Economic Calendar

Tuesday, March 8, 2011

How Long Can USD Keep Head of Steam?

The USD followed through on its smart little technical reversal yesterday with follow-up strength today, but will the currency follow through to the strong side here, or is this simply another modest consolidation that will fade to yield further gains for the greenback like all previous attempts by the currency to make a stand?

UK BRC Sales

The UK Like-for-Like sales number for February were very weak (though overall sales did rise +1.1% YoY) and suggests rather weak end demand from consumer. This makes sense in light of the austerity descending on the British population since the first of the year. The weak demand wasn't as evident in January due to pent up demand from historically disruptive winter weather that kept people pinned up in their homes in December. Continued weak demand will be an interesting possible theme for the UK in coming months.


The Swedish Krona caught a bit of a bid today despite generally souring risk markets and despite dovish talk from the Riksbank Deputy Governor Svensson. He was out arguing for a “lower repo rate path” and for a focus on employment as well as inflation. Sounds like Mr. Svensson needs to join the Bernanke Fed. Another Riksbank member is out speaking later today.


EURUSD is reversing after its extensive grind higher all the way from the . So far, we can only speak of an orderly consolidation. The key is whether the sell-off cuts deeply through the 1.3860 area support provided by the previous high, a move that would weaken the uptrend. Note that the recent test above 1.40 just barely took out a falling trendline - a tease that proved a false break. Round numbers have often been important in EURUSD's history and that 1.40 level remains the key upside resistance for now as we inch close to the EU summit later this month.


The technical situation in AUDUSD is becoming a farce, with an ever-shrinking range between 1.02 and higher and higher lows. The nominal technical formation is an ascending triangle, normally considered a bullish formation, but the longer the pair dallies, ironically, the weaker the formation becomes as an indicator of future direction. Parity is the key downside support beyond the tactical 1.0075 level.


A large scale reversal in AUDNZD, which shows the most significant crack in the uptrend in over a month. This may be the beginning of the end of the uptrend - as valuation here is extreme and there is only so much an earthquake can do to a country's currency. Longer term fair value lies closer to 1.30 if not 1.25 for the pair.

Looking ahead

The USD has followed through a bit stronger today, a development presaged by yesterday's neat technical reversal in key USD crosses. The question now is whether we follow through and move back through more strategic resistance levels for the greenback. To take three USD pairs, that would be on the order of 1.3860 in EURUSD, parity in AUDUSD and 1.6000 in GBPUSD. Certainly from a contrarian perspective, there are grounds for further USD strength as USD shorts are out there in record swarms by some measures. Again (as we discussed yesterday), a continued rally in fixed income (which should tend to favor the USD in interest rate spreads), a easing off of crude oil prices and another couple of percent of downside for equities could prove powerful medicine for the greenback in coming days.

For USDJPY, we await today's 3-year auction with interest. Expectations are relatively low after last month saw a very anemic auction despite relatively high yields (if you can call 1.25% a high yield - but that was higher than the 0.45% the 3-year debt was yielding around the time of Bernanke's official QE2 announcement). The 3-year debt is yielding about the same now as it was at last month's auction - so this will be an interesting one to see whether recent events and disruptions in equity markets see a stronger bid coming into the market.

The rest of the week's calendar is fairly heavy for Australia, with Consumer Confidence and Home loan data tonight, and the employment report tomorrow night. Seems like by this time next week, we are either trading above 1.0200 or below parity.

Economic Data Highlights

  • New Zealand Feb. QV House Prices fell -1.7% YoY vs. -1.5% in Jan.
  • Japan Jan. Adjusted Current Account Total out at ¥1089B vs. ¥1167B expected and ¥1519B in Dec.
  • UK Feb. BRC Like-for-Like Sales out at -0.4% YoY vs. +0.7% expected and +2.3% in Jan.
  • UK Feb. RICS House Price Balance out at -26% as expected and vs. -31% in Jan.
  • Australia Feb. NAB Business Conditions out at -2 vs. -6 in Jan.
  • Australia Feb. NAB Business Confidence out at 14 vs. 4 in Jan.
  • Switzerland Feb. Unemployment Rate fell to 3.4% as expected and vs. 3.5% in Jan.
  • Germany Jan. Factory Orders rose +2.9% vs. +2.5% expected and -3.6% in Dec.
  • US Feb. NFIB Small Business Optimism out at 94.5 vs. 95.0 expected and 94.1 in Jan.
  • Canada Feb. Housing Starts out at 181.9k vs. 174k expected and 170.6k in Jan.

Upcoming Economic Calendar Highlights (all times GMT)

  • US Fed Nominee Diamond to Testify (1500)
  • Sweden Riksbank's Ekholm to Speak (1500)
  • US Fed's Krieger to Speak (1620)
  • US Weekly API Crude Oil and Product Inventories (2130)
  • Australia RBA Assistant Governor Lowe to Speak (2230)
  • Australia Mar. Westpac Consumer Confidence (2330)
  • Japan Jan. Machine Orders (2350)
  • UK Feb. BRC Shop Price Index (0001)
  • Australia Jan. Home Loans (0030)

About the Author


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Is AUD Poorly Positioned Heading Forward?

