Bank Of England Likely To Remain On Hold, But GBP Remains Heavy

Daily Forex Fundamentals | Written by AC-Markets | Jan 07 10 10:32 GMT |

News and Events: Japan's Kan held the first press conference this morning in his new role as Finance Minister; and FX markets were treated to some unexpected JPY commentary that will likely underline the case for further currency weakness in 2010. While it is nothing new that officials from both the BoJ and MoF have been uncomfortable with JPY strength in recent months; the near 10% rally in USDJPY from November's 84.83 lows had certainly pushed the issue of currency intervention to the sidelines for most traders. Nevertheless, Kan stressed that he would like to see further weakness materialize from here, and went on to add that most Japanese firms favoured a USDJPY level around 95.00. He also outlined the case that a review of the budget would be appropriate - raising the possibility that JGB issuance could be increased. The current draft of the government's budget already has JGB issuance tipping just over the Y44trn ceiling that it imposed on itself; and any further increase would dampen further the market's sentiment towards JPY. As such, our bias remains for short JPY positions, but given the current levels of USDJPY just below 93.00-20 resistance, we await any dip for an opportunity to buy. Today's Bank of England meeting is not expected to produce fireworks in the FX markets; consensus forecasts are looking for no change in either interest rates, or the asset purchase target - but it remains an ongoing issue as to whether the UK economy can sustain its recovery without QE stimulus and manage to emerge from recession confidently in 2010. For now, the GBP remains subdued by concerns about sovereign credit ratings, and just yesterday, the leader of the government opposition leveled harsh criticism at Gordon Brown during Prime Minister's Questions over his credibility in managing the budget deficit. Even Bank of England Governor Mervyn King has inadvertently been dragged into the political slanging match after his earlier comments on the government's need for fiscal restraint have been widely touted as ammunition for the Conservative party against the present government's handling of the recession. With an election imminent (popular opinion looking for 6 May as the likely date for a poll), the battle lines are already being drawn between the two major political parties, and much will hinge on which side can credibly nurture the UK's growth, but simultaneously go about reducing the budget deficit in the ambitious fashion that ratings agencies will want to see. GBPUSD has already broken significant support levels in previous days, and 1.6050-70 now looks like an area of considerable resistance for any rallies. If we see a nasty surprise from today's BoE meeting (in particular the suggestion of more QE above the current 200bn target), we could very quickly see a revisit of 1.5833 lows. Today Key Issues: 10:00 EUR EU Retail Sales exp: 0.0% M/M -1.9% Y/Y, prev: 0.0% M/M -1.9% Y/Y 10:00 EUR EU Consumer confidence exp: -16, prev: -17 12:00 GBP UK MPC Interest rate announcement exp: 0.5% prev: 0.5% 13:30 USD US Initial Claims exp: 440k prev: 432k 13:30 USD US Continuing Claims exp: 4975k prev: 4981k The Risk Today: EurUsd Slightly elevated range today (1.4348-1.4447) after yesterday's FOMC, but still comfortably within the ranges. Once again we are left eyeing topside resistance ahead of 1.4500, and beyond there the major hurdles at 1.4600 and 1.4685. If we look on the daily chart, there is a flag formation being carved out with downside support currently coming in around 1.4280, and if breached we can expect a continuation of the downtrend that has been in play since 4th Dec (break of the 12-month uptrend). It may be a difficult move lower however with support lying in wait at 1.4248 (200 day moving average), and range lows at 1.4210. GbpUsd Previous support at 1.6050 now turns into decent resistance with plenty of selling interest lined up between 1.6050-70. We are still looking for a revisit of 1.5833 (Dec 30 lows) after the break of 1.6000 earlier in the week, but for now there is some retail interest providing near-term support around 1.5900 levels. If we re-enter the range, the 200-day moving average at 1.6106 forms first area of good supply, and beyond there expect prior resistance levels to still be in play: 1.6248 (Dec 18 highs), followed by 1.6323 (100 day moving average), and above there the 1.6400 psychological barrier. UsdJpy USDJPY has been well bid over the past few sessions, but it still looks like we will remain range bound between 93.22 (22 Dec high) and the 91.10 lows. A break below 91.10 would indicate a resumption of the larger downtrend that has been in play since mid 2007, but this seems like the less likely scenario in our view. Look for bids ahead of 91.10, and plenty of offers around 93.00-20 zone to contain the pair; a daily close above the 93 handle would suggest a further move higher. UsdChf Range-trading prevails in USDCHF between 1.0280 and 1.0425, but the break above the 100-day moving average (1.0301 currently) does seem to favour further USD strength from here. Next levels to watch outside the range are 1.0508 key high and beyond there the 1.0700 major resistance (38.2% correction of the move from 1.1970 down to 0.9918). Near term support stands at 1.0320 ahead of 1.0220. EURUSD GBPUSD USDJPY USDCHF 1.4580 1.6400 95.00 1.0700 1.4500 1.6335 93.35 1.0625 1.4484 1.6236 93.20 1.0425 1.4345 1.5925 92.95 1.0330 1.4232 1.5900 91.10 1.0300 1.4210 1.5833 90.00 1.0220 1.4100 1.5710 89.10 1.0175 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot ACM FOREX Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

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European Confidence Adds To Recovery Signs

