, Hoenig Says

By Steve Matthews

Oct. 7 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank should start raising interest rates “sooner rather than later,” and such tightening wouldn’t derail the U.S. economic recovery.

“Even if we were to start immediately, much time would pass before incremental increases could be considered tight or even neutral policy,” Hoenig said yesterday in a speech in Denver. “I would not support a tight monetary policy in the current environment, but my experience tells me that we will need to remove our very accommodative policy sooner rather than later.”

Hoenig’s comments parallel those by Fed Governor Kevin Warsh, who said on Sept. 25 the Fed may need to tighten “with greater force than is customary,” and Richmond Fed President Jeffrey Lacker, who said on Oct. 1 that rates may need to be raised even with unemployment near 10 percent.

“We all know that the neutral rate is not zero,” said Hoenig, who doesn’t vote on monetary policy this year. “Equally obvious to me is that a rate of 1 or 2 percent is not tight monetary policy. It is still very accommodative.”

In contrast, New York Fed President William Dudley said this week the central bank needs to focus in the near term on keeping rates low, citing concern inflation could slow too much.

The Federal Open Market Committee said last month the U.S. economy has “picked up” following the deepest recession since the 1930s. Officials slowed the purchase of $1.45 trillion in mortgage-backed securities and housing debt, while pledging to keep the benchmark interest rate near zero for an “extended period.”

Economy Shrank

Economic growth will average 2.6 percent in the second half of this year, according to a Bloomberg News survey of economists last month. The world’s largest economy shrank at a 0.7 percent annual rate from April through June, the best performance in more than a year, according to government figures.

The U.S. jobless rate climbed to 9.8 percent in September, from 9.7 percent in August, the Labor Department reported on Oct. 2. That brings total jobs lost since the recession began in December 2007 to 7.2 million, the most since the Great Depression.

“We are in recovery,” Hoenig said at a forum hosted by the bank’s Denver branch. Stimulus to the economy will probably “prevent a double-dip recession.”

“Consumer confidence is rebounding, and we are starting to see improvement in business and manufacturing,” he said. “Additionally, yield spreads between low-risk assets, such as Treasuries, and higher risk assets are narrowing.”

Almost Zero

The Fed lowered its main interest rate almost to zero in December, switching to asset purchases and credit programs as the main policy tools. Chairman Ben S. Bernanke is leading plans to buy $1.25 trillion of mortgage-backed securities and as much as $200 billion of federal agency debt by March, along with $300 billion of long-term Treasuries by October.

Hoenig also called for Congress to address the problem of creating a resolution mechanism for banks that are so large they could, in the event of failure, damage the financial system. A proposal before Congress for a regulatory overhaul is inadequate, he said.

“The proposal does not adequately address the too-big-to- fail problem in that it still provides too much latitude to rescue failing firms,” he said. “It confirms the practice of addressing failure of the largest firms in an ad hoc manner with individuals rather than the rule of law deciding which firms get rescued and which do not.”

Rescue Firms

Hoenig, the Kansas City Fed’s president since 1991 and the longest-serving Fed policy maker, said large U.S. banks have carried lower capital ratios than their smaller rivals because investors assumed the government will rescue big financial institutions that fail.

“My view is that we do not have to subsidize or ‘learn to live with’ the financial oligarchy that exists,” he said in his speech.

“You can’t keep them from failing,” Hoenig said in response to an audience question. “The unintended consequences of this are just devastating.”

To contact the reporter on this story: Steve Matthews in Mobile at smatthews@bloomberg.net

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Yen Climbs on Prospects Nomura Share Offer Attracting Investors

By Yoshiaki Nohara and Ron Harui

Oct. 7 (Bloomberg) -- The yen rose to the highest level in more than a week against the dollar on speculation foreign investors will buy into a share sale by Nomura Holdings Inc., Japan’s biggest brokerage.

The dollar gained for a fifth day against the pound after Kansas City Federal Reserve President Thomas Hoenig said the central bank should start raising interest rates “sooner rather than later.” New Zealand’s currency gained as Asian stocks continued a global rally and Auckland-based Fonterra Cooperative Group Ltd. said milk powder prices rose to a 13-month high, sparking optimism the nation’s exports are recovering.