In today's trading we saw the AUD/USD pair fall rather strongly, as the USD strengthened against most of its rivals. However, we have see the pair again rejected at the 1.02 level. For the most part, the pair has been in sideways price action throughout the first two months of 2011 as it has been unable to push above 1.02, though at the same time is have been setting higher lows during the period.

The Aussie has a spectacular run throughout 2010 as its economy was bolstered by strong demand from China for its exports of raw materials including iron ore and coal. It also had a very strong advantage in that the central bank - facing a mining jobs boom - was one of the few central banks from the "developed world" raising interest rates helping to increase the interest rate differential between it and the other major central banks.

While the economy still enjoys strong fundamentals, including an unemployment rate that at 5% is at "full employment" the two factors we described above may wane in helping to sustain the currency and could mean a dip back below the parity level.

First, China is trying to reign in its economy with higher interest rates of its own. Inflation is a large concern as is the chance that Chinese banks have lent out too much credit which could cause a financial crisis. China has raised rates 3 times since October, bringing its benchmark interest rate from 5.31 back in September 2010 to 6.06 in February. More may be needed to cool the economy a sufficient amount to get a handle on inflation. That can mean less industrial production in China and therefore less demand for Australian goods.

We saw exports in Australia for the month of January fall by 4%, though much of that was due to the impact of recent flooding. Still further attempts by China to tighten policy will have an adverse effect on Australian exports, and can cause the AUD some problems.

The Aussie's second reason for strength, its interest rate differential against other developed countries, will also not play as important a role going forward. With the price of Brent Crude oil contracts climbing above $115 it has created a lot of anxiety in central banks that it will fuel inflationary pressure.

That has caused the ECB to telegraph an upcoming interest rate increase, and traders are pricing in a Bank of England increase in the coming months. As global interest rates play catch up, the Reserve Bank of Australia is in a wait-and-see mode as it assesses the pass through of the damage that was caused by the strong flooding and recent cyclone.

Therefore the AUD may lose some of its interest rate advantage. While the US Fed is not close to tightening policy - in addition to the ECB and BOE, we have the Bank of Canada on the cusp of needing to being to raise interest rates. If the AUD falls against the EUR, GBP and CAD those effects will be felt in the AUD/USD pair as well.

Therefore, the factors that could hamper AUD strength are there - higher Chinese interest rates and higher oil prices causing central banks to hike rates. They are not givens, but it looks pretty clear that oil prices will remain elevated for the time being.

If these factors materialize then the Aussie may be poorly positioned heading forward for the next few months. It's worth keeping an eye on them in anticipation of Aussie weakness.

About the Author


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USDCAD: Struggling To Put In A bottom But Vulnerable

USDCAD: Its bottom forming process continues to play out as USDCAD is still consolidating slightly above the 0.9682 level, its Mar 01'2011 low. In case a recovery higher occurs, we expect it to be capped at the 0.9809 level, its Feb 17'2011 low. This level should reverse roles and provide resistance thus turning the pair back lower in the direction of its long-term weakness. This will see USDCAD attacking its Mar 01'2011 low at 0.9682 with a convincing break of this level extending further weakness towards its psycho level at 0.9600 and then the 0.9500 level. On the upside, if a break of its Mar 02'2011 high at 0.9774 level and the 0.9809 level, its Feb 17'2011 low happen, further upside risk will shape up towards the 0.9958 level, Feb 15'2010 and then the 1.0056 level.


About the Author

Mohammed Isah
Market Analyst

This report is prepared solely for information and data purposes. Opinions, estimates and projections contained herein are the author's own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which the author incur any responsibility. The does not accept any liability whatsoever for any loss arising from any use of this report or its contents. This report is not construed as an offer to sell or solicitation of any offer to buy any of the currencies referred to in this report


Fed Presidents Signal No Urgency to Expand $600 Billion Bond Purchase Plan

Dallas Fed President Richard W. Fisher

Richard W. Fisher, president of the Federal Reserve Bank of Dallas. Photographer: Alex Kraus/Bloomberg

Three Federal Reserve district bank presidents expressed little need to expand $600 billion in bond purchases any time soon, while differing over whether to end the central bank’s record stimulus early.

Dallas Fed President Richard W. Fisher said yesterday he may vote to end the bond buying before the planned end in June if he deems it to be “counterproductive.” Atlanta Fed President Dennis Lockhart said he’s “very cautious” about additional purchases, while not ruling out the possibility. Charles Evans, president of the Chicago Fed, told CNBC he believes the hurdle for altering the plan is “pretty high.”

Policy makers are set to meet in Washington on March 15 as economic data over the past month indicate their policies are helping to revive growth and reduce unemployment. Fed officials including Charles Plosser, president of the Philadelphia regional bank, have favored an abrupt end to the purchases of Treasuries, rather than a gradual pullback beyond June.

Treasury markets are “so deep and liquid that there doesn’t seem to be a need” to taper the purchases, said Evans, 53, who votes on the Federal Open Market Committee this year. “I wouldn’t be surprised that if we decide to end it, we just end it.”