Daily Forex Fundamentals | Written by ecPulse.com | Jan 07 10 10:37 GMT |

The euro zone restored confidence after the severe fallout on the back of the worst economic recession that hit the economy in 2008. As a result of the improvement signaled in the European economy starting from the second quarter of 2009, confidence climbed in December adding to signs of recovery and providing ample evidence that the economy will grow further in the fourth quarter. Economic confidence rose to 91.3, the highest since June 2008, from 88.8. The economy expanded in the third quarter to 0.4% from the previous contractions of 2.5% and 0.2% recorded in the first and second quarters respectively boosted by the stimulus measures and expansionary monetary policy adopted by the ECB to reviver the economy. Members of the ECB slashed the interest rate to 1% and are spending 60 billion euros on purchasing euro-denominated bonds to support markets with liquidity and give an impetus to economic activities. In response, the economy showed strong data, especially in the third quarter, and still showing progress. PMI manufacturing surged to 51.6 in December from 51.2 in November after the turnaround in global trade which lifted exports for the euro zone's largest economies, while PMI services for December in the euro area climbed to 53.6 from 53.0 a month earlier. According to today's confidence report, industrial confidence increased to -16 from -19 and services confidence soared to -3 from -4, thereby going in line with the expansion in the economy's leading sectors. Moreover, the business climate is becoming better which appeared clearly after the upbeat earnings announced by some European companies and future expansionary plans announced by others. Business climate indicator climbed to -1.22 in December from -1.53 in November. Global demand rebounded again as consume confidence and thereby spending increased. Consumer confidence inched up in December to -16 from -17 in November. Nevertheless, retail sales in the euro zone slipped to -1.2%, the sharpest monthly fall on record, in November compared with the revised 0.2%. Also, the year ending November reading slumped to -4.0% from the revised -1.3%, impacted by the high unemployment (9.8%) in the euro region. Trichet mentioned in December that the economy will recover gradually, and growth will appear in the second half of 2009, where he expects GDP to improve on the quarterly basis, especially after the progress witnessed in the third quarter which more likely will continue in the last quarter. However, he added that the economy will expand at a natural pace in 2010 and recovery will be "anemic" as factors supporting the economy are temporary. The bank projects annual real GDP growth to range between -4.1% and -3.9% this year and between 0.1% and 1.5% next year, while in 2011 it will move between 0.2% and 2.2%. The ECB will gradually scale back, at the appropriate time, the excess liquidity measures and is expected to raise interest rate again in the second half of the current year. After the release of the news the euro continued its slid against the dollar where it is currently traded at 1.4350 recording a high of 1.4446 and a low of 1.4345. Ecpulse disclaimer: The content of ecPulse.com and any page in the website contain information for investors/traders and is not a recommendation to buy or sell currencies, stocks, gold, silver & energies, nor an offer to buy or sell currencies, stocks, gold, silver & energies. The information provided reflects the writers' opinions that deemed reliable but is not guaranteed as to accuracy or completeness. ecPulse is not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trades currencies, stocks, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, stocks gold, silver &energies presented should be considered speculative with a high degree of volatility and risk

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Forex Technical Analysis

Daily Forex Technicals | Written by DeltaStock Inc. | Jan 07 10 10:56 GMT |

EUR/USD Current level-1.4370 EUR/USD is in a downtrend, after peaking at1.5146 (Nov.25,2009). Technical indicators are neutral, and trading is situated between the 50- and 200-Day SMA, currently projected at 1.4793 and 1.4169. We believe, that the pair is in a minor consolidation pattern, before advancing towards 1.4501, en route to 1.4670. Crucial on the downside is 1.4257 and the intraday bias is negative while the pair stays below 1.4401 resistance. Resistance Support intraday intraweek intraday intraweek 1.4401 1.4499 1.4312 1.4170 1.4499 1.5146 1.4257 1.3740 USD/JPY Current level - 92.70 The overall downtrend has been renewed with the recent break below 87.12. Trading is situated below the 50- and 200-day SMA, currently projected at 89.50 and 93.54. The pair is heading towards 93.40 area again and we continue to expect a reversal below that resistance, that shall initiate a downtrend for 88.90. Important on the downside is 92.10. Resistance Support intraday intraweek intraday intraweek 92.90 93.40 92.10 86.01 93.40 95.60 91.25 79.60 GBP/USD Current level- 1.5955 The pair is in a downtrend after peaking at 1.7042. Trading is situated between the 50- and 200-day SMA, currently projected at 1.6454 and 1.5258. The two consecutive tests of 1.6070 resistance failed and the negative bias has been sustained, aiming at 1.5896 and 1.5833. We continue to think, that the pair is still in the consolidation pattern above 1.5833 and one more upward leg is to be expected, towards 1.6410 resistance area. Crucial for the intraday downtrend is 1.5990. Resistance Support intraday intraweek intraday intraweek 1.5990 1.6410 1.5896 1.5706 1.6070 1.7042 1.5833 1.5352 DeltaStock Inc. - Online Forex & Securities Broker www.deltastock.com RISK DISCLAIMER: These analyses are for information purposes only. They DO NOT post a BUY or SELL recommendation for any of the financial instruments herein analyzed. The information is obtained from generally accessible data sources. The forecasts made are based on technical analysis. However, Delta Stock’s Analyst Dept. also takes into consideration a number of fundamental and macroeconomic factors, which we believe impact the price moves of the observed instruments. Delta Stock Inc. assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person's reliance upon the information on this page. Delta Stock Inc. shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation, losses or unrealized gains that may result. Any information is subject to change without notice.

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Job Growth Erodes as Housing Bust Pushes Mobility to Record Low

By Steve Matthews, Mike Dorning and Daniel Taub

Jan. 7 (Bloomberg) -- Raul Lopez, laid off from three construction jobs since October 2007, is focusing his search for work near Antioch, California, because his $392,000 mortgage is almost triple the price his home there would sell for today.

“If it wasn’t for the house, I’d probably move closer to Oakland, Hayward, San Leandro, places where there are jobs,” said Lopez, 36, who is married with four daughters.

The ability to relocate for employment, which helped the U.S. recover quickly after previous deep recessions, is the latest victim of the housing bust. About 12.5 percent of Americans moved in the year ended March 2009, the second-lowest ever, estimates Brookings Institution demographer William Frey, after a 60-year record low of 11.9 percent the previous year.

Local moves may rise “a little bit” in the 12 months that end this March, with long-distance migration “staying flat,” Frey said. “Both will be below normal levels from earlier in the decade.”

Some households are staying put because they owe more on their mortgages than their properties are worth; others have trouble selling houses in depressed areas, economists say. The S&P/Case-Shiller composite index of home prices in 20 U.S. metropolitan areas was down 29 percent in October from its July 2006 peak.