“Foreign investors may buy shares as part of their portfolios amid signs of a recovery in the global economy,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. Ltd. “This may lead to buying of the yen.”

The yen rose to 88.56 per dollar as of 7:41 a.m. in London from 88.82 in New York Yesterday. It earlier touched 88.49, the highest since Sept. 28. The euro was at 130.28 yen from 130.76 yen. The dollar rose to $1.5874 per pound from $1.5922 in New York yesterday. The greenback was at $1.4716 per euro from $1.4722 yesterday, when it reached $1.4762, the weakest since Sept. 24.

The yen rose versus all 16 major currencies on speculation foreign investors will buy Japanese equities. Nomura will sell 800 million shares to local and overseas investors at 568 yen a piece, according to statements filed to the Ministry of Finance. Nomura will raise 433 billion yen ($5.1 billion) from the offering after deducting costs, it said on Oct. 5.

Nomura Shares

Nomura’s share sale is heavily oversubscribed, the Wall Street Journal reported yesterday, citing people familiar with the situation.

The dollar advanced against euro and pound after Hoenig yesterday said raising interest rates wouldn’t derail the U.S. economic recovery.

“Even if we were to start immediately, much time would pass before incremental increases could be considered tight or even neutral policy,” he said in a speech in Denver. “I would not support a tight monetary policy in the current environment, but my experience tells me that we will need to remove our very accommodative policy sooner rather than later.”

Fed Comments

Hoenig spoke after Australia became the first among Group of 20 economies to raise borrowing costs since the start of the financial crisis. His comments echoed those by Fed Governor Kevin Warsh, who said on Sept. 25 the central bank may need to tighten “with greater force than is customary.”

Richmond Fed President Jeffrey Lacker, who said on Oct. 1 that rates may need to be raised even with unemployment near 10 percent.

Fed Chairman Ben S. Bernanke is set to give the keynote speech tomorrow at a conference on “Key Developments in Monetary Economics” in Washington.

“The Fed is showing signs to exit, which is positive for the dollar,” said Toshiya Yamauchi, a Tokyo-based manager of the foreign-exchange margin trading department at Ueda Harlow Ltd. “It’s clear the U.S. economy has reached the bottom and is beginning to rebound.”

The euro weakened as the currency’s 14-day stochastic oscillator versus the dollar rose to 66.5 yesterday from 45.9 on Oct. 5, nearing the 80 level some traders use as a signal that an asset has risen too quickly and is poised to decline.

Short-Covering

“The dollar is undergoing some short-covering as its losses may be overdone a bit,” said Nobuaki Kubo, vice president of foreign exchange in Tokyo at BBH Investment Services Inc., a unit of New York-based Brown Brothers Harriman & Co. “However, the greenback’s rebound is likely to be limited, given that Asian stocks are rising.”

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in an asset’s value. A short position is a bet an asset will decline.

Futures traders increased bets to the most in 1 1/2 years that the euro will gain against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed on Oct. 2.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 39,766 on Sept. 29, the biggest amount since March 25, 2008, compared with net longs of 38,000 a week earlier. The data are sometimes used as a contrary indicator.

Fed Rates

Gains in the dollar were tempered as analyst forecasts compiled by Bloomberg show the Fed will start raising its benchmark rate in the third quarter of 2010, as will the European Central Bank.

“We are still predicting that the Fed will be on hold until 2011 on interest rates,” said Ray Attrill, global research director at Forecast Ltd. in Sydney. “That will continue to drive down the dollar on the basis that the Fed will probably be among the last to exit.”

The ECB will hold its main refinancing rate at a record low of 1 percent at tomorrow’s meeting, and the Bank of England will keep its rate at a record low of 0.5 percent, according to economists in Bloomberg News surveys. The Fed funds target range is zero to 0.25 percent.

Milk Prices

New Zealand’s currency gained against 11 of its 16 major counterparts after Fonterra, the world’s largest dairy exporter, said milk powder for December delivery rose 5.1 percent to $3,019 a metric ton at auction yesterday. That is the highest price since September last year.