The Standard & Poor’s 500 Index has gained more than 9 percent since Nov. 3, when the Fed announced its second large- scale round of asset purchases. Central bankers are about half way through their bond buying program, known as QE2 for the second round of so-called quantitative easing. The Fed ended a $1.7 trillion program in March 2010.

Expanded Payrolls

Joblessness in the U.S. unexpectedly fell to 8.9 percent in February, according to a March 4 report from the Labor Department. The rate fell for a third straight month to the lowest level in almost two years as employers boosted payrolls by 192,000 amid growing confidence in the expansion.

The economy grew at a 2.8 percent annual rate in the fourth quarter, up from 2.6 percent in the previous three months, according to figures from the Commerce Department. The economy, excluding inventories, expanded at a 6.7 percent pace, the most since 1998.

“The liquidity tanks are full, if not brimming over,” Fisher, an FOMC voter this year, said at the Institute of International Bankers Annual Washington Conference. “The Fed has done its job. What is needed now is for business to be incentivized to commit that liquidity to creating American jobs.”

The regional bank chief reiterated that he would vote against extending or enlarging the $600 billion program “barring some frightful development.” If the plan proves to be “counterproductive,” Fisher said he will “vote to curtail or perhaps discontinue it.”

Middle East Turmoil

Lockhart said in a speech in Arlington, Virginia, that the central bank shouldn’t rule out additional purchases because turmoil in the Middle East risks causing a slowdown in the U.S.

“With the information I have today, my first inclination is to be very cautious about extending asset purchases after June,” he said. “Given the emergence of new risks, however, I prefer a posture of flexibility” as it relates to policy options.

Lockhart’s comments echoed Fed Chairman Ben S. Bernanke, who told Congress last week that economic conditions continue to justify holding the central bank’s benchmark interest rate near zero. The chairman also didn’t rule out expanding purchases to keep stimulating the economy.

A survey of economists released yesterday by the National Association for Business Economics found 71 percent expect the Fed to raise its target interest rate over the next year.

Third Round

Lockhart told reporters after his speech that a third round of large-scale asset purchases might be needed in the event of another downturn. “I want to remain open to whatever has to be done or needs to be done at a given time,” Lockhart said.

The Fed has bought $397.6 billion in Treasury securities since Nov. 12 under plans to purchase $600 billion of government debt through June and reinvest proceeds from maturing mortgage debt.

The hurdle for altering the Fed’s current plan is “pretty high,” and a tapering of the purchases is unlikely, Evans said in a CNBC interview.

“It looks more and more to me like $600 billion is a good number,” the Chicago Fed president said. “We’re going to continue to need short-term interest rates to be low for an extended period of time.”

To contact the reporter on this story: Vivien Lou Chen in San Francisco at

To contact the editor responsible for this story: Christopher Wellisz at


Euro Weakens Against Dollar Amid Concern European Debt Crisis Will Deepen

The euro fell the most in two weeks against the dollar as concern the region’s leaders won’t agree on a solution to its debt crisis damped appetite for its assets.

The 17-nation currency retreated from almost the strongest level in nine months against the yen. Financing costs rose as Greece sold 1.625 billion euros ($2.3 billion) of treasury bills a day after having its credit rating cut by Moody’s Investors Service. The Norwegian krone declined against 15 of its 16 major peers as oil fell for the first time in three days.

“As we get closer to the results of the euro summit and you have these concerns lingering and spreads widening, you have these pent-up aggressions playing out,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “Being overweight euros is probably not the most prudent decision.”

The shared currency declined 0.6 percent to $1.3881 at 10:26 a.m. in New York. It reached $1.4036 yesterday, the strongest level since Nov. 8. It was little changed at 114.84 yen after touching 116 on March 4, the highest since May 14. The dollar strengthened 0.6 percent to 82.73 yen.

Dollar Trend

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against currencies including the euro and yen, climbed for a second day, gaining 0.5 percent to 76.878.

The euro, which has risen 3.9 percent against the dollar this year, has struggled to extend its advance beyond $1.40 as European Union leaders clashed about how to deal with the sovereign-debt crisis that forced Ireland and Greece to seek financial aid last year. The 27-nation EU intends to approve a “comprehensive” package of measures at a March 24-25 summit in a bid to calm bond markets.

The yield on 10-year Greek debt jumped as much as 45 basis points to the most since before the euro was created in 1999, according to data compiled by Bloomberg. Greece sold the 26-week bills today to yield 4.75 percent, up from 4.64 percent the last time the securities were sold in February, the Athens-based Public Debt Management Agency said.

Portugal plans to sell up to 1 billion euros of September 2013 notes tomorrow, its second auction this year.

Austria opposes easing conditions of bailouts sought by Ireland and Greece, Chancellor Werner Faymann told reporters today in Vienna. The nation’s Finance Minister Josef Proell said he didn’t see “pressure from other EU countries” for a change.

ECB Watch

The euro climbed 1.2 percent in the past week, according to Bloomberg Correlation-Weighted Currency Indexes, which track the currencies of 10 developed nations, fueled by speculation that the European Central Bank may raise interest rates as early as next month to contain inflation.

“There are other issues than simply a more hawkish ECB,” said John McCarthy, director of currency trading at ING Groep NV in New York. “The implication of higher rates is also there. The last thing those countries need is higher interest rates.”