“One of the hallmarks of America’s labor market is a high level of mobility,” said Joseph Stiglitz, a Nobel Prize-winning economist, in a Jan. 3 interview in Atlanta, where he was speaking to an economics conference. “We are about to lose that.”

Stagnant Workforce

The stagnant workforce may raise the long-term trend rate for unemployment by 1 percentage point and lower economic growth 0.3 percent a year through 2012, said Michael Feroli, an economist in New York for JPMorgan Chase & Co. It has already contributed to keeping the jobless rate as much as 1.5 percentage points higher than would have been suggested by the depth of the recession, Peter Orszag, director of the U.S. Office of Management and Budget, estimated in July.

The U.S. economy shrank 3.8 percent in the 12 months that ended in June, the worst performance since the 1930s. Unemployment reached a 26-year high of 10.2 percent in October before sliding to 10 percent in November. The rate stayed at 10 percent in December, according to the median estimate of 72 economists in a Bloomberg News survey. The Labor Department will release the data on Jan 8.

Pharmaceutical and biotechnology companies have lost potential employees in the past two years as candidates are stuck with houses worth less than their mortgages, said Deborah Coogan Seltzer, a vice president in Atlanta for the Dallas-based executive search firm Pearson Partners International. Some prospects also worry it may take a year or more to sell their homes, even if they have equity in the properties, she added.

Candidates Withdraw

“It’s a constant factor,” Seltzer said. “Conservatively, in at least 70 percent of the searches I’ve worked on in the last 12-to-18 months at least one or two candidates have withdrawn from the process after they’ve investigated their real-estate situation.”

Some companies are allowing recent hires to stay where they are and use a combination of telecommuting and traveling, said Kevin Kelleher, president and chief executive officer of Danbury, Connecticut-based Cartus Corp., which specializes in relocation.

Employers and their prospects are “thinking about assignments or commuting policies rather than picking up the family and moving on,” he said.

Seltzer and Kelleher declined to provide names of specific companies.

Labor-Market Recoveries

The ability and willingness of workers to relocate has contributed to labor-market recoveries following recessions that ended in March 1975 and November 1982, said Mark Zandi, chief economist at West Chester, Pennsylvania-based Moody’s Economy.com. The unemployment rate fell 1.6 percentage points to 7.4 percent in May 1976 from a year earlier and dropped 2.5 percentage points to 8.3 percent in December 1983 from the previous December.

While some economists say the recession that began in December 2007 may have ended last summer, unemployment will fall only 0.8 percentage point to an average of 9.2 percent in 2011, according to a December Bloomberg News survey of 46 economists.

“You don’t have to be a rocket scientist” to know that unemployment will be higher and “the noninflationary speed limit, or what economists call the potential growth rate of the economy, is going to be lower as a result of the housing-related decline in labor mobility,” David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto, said in a Jan. 4 telephone interview.

‘Negative Equity’

Almost 10.7 million homes, or 23 percent of all mortgaged properties, were worth less than the debt owed on them at the end of the third quarter, according to a Nov. 24 report from First American CoreLogic. An additional 2.3 million mortgages are approaching “negative equity” as loan defaults mount nationwide, the Santa Ana, California-based real-estate research company said.

Sixty-five percent of Nevada homeowners owed more than their houses were worth, the highest rate in the nation, according to the report. Arizona ranked second, at 48 percent, followed by Florida, Michigan and California.

States that grew the fastest during the 2002-2006 housing bubble, including Florida and Nevada, are now experiencing reversals in population trends. The number of people in Florida, where unemployment is 11.5 percent, fell 58,294 in the 12 months ended April 2009, the first decline since 1946, the University of Florida Bureau of Economic and Business Research estimated in August.

Can’t Sell

More people might have left if they had been able to sell their homes, said Jack McCabe, president of McCabe Research & Consulting in Deerfield Beach, Florida, which specializes in real estate.

“Loan modifications have been of insignificant help,” he said.

Through November, U.S. lenders had permanently renegotiated about 31,000 of the 4 million mortgages targeted for relief by the Obama administration’s foreclosure-prevention plan.

Housing woes have exacerbated a decline in worker mobility that began in 1951, when 21 percent of Americans moved, according to the Census Bureau. More families now depend on two incomes, which makes moving more complicated, said Peter Francese, a demographic-trends analyst in Exter, New Hampshire, for New York-based advertising agency Ogilvy & Mather Worldwide.

Aging Population

The aging U.S. population also reduces mobility, he said. The largest age group is 45- to 55-year-olds and the fastest- growing segment is 55- to 65-year-olds, both of which have established family and social networks that complicate relocation, Francese said.

Out-of-state moves, usually associated with job changes, remained at a record low 1.6 percent of the population for a second year in the 12 months ended March 2009, Brookings’ Frey estimates.

Anecdotal evidence suggests an even lower rate for the full year. Shipments handled by movers and paid for by individuals in the first half dropped 18 percent from January-June 2008, while employer-paid moves fell 27 percent, according to the American Moving & Storage Association, an industry trade group based in Alexandria, Virginia.

“This is our first national slump caused by a housing bubble and that ties down workers,” said Nobel Prize-winning economist Paul Krugman in a Jan. 4 interview. “It is a transitory thing, but transitory can mean several years.”

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Mike Dorning in Washington at mdorning@bloomberg.net; Daniel Taub in Los Angeles at dtaub@bloomberg.net

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U.K. December House Prices Rise for Sixth Month, Halifax Says

By Svenja O’Donnell

Jan. 7 (Bloomberg) -- U.K. house prices rose in December for a sixth month as low interest rates helped stoke demand for homes, Halifax said.

Prices increased 1 percent to an average of 169,042 pounds ($269,305) after rising 1.3 percent in November, the division of Lloyds Banking Group Plc said in a statement on the Regulatory News Service today. From a year earlier, values increased 5.6 percent.