“The Fonterra news caused the kiwi to jump,” said Tim Kelleher, vice president of institutional banking and markets in Auckland at Commonwealth Bank of Australia. “Unless we see the U.S. dollar turn around or equities weaken, the Australian and kiwi dollars will carry on higher, with dips very well supported.”

The so-called kiwi rose as much as 0.3 percent against the dollar and traded at 73.46 U.S. cents.

Japan’s Nikkei 225 Stock Average added 1.1 percent, and the MSCI Asia Pacific Index of regional shares advanced 1.6 percent. The Standard & Poor’s 500 Index gained 1.4 percent in New York yesterday.

New Zealand’s dollar has been the best performer among the 16 most-active currencies against the greenback over the past three months on speculation that the Reserve Bank of New Zealand will raise interest rates.

“Whilst the governor has assured kiwi mortgagees that rates are unlikely to rise until the later part of 2010, the risks of an earlier move are growing by the day,” Jarrod Kerr, a senior interest-rate strategist at Commonwealth Bank of Australia in Sydney, wrote in a note to clients yesterday.

Governor Alan Bollard said July 30 that the overnight cash rate will stay at 2.5 percent or move lower until the latter part of 2010.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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Deutsche Bank Lifts Yearend 2010 Euro-Dollar Forecast to $1.40

By Morwenna Coniam

Oct. 7 (Bloomberg) -- Deutsche Bank AG, the world’s biggest currency trader, increased its yearend 2010 euro-dollar forecast to $1.40 from $1.15.

The euro will climb to $1.55 in the first quarter, Henrik Gullberg, a foreign-exchange strategist at the bank in London, said today.

The common European currency was little changed against the dollar, trading at $1.4709 as of 8:21 a.m. in London, from $1.4722 yesterday.

To contact the reporter on this story: Morwenna Coniam in London at mconiam@bloomberg.net

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Slovenia Won’t Meet EU Budget Limit Before 2012, Krizanic Says

By Agnes Lovasz

Oct. 7 (Bloomberg) -- Euro region member Slovenia, which is facing European Union criticism over its fiscal policy, won’t bring the budget deficit back in line with EU rules before 2012 to sustain a recovery, Finance Minister Franc Krizanic said.

Stimulus measures equivalent to 1.2 percent of gross domestic product swelled the deficit to more than 5 percent this year, Krizanic said in an interview in Istanbul yesterday. Next year, he expects “about the same” level, as growth will be “sluggish,” with expansion estimated at 1 percent.

“There will be very moderate or slow growth,” he said. “If this forecast is right, we will also have a relatively high budget deficit next year. With 1 percent growth, we couldn’t go very fast to balance the budget. It would be senseless. It would cause political turmoil and a decline in GDP.”

A widening budget deficit would be “worrying,” Fitch Ratings analyst Chris Pryce said in an interview last week. The Adriatic nation’s credit rating, the highest in eastern Europe, may be downgraded if the worst-performing economy to use the euro deteriorates further, according to Fitch, which rates Slovenia’s debt AA.

The government of Prime Minister Borut Pahor will spend about 15 percent of GDP this year to stabilize the financial system and reignite growth. The government is also providing state guarantees to companies such as appliance maker Gorenje Group d.d., the second-biggest exporter after the nation’s Renault SA unit.

Exit Strategy

“Now we should think about our exit strategy after the crisis, when and how we should balance our budget,” said Krizanic. “We will go down in 2011, with the improvement of growth. In 2012 we should be below 3 percent.”

The government will implement fiscal rules that cap expenses, Krizanic said. “The combination of growing revenues and fixed expenditure will lead to a balanced budget.”

Krizanic said the ultimate goal is a surplus, though he wouldn’t say when. “Fiscal policy should be led in the sense that we should have a deficit during the bad times, and a surplus in the upturn,” he said.

The government expects growth to pick up to 2 percent in 2011, which is “still slow for a catching-up economy,” according to Krizanic.

“We are now feeling an improvement” in the economy, which the government predicts will contract 7 percent this year,” he said. “Tax receipts show that we are in an upturn now.