ECB council member Axel Weber said the bank has embarked on a normalization of interest rates and he doesn’t want to correct market speculation for as many as three quarter-point increases this year.

It was the intention of the ECB to bring forward market expectations and “I see no reason at this stage to signal any dissent with how markets priced future policies,” Weber told Bloomberg News in Frankfurt today when asked about investors pricing in an increase in the benchmark rate to 1.75 percent by the end of the year.

Krone Declines

Norway’s krone depreciated by 0.6 percent to 5.5866 per dollar and was little changed at 7.7569 against the euro.

Crude oil traded in New York fell 0.8 percent today as the Organization of Petroleum Exporting Countries discussed the possibility of boosting output, easing concern that supply shortages may be prolonged. It reached $106.95 yesterday, the most since September 2008.

New Zealand’s dollar advanced, halting a five-day loss, as a technical indicator showed its recent declines may have been excessive. The so-called kiwi rebounded from the weakest level since September against the yen as traders reduced their bets that the central bank will cut interest rates at its meeting this week.

The New Zealand dollar rose to 73.95 U.S. cents from 73.69 in New York yesterday, after falling to 73.39 on March 4, the weakest since Oct. 1. The kiwi gained to 61.19 yen from 60.60 yen yesterday, when it touched 60.35 yen, the weakest level since Sept. 9.

The pound reached a one-week low against the dollar and snapped a four-day decline versus the euro. Retail sales dropped 0.4 percent from January, when they gained 2.3 percent, a report from the British Retail Consortium and KPMG showed. Bank of England policy makers will maintain the U.K. interest rate at 0.5 percent on March 10, according to all 61 economists surveyed by Bloomberg News.

The pound was 0.3 percent lower at $1.6157, after touching $1.6166, the least since Feb. 28. It strengthened to 85.96 pence per euro from 86.21 pence, after reaching 86.36 pence, the weakest since Jan. 28.

To contact the reporters on this story: Catarina Saraiva in New York at; Lukanyo Mnyanda in Edinburgh at

To contact the editor responsible for this story: Dave Liedtka at


Natural Gas Futures Advance in New York, Reversing Earlier Decline of 2.4%

Natural gas futures climbed in New York, reversing an earlier decline.

Gas for April delivery rose 1.3 cents, or 0.3 percent, to $3.94 per million British thermal units at 11:29 a.m. on the New York Mercantile Exchange. The futures earlier fell as much as 2.4 percent.

To contact the reporter on this story: Christine Buurma in New York at;

To contact the editor responsible for this story: Dan Stets at


European Stocks Fluctuate; National Bank of Greece Tumbles

European Stocks, U.S. Index Futures Gain

Traders work at the Frankfurt Stock Exchange in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

March 7 (Bloomberg) -- Jonathan Golub, chief U.S. market strategist at UBS Securities LLC, talks about the outlook for U.S. stocks. Golub also discusses crude oil prices and the U.S. economy. He speaks with Matt Miller, Carol Massar, Dominic Chu, Adam Johnson and Julie Hyman on Bloomberg Television's "Street Smart." Doug Prskalo of Blue Capital Group also speaks. (Source: Bloomberg)

European stocks fluctuated, following two days of declines, as European Central Bank council member Axel Weber signaled that the ECB may raise interest rates several times this year.

National Bank of Greece SA (ETE) and EFG Eurobank Ergasias SA (EUROB) both lost more than 6 percent as the yield on Greek 10-year bonds surged to a record. Andritz AG (ANDR) rose 3.5 percent after reporting higher-than-estimated full-year net income. Aegon NV (AGN) gained 1.4 percent as Scor SE (SCR) was said to be in talks to buy a unit of the Dutch insurer.

The benchmark Stoxx Europe 600 Index rose 0.1 percent to 281.11 at 3:57 p.m. in London, after earlier rising as much as 0.7 percent and falling as much as 0.5 percent. The gauge dropped yesterday as oil climbed above $105 a barrel in New York after forces loyal to Libya’s ruler Muammar Qaddafi repelled a rebel attack on the central city of Sirte.

“We have enormous pressure from the commodity side at the moment,” said Andreas Lipkow, an equity trader at MWB Fairtrade Wertpapierhandelsbank AG in Frankfurt. “The ECB and the Fed have to react right now and have to raise interest rates. Investors are very nervous and the way central banks will formulate the next steps is very important.”

Weber said he doesn’t want to correct market expectations for as many as three quarter-point increases this year in the bank’s benchmark interest rate this year. ECB President Jean- Claude Trichet yesterday said that the world’s central bankers are united in their aim to prevent surging oil prices from fanning broader inflation.

Oil Falls

Crude fell in New York after Kuwait’s Oil Minister confirmed that the Persian Gulf country has held talks to boost production. Organization of Petroleum Exporting Countries are holding “consultations” and have yet to decide to raise output, Sheikh Ahmad al-Abdullah al-Sabah said.

National benchmark indexes decreased in 9 of the 18 western European markets today. The U.K.’s FTSE 100 Index slipped 0.4 percent, Germany’s DAX Index retreated 0.2 percent while France’s CAC 40 Index added 0.2 percent.