The drop in interest rates “has helped to stimulate housing demand, albeit from a low base,” Martin Ellis, housing economist at Halifax, said in the statement. “The prospects for the market this year will depend on how the U.K. economy evolves and whether there is a significant increase in the supply of properties for sale. Overall, our current view is that house prices will be flat during 2010.”

The report adds to evidence that the economy is emerging from the recession. The Bank of England will today stick to its plan to buy 200 billion pounds of bonds and keep the benchmark rate at a record low as policy makers assess the strength of the recovery, economists say.

U.K. house prices rose for an eighth month in December, Nationwide Building Society said last week.

Prime minster Gordon Brown is seeking to capitalize on signs the U.K. economy is recovering from the worst recession on record. Both his Labour government and the opposition Conservatives battle to convince voters they are best placed to reduce Britain’s ballooning budget deficit while sustaining economic growth. The Conservatives have led in the polls for the past two years.

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

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Kan Says It Would Be Nice for Yen to Weaken a Bit

By Toru Fujioka and Keiko Ujikane

Jan. 7 (Bloomberg) -- Japan’s Finance Minister Naoto Kan sent the yen tumbling in his first day in office, saying he would like the currency to weaken “a bit more,” and pledging to monitor its level.

“We will make efforts to make the yen an appropriate level while considering various impacts on the economy that may be caused by currencies,” Kan said in his inaugural press conference in Tokyo today. While the yen has had a large correction since reaching a 14-year high in November “I hope it will correct a bit more,” he said.

Kan’s remarks reflect concern that the yen, which has risen 18 percent against the dollar in the past two years, will hurt exporters and restrain a recovery from the nation’s deepest postwar recession. The stance may increase concern that Japan’s policy makers will consider intervening in the foreign-exchange market for the first time since 2004 should the yen soar.

Against the dollar, the yen fell 0.5 percent to 92.75 as of 4:18 p.m. in Tokyo. Kan said that manufacturers think that a range of 90 to the mid-90s per dollar is appropriate.

“If the dollar-yen falls below 90 again, we will see some sort of reaction from the government and the central bank,” said Keiko Onogi, a strategist in Tokyo at Daiwa Securities SMBC Co.

Eye on BOJ

Kan, the deputy premier named yesterday to take the finance portfolio after the resignation of Hirohisa Fujii, also said he will cooperate with the Bank of Japan on the yen’s level. He last year urged the central bank to step up to fight deflation, before it announced a 10 trillion yen ($112 billion) credit program.

The comments on the currency represent a continuing shift away from the stance first adopted by Fujii when he took office in September. Fujii himself roiled traders that month by indicating he favored a stronger yen, as part of the Democratic Party of Japan-led government’s campaign to bolster households’ spending power.

Fujii said in September it’s “absurd” that a lower exchange rate helps exporters, and that market interventions can “destroy a free economy.” After the yen soared, he warned in November that Japan was ready to act to stem “abnormal” currency moves.

G-7 Meeting

Group of Seven finance ministers and central bankers, who typically discuss currencies at their regular meetings through the year, are next scheduled to gather in Canada in February. Kan said today he’s not sure yet whether he’ll attend the gathering.

Japan’s currency has fallen about 9 percent since reaching a 14-year high of 84.83 on Nov. 27. The Finance Ministry, through the Bank of Japan, is in charge of deciding on yen purchases or sales, and officials haven’t intervened to buy the yen since 2004.

Fujii, a 77-year-old who was finance minister in 1993, stepped down over ill health after battling ministers to restrain spending in the government’s 2010 budget proposal. Fujii succeeded in keeping new bond sales for the next fiscal year around 44 trillion yen ($480 billion), the same as the previous government budgeted for the year ending in March.

Kan said today that Prime Minister Yukio Hatoyama’s government had earned the trust of the bond market by capping the bond sales target. He also said that he wants to use budget policy to help avoid a relapse into recession.

Economy Challenges

Japan’s economy has been plagued by a shrinking population and deflation that has seen 13 years of price declines since 1994. Successive attempts at fiscal stimulus have caused debt to soar, with the International Monetary Fund projecting the ratio to gross domestic product will rise to 246 percent by 2014.

Falling prices threaten to erode manufacturers’ earnings, Sony Corp. Vice Chairman Ryoji Chubachi told reporters in Tokyo on Jan. 5.

“Given the circumstances of Japanese companies, I have an impression that the currency’s level is too high,” Katsuhiko Machida, chief executive of Sharp Corp., Japan’s largest maker of liquid-crystal displays, said in Tokyo yesterday. “It could weaken as much as to 100 yen per dollar.”

Kan, 63, was health minister in 1996 when his popularity rose as he exposed that agency’s role in allowing up to 5,000 Japanese to contract HIV through contaminated blood products. A co-founder of the DPJ, he was later tarnished by revelations he failed to pay his full pension contribution, forcing him to step down as party leader in 2004.

Kan Record

As deputy premier and Economic and Fiscal Policy Minister, Kan has been vocal in recent months in discussing the nation’s economic challenges, pressing the Bank of Japan to step up its efforts to end deflation, and favoring a retreat in the yen’s exchange rate that threatened exporters.

On Dec. 17, he said that a weaker Japanese currency was “favorable” and that he was glad that it had fallen from the previous month’s 14-year peak.

Kan and Hatoyama helped found the DPJ in 1998. Kan told reporters in July 1996 that he was seeking “to work with politicians who will control the executive branch with the backing of the people.”

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

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Europe Economic Confidence Jumps to Pre-Lehman Level

By Simone Meier

Jan. 7 (Bloomberg) -- European confidence in the economic outlook jumped in December to a level last seen before the demise of Lehman Brothers Holdings Inc., adding to signs the economy will gather pace this year.

An index of executive and consumer sentiment in the 16- nation euro region rose for a ninth month to 91.3 from 88.8 in November, the European Commission in Brussels said today. That beat economists’ forecasts and was the highest since June 2008, three months before Lehman’s collapse exacerbated the global financial crisis. Retail sales dropped 1.2 percent in November from the previous month, a separate report showed.