To contact the reporter on this story: Agnes Lovasz in Istanbul at alovasz@bloomberg.net

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Winters Shows JPMorgan Path to Safety, Dimon Shows Him the Door

By Elizabeth Hester, Matthew Leising and James Sterngold

Oct. 7 (Bloomberg) -- William Winters told a former colleague in London six months ago that JPMorgan Chase & Co. shunned the structured products and off-balance sheet vehicles that crippled global markets because they didn’t make financial sense.

“I remember him explaining that they’d looked at these for years and couldn’t understand how the economics worked,” said John Fullerton, a JPMorgan executive who was one of six people assigned to untangle derivative trades that led to the demise of Long-Term Capital Management LP in 1998. “Despite the tremendous pressure all around them to do it, they didn’t do it because the math didn’t work.”

JPMorgan endured the financial crisis without a quarterly loss, and now the investment bank previously run by Winters, 48, and co-head Steven Black, 57, is having a record year. Winters’s reward: Getting ousted last week by his boss, Chief Executive Officer Jamie Dimon.

Winters, who has lived in London since 1992, is out of work for the first time since he joined New York-based JPMorgan in 1983. He may not have much trouble landing a new post -- provided banks that must cope with government-imposed pay limits can afford him. He made more than $40 million combined for 2006 and 2007.

“Every CEO is going through that calculus of, ‘Is this guy better than my guy? Is he a good acquisition for us in terms of where we want to go?’” said Charles Murphy, a former Credit Suisse Group AG banker who is now a professor of finance at New York University’s Stern School of Business.

Fielding Phone Calls

Last week, Dimon named James ‘Jes’ Staley, previously head of asset management, as the investment bank’s sole CEO. Black will become the investment bank’s executive chairman until the end of 2010.

It was Black’s indication he wanted to step back from the business and pressure from the board on succession planning that prompted the change, people with knowledge of the discussions said last week. Dimon concluded that he didn’t want Winters to lead it on his own, the people said, speaking anonymously because the talks were private. Staley’s new job signals he’s one of the board’s top picks to succeed Dimon, a person briefed on the management decision said last week.

“Bill’s departure is a clear loss for JPM, and given Morgan’s scale and complexity, it’s not a plus for the stability of the financial system,” Fullerton said. “You’ve got such a complex mix of risk in one institution that it matters who’s there.”

Looking Ahead

Winters has been fielding phone calls from people interested in talking about what he wants to do next, a person familiar with his thinking said. He remains on JPMorgan’s payroll until January, giving him time to consider opportunities, the person said.

His strength is in understanding and managing risk and the more technical side of markets, say people who know him. Adrian “Buzz” Doherty, another ex-JPMorgan colleague, said Winters was early to move to computer-based analysis and used those tools to advise clients on buyouts. He cited KKR & Co.’s $250 million acquisition of a stake in Union Texas Petroleum Holdings in 1985. KKR reaped $1.1 billion over the course of its investment in the company, a spokeswoman said.

“He was very often a step ahead of people who had many more years of experience,” said Doherty, now an executive vice president at private-equity firm Ridgewood Energy Corp. in Ridgewood, New Jersey.

Winters grew up in Greenwich, Connecticut. He studied international relations at Colgate University, graduating from the liberal arts college in Hamilton, New York, in 1983.

Croatian Beer-Bottling

After spending a semester abroad in Croatia, Winters took a year off from school to live there. He worked in a beer-bottling plant and met the Croatian woman who would become his wife.

Winters’s first job at JPMorgan was as a banker to oil and gas companies. Four years later, he joined the swaps department, which worked on developing derivatives related to energy, currency and debt products.

He wasn’t always in top form as he came up in the derivatives unit. Winters stumbled on his first cross-currency foreign exchange deal by reversing what to buy and sell, according to Stephen Sinacore, his colleague at the time.

“He broke into a sweat because he bought dollars instead of selling dollars,” said Sinacore, who left JPMorgan in 1998 and later co-founded investment management firm Atrevida Partners LLC in Rye, New York. “I think he thought he was going to get fired.”