European stocks erased an earlier advance as Greek government bonds slid, driving the yield on the 10-year security to the highest level since Bloomberg began collecting the data in 1988. The yield jumped as much as 48 basis points to 12.82 percent, while credit-default swaps insuring Greek government bonds rose 5 basis points to an all-time high of 1,037.

National Bank of Greece, Greece’s biggest lender by market capitalization, slid 6.8 percent to 6.15 euros. Eurobank and Alpha Bank SA lost 6.1 percent to 4.30 euros and 4.3 percent to 4.69 euros, respectively. Moody’s Investors Service yesterday downgraded Greece’s government bond ratings to B1 from Ba1, and assigned a negative outlook. The Greek equity market was closed for a holiday yesterday.

Randgold Retreats

Randgold Resources Ltd. (RRS), a producer of the metal in West Africa, sank 8.6 percent to 4,462 pence, the biggest decline in the Stoxx 600. Ivory Coast President Laurent Gbagbo took control of local purchases and exports of cocoa and coffee, escalating his conflict with rival Alassane Ouattara, the internationally recognized winner of November’s election.

Andritz jumped 3.5 percent to 63.71 euros. The Austrian maker of machines for the paper and steel industries reported full-year net income of 179.6 million euros ($249.6 million), beating analysts’ estimates. Andritz also forecast that its 2011 sales will “increase substantially compared to 2010” and that its profit will rise.

Deutsche Telekom, Vodafone

Deutsche Telekom AG soared 4 percent to 10.02 euros. Europe’s largest telecommunication company has held talks to sell its T-Mobile USA unit to Sprint Nextel Corp. in exchange for a major stake in the combined entity, said people with knowledge of the matter.

Telecommunication stocks advanced after Morgan Stanley raised its recommendation on the industry’s shares to “maximum overweight.” BT Group Plc (BT/A) advanced 3.4 percent to 190.1 pence and Vodafone Group Plc (VOD) gained 1.8 percent to 181.9 pence.

“Telecoms is our preferred defensive sector as we think it offers greater potential for a positive growth surprise as well as offering a substantial dividend yield boost over other sectors,” strategists led by Morgan Stanley’s London-based head of European equity strategy Graham Secker wrote in a report.

Aegon rose 1.4 percent to 5.60 euros, erasing yesterday’s decline. Scor, France’s largest reinsurer, is in talks to buy Dutch rival Aegon’s Transamerica Reinsurance unit, said four people with knowledge of the matter. Scor dropped 3.6 percent to 20.30 euros as the company said that catastrophes in Australia and New Zealand will cost it a total 200 million euros, net of retrocession.

Lundin Petroleum AB (LUPE) surged 4 percent to 82.80 kronor after BofA Merrill Lynch Global Research upgraded the company to “buy” from “sell.”

Wacker Chemie AG (WCH) climbed 2.5 percent to 137.80 euros as UBS AG lifted its recommendation on the chemicals company to “buy” from “neutral.”

To contact the reporter on this story: Julie Cruz in Frankfurt at

To contact the editor responsible for this story: Andrew Rummer at


Chilean Peso Slides Most in a Week on Decline in Copper Prices

The Chilean peso fell the most in a week as the price of copper, the country’s main export, declined faster than oil prices, weakening the country’s terms of trade.

The peso slid 0.4 percent, more than the other six major Latin American currencies tracked by Bloomberg, to 475.6 per U.S. dollar as of 10:40 a.m. New York time from 473.85 yesterday.

As copper falls compared with oil, Chile’s export income declines relative to the cost of its imports. South America’s fifth-largest economy relies on imports for 99 percent of its oil while oil and gasoline are its two largest imports.

“Terms of trade keep hitting the local economy,” said Alejandro Araya, a trader at Banco Santander SA in Santiago. “Copper is falling and oil remains above $100. As long as they don’t fall into line we’ll have the peso between 474 and 478 per dollar.”

Foreign investors in the Chilean peso forwards market had a net bet of $1.3 billion that the peso would weaken against the dollar as of March 4, central bank data show.

Copper declined on concern that high oil prices may slow economic growth. A pound of the metal for May delivery slid as much as 1.7 percent to $4.254 on the Comex in New York.

Chile’s central bank bought $50 million today at an average of 475.5 pesos per U.S. dollar, according to its website, as part of a $12 billion plan to weaken the peso.

The bank is scheduled to announce today whether it will reduce or continue its daily dollar buying. Economists Rodrigo Aravena at Banchile Inversiones and Felipe Alarcon at Banco de Credito & Inversiones said they don’t expect any changes.

Inflation Expectations

The peso weakened 6.6 percent in the first week after the bank announced its dollar-buying plan. That weakness contributed to an increase in inflation expectations, which is now fueling speculation that the central bank will consider accelerating the pace of its interest-rate increases on March 17.

Factors other than the bank’s dollar purchases are now driving the currency. It was the weakest currency in the region in January and the strongest in February as copper rose to a record. So far in March the peso is little changed as expectations of rate rises mitigate the weaker terms of trade.