European companies are boosting spending and output to meet reviving global orders after governments spent billions of dollars to fight the worst economic crisis since World War II. Manufacturing in the U.S., the world’s largest economy, expanded last month at the fastest pace in more than three years. Rising unemployment may hurt consumer spending, while a stronger euro threatens to undermine exports.

“Sentiment will continue to rise over the coming months even if it doesn’t necessarily translate into a stronger economic performance,” said Christoph Weil, an economist at Commerzbank AG in Frankfurt. “It’s a catching-up process. The fourth and first quarters will still show robust growth rates followed by some weakening.”

Benchmark Bond

The euro was little changed against the dollar after the confidence data, trading at $1.4354 at 10:04 a.m. in London, down 0.4 percent on the day. The yield on the German 10-year benchmark bond was unchanged at 3.38 percent.

Adding to signs the economy is gathering pace, Europe’s manufacturing and services industries expanded for a fifth month in December and European investors grew more confident in January, data showed this week. In Germany, Europe’s biggest economy, business confidence increased to a 17-month high in December.

Porsche SE, the sports-car maker merging with Volkswagen AG, said on Dec. 18 that sales may revive this fiscal year. Infineon Technologies AG, Europe’s second-largest maker of semiconductors, last month raised its first-quarter outlook.

The Dow Jones Stoxx 50 Index has risen 17 percent in the past year, while Germany’s benchmark DAX Index has gained 20 percent during the same period.

Unconventional Measures

The European Central Bank on Dec. 3 kept its benchmark interest rate at a record low of 1 percent and said it will withdraw some unconventional measures as the region’s economy strengthens. The Frankfurt-based ECB on that day predicted economic growth of about 0.8 percent this year and around 1.2 percent in 2011.

“The economic situation has improved,” ECB Executive Board member Juergen Stark told Il Sole 24 Ore in an interview published yesterday. “Data is influenced by a recovery in exports but also an improvement on equity markets and by stimulus measures taken by countries to help the economy. These two last factors are of temporary nature.”

The euro’s 5 percent ascent against the dollar over the past year is weighing on the economic recovery by making European exports less competitive just as surging oil prices threaten to crimp corporate earnings. Industrial orders declined more than economists forecast in October, led by a drop in demand for capital goods such as machinery and tools.

European unemployment probably rose to 9.9 percent in November from 9.8 percent in the previous month, according to a Bloomberg survey. That would be the highest in 11 years. The statistics office will release the report tomorrow.

‘Challenging’

Siemens AG, Europe’s largest engineering company, last month reported its first quarterly loss in a year and forecast earnings to drop in 2010. The Munich-based company expects the market environment to remain “challenging in 2010,” Chief Executive Officer Peter Loescher said on that day.

“I expect that 2010 will be, from a macro-environment point of view, still a challenging year,” said Peter Voser, CEO at Royal Dutch Shell Plc, Europe’s largest oil company. “We’ll see pressure on refining margins and some further pressure on competitive performance regarding costs.”

Economists projected a gain in economic confidence to 90, the median of 17 forecasts in a Bloomberg News survey showed.

To contact the reporter on this story: Simone Meier in Dublin at smeier@bloombert.net

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China Guides Bill Yields Higher, Seeking to Curb Record Lending

By Bloomberg News

Jan. 7 (Bloomberg) -- China’s central bank sold three-month bills at a higher interest rate for the first time in 19 weeks after saying its focus for 2010 is controlling the record expansion in lending and curbing price increases.

Stocks fell across Asia and oil declined on concern growth will slow in China, the engine of the world economy’s recovery from its worst recession since World War II. The People’s Bank of China offered 60 billion yuan ($8.8 billion) of bills at a yield of 1.3684 percent, four basis points higher than at last week’s sale, according to a statement.

“It’s definitely a signal that the central bank is tightening liquidity,” said Jiang Chao, a fixed-income analyst in Shanghai at Guotai Junan Securities Co., the nation’s largest brokerage by revenue. “The rising yield is used to prevent excessive growth in bank lending.”

Premier Wen Jiabao said on Dec. 27 that last year’s doubling in new loans had caused property prices to rise “too quickly,” while surging commodity costs were increasing inflationary pressure. Guiding market rates higher may be a prelude to raising reserve requirements or benchmark interest rates, said Shi Lei, a Beijing-based analyst at Bank of China Ltd., the nation’s third-largest lender.

The MSCI Asia Pacific Index of regional stocks fell 0.5 percent and oil for February delivery slid 0.7 percent after 10 days of gains. Copper for three-month delivery dropped 0.7 percent. The Shanghai Composite Index fell 1.9 percent, led by Bank of China Ltd. and Industrial & Commercial Bank of China Ltd.

Tightening in Asia

“We expect some tightening of monetary policy in Asia in the first half,” said Norman Villamin, Singapore-based head of investment analysis for Asia Pacific at Citigroup Private Bank. “Markets will struggle to go higher.”

Australia’s central bank raised borrowing costs by a quarter percentage point on Dec. 1 to 3.75 percent after similar moves in November and October. The Bank of Korea, which meets tomorrow, will probably raise its benchmark rate one percentage point to 3 percent by end-2010, according to a Bloomberg survey of economists. By contrast, the Federal Reserve target rate is close to zero and policy makers last month discussed increasing asset purchases should the economy weaken.

Policy makers will seek “moderate” loan growth while managing inflation expectations, the People’s Bank said yesterday in a report on its annual work meeting. The government has told lenders to pace lending, while tightening mortgage rules for second-home purchases. Liu Mingkang, the top banking regulator, wrote in an opinion piece in Bloomberg News this week that “structural bubbles threaten to emerge” in the economy.

Bill Sales

Guotai Junan’s Jiang said the yield on benchmark one-year bills will climb in open-market operations next week. The central bank resumed sales of those bills on July 9 after an eight-month suspension to help drain cash from banks.

The central bank is set to withdraw 137 billion yuan from the financial market this week, the biggest since the week ended on Oct. 23, according to data compiled by Bloomberg News.