Instead, he became part of a team charged with devising products to sell into the then-fledgling market for credit derivatives.

‘A Sense of Mission’

“There was this sense that we had found this fantastic technology which we really believed in and we wanted to take to every part of the market we could,” Winters said, according to “Fool’s Gold,” the 2009 book by Financial Times journalist Gillian Tett. “There was a sense of mission.”

While JPMorgan avoided the riskiest derivative products, the bank ranked first among U.S. commercial banks with $80 trillion in notional value of over-the-counter derivative contracts at the end of the second quarter, according to the Office of the Comptroller of the Currency. JPMorgan was also first in revenue from derivative and cash trading, with $1.9 billion in the second quarter, the OCC said Sept. 25.

Winters moved to London in 1992 as head of European swaps and added fixed income to his responsibilities when the divisions were merged in 1995. After adding basic rates and currencies globally to his job description in 1997, he was named head of global markets in 1999.

Merger

A year later, after the merger of J.P. Morgan & Co. and Chase Manhattan Corp., Winters was demoted to co-head of the fixed-income department. He shared the job with Don Wilson from Chase Manhattan.

In March 2004, Winters and Black were named co-heads of the investment bank, a move that surprised some JPMorgan bankers because sharing the top job tended to spark distrust and infighting, according to Tett’s book. Winters was also an unusual choice because he preferred to shun the spotlight, unlike Dimon, according to the book.

In one of Winters’s first deals as co-CEO, in November 2004, he forged a joint venture with Cazenove Group Plc, at the time the U.K’s oldest independent stockbroker. The unit, called JPMorgan Cazenove, helped deepen JPMorgan’s client relationships and boost the firm’s European business, bankers said at the time.

JPMorgan Cazenove Holdings has been profitable every year since it began operations in 2005, even as markets crumbled in 2007 and 2008.

Avoiding Risk

Winters also helped JPMorgan avoid structured investment vehicles, the off-balance sheet entities that borrowed money in the asset-backed commercial paper market to buy longer-dated bonds. As rivals piled into the business in the late 1990s, JPMorgan resisted because it couldn’t get the right return to justify putting capital at risk, said a person familiar with the matter.

JPMorgan’s decision meant the firm didn’t have to bail out the funds at the end of 2007, as the market for asset-backed securities dried up. Citigroup Inc. took over seven ailing funds and assumed $58 billion in debt to avoid forced asset sales in December 2007. HSBC Holdings Plc, Societe General SA and WestLB AG all were forced to bail out the so-called SIVs to avert fire sales of assets.

“That took a lot of bravery to stand up in a market that was growing, where people were making money, to step back and say, ‘We’re not going to do that,’” Sinacore said.

Leadership

The leadership of Winters and Black was further tested during JPMorgan’s takeover of ailing investment bank Bear Stearns Cos. in March 2008. The duo and a team of more than 400 people worked around the clock to determine whether the acquisition was even feasible.

JPMorgan decided it could be done only if the Fed assumed $30 billion of Bear Stearns assets, helping create a floor for the market, a person familiar with the deal said. The acquisition added businesses including an equity prime brokerage and tested the integration skills of Black and Winters.

“We’ve done almost the unheard-of on Wall Street, which is have a really good partnership and running a great business for more than five years,” Black said in an interview last week. “I have no doubt that he’ll end up going off and doing something where he ends up running his own show and he’ll have every opportunity to do that given how rare a talent he is.”

Executives close to Winters say he likes living in London and it would take a compelling opportunity for him to return to the U.S. While he’s managed a profitable business that includes complex financial instruments, he lacks experience in areas such as consumer banking or asset management.

“He was never a quitter,” said William Demchak, the senior vice chairman at PNC Financial Services Group Inc. who helped build JPMorgan’s derivatives business with Winters. “He could have walked away a long time ago, but he stuck around to make the bank better.”

To contact the reporters on this story: Elizabeth Hester in New York at ehester@bloomberg.net; Matthew Leising in New York at mleising@bloomberg.net; James Sterngold in New York at Jsterngold2@bloomberg.net.

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