Buying a greater volume of dollars every day would mean the bank needs to sell more bonds to soak up the extra pesos it would be leaving in the market, said Banchile’s Aravena.

“That could mean an increase in yields which, given the probable rise in central bank rates, could have a very negative effect on the fixed-income market,” he said. “The only thing the dollar buying is achieving is the accumulation of international reserves, nothing else.”

Inflation-Linked Debt

The bank may say it plans to sell an increased volume of inflation-linked debt, according to BCI’s Alarcon.

Yields on central bank inflation-linked bonds have declined as traders price in expectations of faster-rising prices. Banco Security this week recommended investors have all bond portfolios in short- and medium-term inflation-linked debt.

“Anything that even looks inflation-linked gets bought up completely,” Alarcon said. “It wouldn’t be a surprise if the bank kept overweighting inflation-linked bond sales versus pesos. They may want to affect breakeven inflation and they could do that by overweighting inflation-linked issuance.”

Breakeven inflation is a measure of the gap between inflation-linked and nominal yields. It reflects traders’ estimation of the likely average of future inflation.

The gap between 10-year nominal and inflation-linked central bank bonds rose to 3.81 percent on March 2, the highest since October 2008, according to data compiled by Bloomberg.

To contact the reporter on this story: Sebastian Boyd in Santiago at

To contact the editor responsible for this story: David Papadopoulos at


Roubini Sees Double Dip for Advanced States If Oil Hits $140

Roubini Sees Double Dip for Advanced States If Oil Hits $140

Nouriel Roubini speaks at the 12th Hedge Funds World Conference in Dubai, on Tuesday, March 8, 2011. Photographer: Gabriela Maj/Bloomberg

March 7 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., and Daniel Yergin, chairman of IHS-Cambridge Energy Research Associates, offer their views on the possible impact of $100 a barrel crude oil on the U.S. economy and corporate America. This report also contains comments from Stephen Girsky, vice chairman at General Motors Co.; Robert Livingston, chief executive officer at Dover Corp.; Mark Zandi, chief economist at Moody's Analytics Inc.; Nariman Behravesh, chief economist at IHS Inc., and Mark Gertler, a professor at New York University. (Source: Bloomberg)

Nouriel Roubini, the economist who predicted the global financial crisis, said an increase in oil prices to $140 a barrel will cause some advanced economies to slide back into recession.

Underlying how fragile the global economic recovery is, Roubini said the European Central Bank may be making a mistake by raising interest rates “too soon” when debt-ridden countries on the euro region’s periphery struggle to restore the competitiveness of exports.

“If you had the oil price going up to where it was in the summer of 2008, at $140 a barrel, at that point some of the advanced economies will start to double dip,” he told reporters in Dubai today. “In the U.S., where growth is accelerating fast, a 15 to 20 percent increase in oil prices, there won’t be double dip, but growth reaching a stalled speed again.”

Popular revolts sweeping the Middle East and North Africa, home to more than half of the world’s proven oil reserves, have pushed Brent crude-oil prices close to $120. Goldman Sachs Group Inc. raised its forecast for Brent crude in the second quarter of the year to $105 a barrel amid fighting in Libya between Muammar Qaddafi and rebels seeking to end his four-decade rule.

Crude for April delivery fell as much as $2.11 to $103.33 a barrel in electronic trading on the New York Mercantile Exchange, and was at $105 at 5:19 p.m. in Dubai. Yesterday, the contract settled at $105.44, the highest since Sept. 26, 2008. Prices are up 27 percent from a year ago.

IMF Forecast

In January, the International Monetary Fund revised its forecast for global economic growth this year to 4.4 percent from an earlier estimate of 4.2 percent, reflecting stronger U.S. output based on tax-cut extensions, while emerging nations lead the recovery.

Oil prices at their current levels probably won’t lead to a “significant” acceleration in inflation in advanced economies because they are recovering from a “severe recession” and still face high unemployment, Roubini, 52, told a conference on hedge funds in the Persian Gulf emirate earlier today.

“Workers don’t have much wage-bargaining power,” he said.

Joblessness in the U.S. unexpectedly dropped to 8.9 percent in February, according to a March 4 report from the Labor Department. The rate fell for a third straight month to the lowest level in almost two years as employers boosted payrolls by 192,000 amid growing confidence in the expansion.

The U.S. economy grew at a 2.8 percent annual rate in the fourth quarter, up from 2.6 percent in the previous three months, according to figures from the Commerce Department.

‘Barely Enough’

Still, Roubini said job creation this year in the U.S., the world’s biggest economy, is going to be “barely enough to satisfy the increase in labor supply.”

With unemployment keeping core inflation in check, raising interest rates in some advanced economies too soon would be a mistake, Roubini said.

ECB President Jean-Claude Trichet said on March 3 that policy makers may boost borrowing costs as soon as next month to fight increasing price pressures even as governments from Spain to Ireland struggle to lower their budget deficits and revive economic growth. Euro-region inflation quickened to 2.4 percent last month, the fastest since October 2008.

“My view of it is that the ECB is worrying too much about inflation,” Roubini said. A premature increase in interest rates by European policy makers may put “significant” pressure on the Bank of England to follow suit, he said.