China’s one-year interest-rate swap, the cost of receiving a floating rate for 12 months, rose 10.5 basis points to 2.24 percent. A basis point is 0.01 percentage point.

The central bank kept the benchmark one-year lending rate at a five-year low of 5.31 percent last year after five reductions in the last four months of 2008. It may rise to 5.85 by the end of 2010, according to a Bloomberg News survey of 29 economists in November.

Lending Boom

“There’s no doubt that lending has been excessive and that explains why policy makers are starting to be more cautious about lending this year,” said Qu Hongbin, chief China economist for HSBC Holdings Plc in Hong Kong.

Qu estimates new loans will be limited to 7 trillion yuan in 2010. Banks extended an unprecedented 9.21 trillion yuan of loans in the first 11 months of 2009, compared with 4.15 trillion yuan a year earlier.

The People’s Bank said it would curb volatility in lending and monitor the property market, while reaffirming a “moderately loose” monetary policy. The statement contrasted with the start of 2009, when the central bank targeted “appropriate” increases in lending and said monetary policy would play “a more active role in promoting economic growth.”

Consumer prices climbed 0.6 percent in November from a year earlier, snapping a nine-month run of declines. The central bank is on alert for inflation after economic growth accelerated to 8.9 percent in the third quarter of 2009, the fastest in a year.

Property Prices

Housing Minister Jiang Weixin said yesterday that the nation will limit credit for some home purchases to reduce property-market speculation. Prices across 70 cities rose at the fastest pace in 16 months in November, gaining 5.7 percent from a year earlier, led by Shenzhen, Wenzhou and Jinhua.

The central bank didn’t state a 2010 target for growth in M2, the broad measure of money supply, after overshooting a 17 percent goal last year. The actual rate was more than 25 percent for most of 2009, rising to a record 29.7 percent in November.

“Growth will probably slow this year as tight credit will dampen the demand side,” said Zhang Ling, who helps oversee about $7.21 billion at ICBC Credit Suisse Asset Management Co. in Beijing. “That will dash investors’ hopes of another year of fast growth.”

--Zhang Dingmin, Luo Jun, Sophie Leung, Judy Chen. Editors: Paul Panckhurst, James Regan

To contact Bloomberg News staff for this story: Dingmin Zhang in Beijing at +86-10-6649-7576 or dzhang14@bloomberg.net Jun Luo in Shanghai at +86-21-6104-7021 or jluo6@bloomberg.net

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Netanyahu Said to Ask Fischer to Serve Second Term

By Alisa Odenheimer

Jan. 7 (Bloomberg) -- Prime Minister Benjamin Netanyahu has told Bank of Israel Governor Stanley Fischer that he would like him to serve a second term, a person familiar with the situation said.

A formal offer will only be made if Fischer agrees to stay on after his term finishes at the end of April, the person, who declined to be identified because a decision hasn’t been made yet, said yesterday. Bank of Israel spokesman Yossi Saadon said that Fischer had no comment, and Netanyahu spokesman Mark Regev said the Prime Minister’s Office would not react to the reports.

Fischer, who has received offers from abroad, wants to stay on and is waiting to see whether parliament passes a new law regulating the central bank, which he strongly supports, the person said. Fischer’s children and grandchildren live abroad and family reasons are also a consideration, the person said.

Fischer, 66, helped steer the economy back to growth amid the worst global recession since World War II. Israel’s economy grew 0.5 percent last year. The economies of the U.S. and the European Union probably contracted 2.7 percent and 4.2 percent respectively last year, according to the International Monetary Fund.

The Bank of Israel will raise its 2010 growth estimate of 2.5 percent, Fischer said this morning at a hoteliers’ conference in Tel Aviv, without specifying the new figure. “The expectations for Israel’s economy are good, while those for the rest of the developed world are not as good,” Fischer said.

Stock Surge

“There is no one that comes close to the man, not in terms of his experience, understanding, confidence or his stature in the international community,” Vered Dar, chief economist at Tel Aviv-based Psagot Investment House, said in a telephone interview.

Israel’s benchmark TA-25 stock index surged 75 percent last year, led by Delek Group Ltd., an energy and real estate company, which rose more than six-fold, and Israel Corp Ltd., a holding company with interests in chemicals and energy, which gained more than 200 percent.

Fischer cut Israel’s benchmark interest rate by half a percentage point to 3.75 percent in October 2008, acting the day before the U.S. Federal Reserve, the Bank of England and the European Central Bank.

Raising Rates

In August 2009, Fischer became the first central bank governor in the world to reverse course in response to signs of a financial recovery when he raised the benchmark a quarter point to 0.75 percent. He has since raised the rate twice more to 1.25 percent.

To help cushion the damage to exports from the crisis, Fischer in March 2008 ordered the Bank of Israel to buy dollars to drive down the value of the shekel. By November 2009, foreign currency reserves more than doubled to $61.55 billion.

In the wake of the rate cuts and dollar purchases, Israel’s economy grew 1.1 percent in the second quarter of last year, snapping six months of recession. Gross domestic product expanded 3 percent in the third quarter.

“Fischer is very well respected and the markets have been happy with the job he’s done,” said Win Thin, a senior currency strategist at New York-based Brown Brothers Harriman & Co. “He cut rates aggressively and he was the first to tighten when the economy showed signs of life.”

Independence

Fischer has said one of his conditions when he accepted the offer for his first term was that Israel amend its law governing the central bank, which dates from 1954. A new draft law would ensure the independence of the central bank, demand transparency and set up a committee to set interest rates. Under the current law, the governor has the sole authority to change rates.

The daily Ma’ariv reported yesterday that Netanyahu is keen for Fischer to stay on, citing unidentified people close to the prime minister.

Fischer became governor of the Bank of Israel and a citizen of the country in 2005 following a career as an academic, international policy maker and a banker in the U.S.

As a professor at the Massachusetts Institute of Technology he was Federal Reserve Chairman Ben S. Bernanke’s adviser on his graduate thesis.