U.K. Squeeze

The U.K. government is engaged in the country’s biggest fiscal squeeze since World War II as growth faltered and the economy shrank in the final quarter of 2010. With spending cuts due to take effect from next month, Prime Minister David Cameron is trying to drive growth in the private sector by easing planning restrictions, cutting business taxes and making it easier for small companies to bid for public contracts.

Soaring food and energy costs pushed inflation to 4 percent in January, twice the Bank of England’s target. While the central bank expects inflation to accelerate in the coming months, it has kept its benchmark interest rate unchanged. Still, three of the Bank of England’s nine policy makers last month voted for an increase.

“In the U.K., things are even more complicated because even before the monetary and fiscal tightening, fourth-quarter growth was negative,” Roubini said. “Monetary and fiscal tightening is coming to the U.K. at the worst of all times, when the economic activity is weak.”

The U.K. economy may expand 2 percent this year and 2.3 percent in 2012, according to IMF projections in January.

In the developing economies, the Washington-based lender expects consumer prices to average 6 percent this year. Roubini said inflation in some emerging economies “where monetary policy is behind the curve” risks going “out of control, in some cases to double digits,” unless central banks start raising interest rates soon or use exchange rates to stabilize prices.

To contact the reporters on this story: Arif Sharif in Dubai at; Alaa Shahine in Dubai at

To contact the editor responsible for this story: Andrew J. Barden at


Treasuries Decline as Oil Falls From Highest Level Since 2008, Stocks Gain

Treasuries fell as crude oil dropped from almost its highest level since September 2008 and stocks rose, reducing demand for the safety of U.S. government debt.

The yield difference between 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the securities, touched 2.55 percentage points, the widest in 32 months. Three-year debt slid before the $32 billion auction of the securities, the first of three note and bond sales this week totaling $66 billion.

“What you’ve got here is a great amount of uncertainty as it relates to oil and how things will actually play out in the Middle East,” said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.

Benchmark 10-year note yields advanced almost one basis point, or 0.01 percentage point, to 3.53 percent at 11:02 a.m. in New York, according to BGCantor Market Data. The price of the 3.625 percent security due in February 2021 slid 2/32, or 63 cents per $1,000 face amount, to 100 25/32.

The yield on the current 3-year note gained two basis points to 1.23 percent. The 30-year bond yield increased one basis point to 4.63 percent.

Crude oil for April delivery on the New York Mercantile Exchange dropped for the first time in three days, falling 0.9 percent to $104.54 a barrel. Kuwait’s oil minister, Sheikh Ahmad al-Abdullah al-Sabah, told reporters in Kuwait City today that OPEC members are discussing whether to hold an emergency meeting on possibly increasing production.

Crude Oil Prices

The price reached $106.95 yesterday, the highest level since Sept. 26, 2008, as Libyan warplanes bombed rebel positions near a crude-producing hub.

An increase in oil prices to $140 a barrel will cause some advanced economies to slide back into recession, according to Nouriel Roubini, the economist who predicted the global financial crisis.

The European Central Bank may be making a mistake by raising interest rates “too soon” when debt-ridden countries on the euro region’s periphery struggle to restore the competitiveness of exports, Roubini told reporters in Dubai.

Greek 10-year bond yields and credit-default swaps surged to a record as borrowing costs increased at a $2.3 billion sale of treasury bills. Greek bond losses extended declines to a ninth day after Greece’s credit rating was cut by Moody’s Investors Service yesterday.

Greek Yields

The yield on 10-year Greek bonds jumped as much as 48 basis points to 12.82 percent, the most since Bloomberg began collecting the data in 1988.

Spain will sell 4 billion euros of 15-year bonds at a yield of 217 basis points more than the benchmark mid-swap rate, according to a banker involved in the transaction. Portugal plans to sell up to 1 billion euros of September 2013 notes tomorrow in its second auction this year.

The three-year notes the U.S. Treasury is selling today yielded 1.273 percent in pre-auction trading, compared with 1.349 percent at the offering of the securities on Feb. 8.

Investors bid for 3.01 times the amount of available debt last month. The average for the past 10 auctions is 3.14.

Indirect bidders, which include foreign central banks, bought 27.6 percent in February, compared with the 10-sale average of 38.9 percent. Direct bidders, non-primary dealers buying for their own accounts, purchased 10.1 percent, the least in a year. The 20 primary dealers are firms that are required to underwrite the U.S. debt.

U.S. Debt Sales

The government also plans to sell $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds a day later.

Treasuries have handed investors a 0.4 percent loss this year, after a 2.7 percent drop in the fourth quarter of 2010, according to indexes compiled by Bank of America Merrill Lynch. Ten-year yields will rise to 3.93 percent by year-end, a Bloomberg survey of bank and security company estimates shows.

The U.S. jobless rate decreased to 8.9 percent in February from 9 percent in January, the Labor Department said March 4.

The Reuters/University of Michigan preliminary index of consumer confidence for March may show sentiment eased to 76.5 from 77.5 at the end of February, according to the median forecast of 66 economists before the March 11 report.