Fischer was first deputy managing director of the International Monetary Fund from 1994 to 2001.

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net

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Central Bankers to Gather With Private Banks at BIS

By Masahiro Hidaka and Shamim Adam

Jan. 7 (Bloomberg) -- Central bankers plan to hold talks with representatives of financial firms to discuss regulation at a Bank for International Settlements meeting this weekend, according to two Group of Seven central bank officials.

The BIS meetings, held in Basel, Switzerland, occasionally feature sessions with private banks and this month’s gathering will be such an example, the officials said on condition of anonymity because the agenda isn’t public. One of them said chief executive officers usually attend the January gatherings.

The meeting comes as policy makers seek ways to avoid a repeat of the excessive risk-taking that helped spark the recent banking crisis and a month after the BIS urged central banks to take greater account of financial stability. Leaders from the Group of 20 emerging and developed nations pledged in September to develop rules by the end of 2010 to require banks to hold more and better-quality capital and discourage leverage.

“The central bankers are clearly aiming to head off the excesses that will certainly come out of the very easy monetary policy” put in place during the crisis, said Bill Belchere, global chief economist at Mirae Asset Securities in Hong Kong. “They have no choice but to be prudent and vigilant to grapple with the potential problems and stop bubbles before they emerge.”

Central Bank Rates

The Federal Reserve has cut its benchmark rate to almost zero and taken on more than $1 trillion of assets on its balance sheet to combat the credit freeze, while its Japanese counterpart’s benchmark is also near zero. The European Central Bank’s main rate is a record-low 1 percent.

Representatives of banks including BlackRock Inc., Citigroup Inc. and Wells Fargo & Co. will attend the session over the Jan. 9-10 weekend, the Financial Times reported earlier. Wells Fargo CEO John Stumpf isn’t planning to attend, said Janis Smith, a spokeswoman for the San Francisco-based bank. A Citigroup spokesman who declined to be identified said the bank had no comment.

The FT said the BIS invitation cited concerns that financial companies are returning to risk-taking patterns that were in place before the global crisis began in 2007.

“The big issue is disclosure of financial data -- whether banks should have to disclose more information about their risk,” said Fariborz Moshirian, professor of finance at the Australian School of Business at the University of New South Wales. “Multinational banks are finding it very convenient at the moment to increase their activities because there is not any extra supervision.”

International Regulators

Bank of Italy Governor Mario Draghi, who heads the Financial Stability Board of international regulators and central bankers, is scheduled to produce a report on progress toward strengthening regulations before the next G-20 summit. Draghi has warned that banks may seek to block regulatory overhauls as the global economy recovers from the deepest postwar recession.

Banks, buoyed by improving earnings and after repaying state bailouts, have been lobbying against reforms aimed at restricting how much risk they can take. Goldman Sachs Group Inc. and JPMorgan Chase & Co. have seized on record-low interest rates, a stock-market rally and the demise of competitors like Lehman Brothers Holdings Inc. to bolster trading profits.

“As the situation improves, the power of vested interests contrary to any substantive reform get stronger,” Draghi said in a Nov. 12 speech in Rome. A “critical stage” in overhauling regulation and oversight of financial markets is beginning and authorities need “to take bold and radical action to remedy the current deficiencies,” he said.

Leverage Ratio

The Basel Committee on Banking Supervision, for which the BIS provides a secretariat, last month issued a consultation on a series of proposals aimed at making the banking industry more resilient. Among its suggestions was improving the quality of capital that banks hold and introducing a leverage ratio.

The BIS said in a report last month that central bankers should allow financial stability to play a role in monetary policy because low interest rates often spur banks to take on too much risk. It said in the same report that the “current crisis has underlined the importance” of introducing so-called macroprudential supervision, which assesses the risks posed to the whole banking sector rather than individual companies.

U.S. President Barack Obama has also expressed frustration that financial firms that got government bailouts are continuing to take large bonuses and fighting his effort to revamp bank regulations.

“I did not run for office to be helping out a bunch of, you know, fat-cat bankers on Wall Street,” Obama said in an interview with CBS’s “60 Minutes” broadcast on Dec. 13.

Central bankers meet six times a year at the BIS, which calls itself the bank for central banks, holds currency reserves on behalf of its members and produces research.

To contact the reporters on this story: Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net; Shamim Adam in Singapore at sadam2@bloomberg.net

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FOMC Debates Asset Purchases, Inflation as Economy Strengthens

By Scott Lanman

Jan. 7 (Bloomberg) -- Federal Reserve officials discussed whether the economy is strong enough to allow their $1.73 trillion of asset purchases to end in March and differed over the risk of inflation, minutes of their last meeting showed.

A few policy makers said it “might become desirable at some point” to boost or extend securities purchases aimed at lowering mortgage rates, while one person sought a reduction, according to minutes of the Dec. 15-16 meeting of the Federal Open Market Committee released in Washington yesterday. On inflation, some officials said slack in the economy will damp prices, and others saw risks from the central bank’s “extraordinary” stimulus.

The Fed’s debate is intensifying while Chairman Ben S. Bernanke and his colleagues are trying to withdraw unprecedented stimulus and emergency lending programs without impeding efforts to sustain a recovery. Officials judged economic and job growth “would be rather slow relative to past recoveries from deep recessions,” the Fed said.

“They’re focused on a balancing act, wrestling with a recovery that’s gaining solid footing but that remains fragile,” said Paul Ballew, a former Fed economist who’s now a senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio. “The Fed is keeping some levers out there as options.”

Short-term Treasuries rose after the report. Two-year U.S. government bonds reversed losses, with the yield falling two basis points to 0.99 percent in New York. A basis point is 0.01 percentage point. The Standard & Poor’s 500 Index was little changed at 1,137.14.

‘Expectations Anchored’

“To keep inflation expectations anchored, all participants agreed that monetary policy would need to be responsive to any significant improvement or worsening in the economic outlook and that the Federal Reserve would need to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and place,” the minutes said.

Policy makers in the Dec. 16 statement following their meeting said the labor market is stabilizing, while repeating a pledge to keep interest rates “exceptionally low” for an “extended period.” The Fed said most lending programs would expire as scheduled on Feb. 1 because of “improvements in the functioning of financial markets.”

The FOMC, in a unanimous decision, left its target for the benchmark interest rate unchanged in a range of zero to 0.25 percent and left unchanged its plans to buy $1.43 trillion of housing-finance debt through March. Fed policy makers next meet Jan. 26-27 in Washington.

‘Policy Stimulus’

“A few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the committee’s large-scale asset purchases and continuing them beyond the first quarter,” especially if the economic outlook or mortgage market deteriorated, the minutes said.

One member said the Fed could reduce planned asset purchases because of improvement in financial markets and the economy, and “that it might become appropriate” to start reducing asset holdings “if the recovery gains strength over time.”

The Fed is buying $1.25 trillion of mortgage-backed securities issued by housing-finance companies Fannie Mae, Freddie Mac and federal agency Ginnie Mae. The central bank began the program in January 2009.

Fannie, Freddie

The Fed separately purchased $300 billion of Treasury securities from March through September 2009 and is buying, through March, $175 billion of corporate debt issued by government-backed Fannie and Freddie and the government- chartered Federal Home Loan Banks.

Officials “generally thought the most likely outcome” was for economic growth to “gradually strengthen over the next two years,” helping reduce joblessness. Still, the “weakness in labor markets continued to be an important concern.”

At the same time, Fed officials “noted that any tendency for dollar depreciation to put significant upward pressure on inflation would bear close watching,” the central bank said. Some policy makers saw “upside” inflation risks because of investor concerns about Fed stimulus and federal budget deficits, the Fed said.

“The division on inflation is a very central one in terms of how it gets resolved, in terms of how quickly and when they begin the rate process,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York.

Rate Forecast

Policy makers won’t raise their target for overnight lending among banks until the third quarter of this year, according to the median of 62 forecasts in a Bloomberg News survey of economists taken early last month.

The minutes said that the New York Fed’s open market desk “was continuing to develop” the capacity to conduct reverse repurchase agreements using agency mortgage-backed securities collateral and expects the work to be finished in the first half of this year.

The New York Fed is also “exploring the operational issues associated with expanding potential counterparties” for reverse repurchase agreements beyond the 18 primary dealers, the minutes said.

In a reverse repo, the Fed lends securities for a set period, draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to the 18 primary dealers that act as counterparties to the central bank.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

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Yen Declines as Japan’s Kan Says He Supports a Weaker Currency

By Bo Nielsen and Yasuhiko Seki

Jan. 7 (Bloomberg) -- The yen fell against the dollar and the euro after Japanese Finance Minister Naoto Kan said on his first day in office that he backs a weaker currency.

The Japanese currency also declined versus 11 of the 16 most-traded currencies after Kan said in his inaugural press conference that he will try to keep the yen at an “appropriate level”. The Australian dollar rose to a 25-year high versus the pound after a report showed retail sales surged the most in eight months in November, fanning speculation the central bank will raise interest rates.

“It’s clear that Kan is going to say what he thinks and he thinks the yen should weaken,” said Neil Mellor, a currency strategist at BNY Mellon Corp. in London. “He seems to have reverted back to the old weak-yen policy.”

The yen dropped to 92.69 per dollar as of 8:49 a.m. in London from 92.32 yesterday in New York. The Japanese currency slipped to 133.13 per euro from 133.01, after earlier climbing to 132.40. The dollar rose to $1.4362 per euro from $1.4408.

Kan said today in Tokyo that he will seek to keep the yen at “an appropriate level while considering various impacts on the economy that may be caused by currencies.” While the yen has fallen since reaching a 14-year high in November, “I hope it will correct a bit more,” he said.

The yen surged to 84.83 per dollar on Nov. 27, the strongest since July, 1995, after Kan’s predecessor, Hirohisa Fujii, said he didn’t support a weak yen and opposed “easy intervention.” The Japanese currency has fallen 9.3 percent since then.

‘Clear Difference’

“It was reconfirmed that Kan doesn’t want a rising yen to hurt the economy in a clear difference from his predecessor,” said Keiji Matsumoto, a strategist in Tokyo at Nikko Cordial Securities Inc. “It is apparent that Kan won’t tolerate a stronger yen.”

The Australian dollar touched 1.7310 per U.K. pound, the strongest in 25 years, and traded up 0.5 percent at 1.7330 as retail sales climbed 1.4 percent from October, when they gained a revised 0.4 percent, the Bureau of Statistics said in Sydney today. The median forecast of 12 economists surveyed by Bloomberg News was for a 0.3 percent gain.

“There’s only good news coming out of Australia,” said Ray Farris, the London-based head of FX strategy at Credit Suisse Group AG to Bloomberg Television. “We like the Australian dollar.”

Interest Rates

The Bank of England will probably keep benchmark rates at 0.5 percent at a meeting today in London, according to a Bloomberg survey. Japan’s benchmark rate is 0.1 percent and the U.S.’s is zero to 0.25 percent. Australia’s key rate is 3.75 percent.

The dollar rose against the euro before a report tomorrow that may show U.S. employers didn’t cut jobs in December for the first time since the recession started. Nonfarm payrolls were unchanged after falling 11,000 the prior month, according to the median estimate of 74 economists in a Bloomberg survey.

The MSCI Asia Pacific index fell 0.4 percent and the Dow Jones Stoxx 600 Index of European shares fell 0.2 percent, after China took steps to remove economic stimulus. The central bank sold three-month bills at a higher interest rate for the first time in 19 weeks after saying its focus for 2010 is controlling the record expansion in lending and curbing price increases.

“The Chinese central bank’s action came as a negative surprise,” said Kumiko Gervaise, a Tokyo-based currency analyst at Gaitame.com Research Institute Ltd., a unit of Japan’s biggest currency margin trader. “Higher-yielding currencies showed a knee-jerk reaction to this news, and the safe-haven currencies were bought back.”

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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