To contact the reporters on this story: Susanne Walker in New York at

To contact the editor responsible for this story: Dave Liedtka at


Australia to Probe Woolworths, Wesfarmers on Cuts to Milk Prices

Australia Milk Spat Bucks Global Food Inflation

A sign advertises 2-liter bottles of milk for A$2 in the dairy section of a Coles supermarket in Melbourne. Photographer: Carla Gottgens/Bloomberg

Australia Milk Spat Bucks Global Food Inflation

A banner advertises 2-liter bottles of milk for A$2 at a Coles supermarket in Perth. Photographer: Ron D'Raine/Bloomberg

Australia Milk Spat Bucks Global Food Inflation

Shoppers pass a cardboard sign advertising lowered milk prices in the dairy section of a Coles supermarket in Melbourne. Photographer: Carla Gottgens/Bloomberg

Australia Milk Spat Bucks Global Food Inflation

Dairy cows wait in a holding pen prior to milking at Caldermeade Farm in southeastern Victoria. Photographer: Carla Gottgens/Bloomberg

Australia Milk Spat Bucks Global Food Inflation

Dairy cows are milked on a rotating platform at Caldermeade Farm. Photographer: Carla Gottgens/Bloomberg

Australia Milk Spat Bucks Global Food Inflation

David Algie, farm manager, attaches suction nozzles to dairy cows for milking at Caldermeade Farm. Photographer: Carla Gottgens/Bloomberg

Australia Milk Spat Bucks Global Food Inflation

Milk collects in a drum under a milking platform at Caldermeade Farm. Photographer: Carla Gottgens/Bloomberg

Australia Milk Spat Bucks Global Food Inflation

Dairy cows walk back to pasture after being milked at Caldermeade Farm. Photographer: Carla Gottgens/Bloomberg

Australia Milk Spat Bucks Global Food Inflation

Dairy cows walk back to pasture after being milked at Caldermeade Farm. Photographer: Carla Gottgens/Bloomberg

Executives from Australia’s largest food retailers are scheduled to appear before parliament this week to address concerns their decision to cut the price of milk may be hurting the nation’s 7,500 dairy farms.

Wesfarmers Ltd. (WES)’s Coles supermarkets discounted milk to A$1 ($1.01) a liter from as high as A$1.49 on Jan. 26 to gain customers. Woolworths Ltd. (WOW), Aldi Group and Pick n Pay Stores Ltd. (PIK) followed the next day.

The discounts are the latest salvo in supermarket efforts to keep customers as Essen, Germany-based discount grocery chain Aldi expands in the country. Australian food prices last year had their slowest annual growth in 16 years.

“Australian consumers don’t know how good they have it,” said Charlie McElhone, manager of economics and trade at the National Farmers Federation, a group that represents Australia’s farmers. “When you look at the breakout in global food inflation, this is the place to be at the moment.”

Aldi, which opened its first Australian store in 2001, says its products are 25 percent to 40 percent cheaper than competitors and plans to add 25 outlets this year to its existing 250. Coles said it has reduced prices on 5,000 products -- about 20 percent of its inventory -- in the past six weeks.

Australian discounts are in contrast to rising global food prices, which fueled the unrest that toppled regimes in Egypt and Tunisia and pushed Libya toward civil war. The World Bank said last month that 44 million people have been pushed into extreme poverty since June as food shortages lifted a United Nations gauge of world prices to a record.

Chain Reaction

While Australian supermarkets promised to absorb the price cuts on their self-labeled milk, the reductions hurt processors like Fonterra Co-operative Group Ltd. and Kirin Holdings Co. who lose sales of more-expensive branded products. In turn, they’re expected to pass on cuts to farmers in negotiations for annual supply contracts starting in July, said Luke Mathews, a commodity strategist at Commonwealth Bank of Australia.

“The price pressure flows through the supply chain and will ultimately impact the farm,” said Mathews.

Farmer Brian Tessmann said he currently earns about 56 cents a liter on branded milk and about 40 cents on unbranded milk and needs average prices above 50 cents to break even. Some farms get as little as 20 cents a liter, he said.

“We will be the collateral damage as supermarkets try to get more people through the door to buy milk cheaper than water,” said Tessmann, 53, as he walked through dairy sheds at his property in Coolabunia, where the family has milked cows for 100 years. “We might have to give dairying away.”

Parliamentary Inquiry

Parliament called supermarket executives to an inquiry that started today to explain how the price cuts will affect the industry, the Senate economics committee said in a statement. A Coles representative is due to appear on March 22.

Prime Minister Julia Gillard’s minority Labor government relies on support from four non-party lawmakers, two of whom represent areas that list dairying as a main industry.

Australian dairy farmers are struggling with high feed costs after droughts, then record floods, destroyed crops.

The cut in the price of unbranded milk has boosted milk sales by as much as 20 percent, Wesfarmers Chief Executive Richard Goyder has said.

“It is a well-trodden path to pick out a particular product and reduce its price to get foot traffic,” said Will Seddon, who holds Wesfarmers and Woolworths in the $350 million he manages at White Funds Management Pty in Sydney. “They will make up the losses through higher prices on other products.”

Shares in Woolworths, Australia’s biggest retailer, have risen 0.1 percent this year. Wesfarmers, whose businesses range from retail to mining, has gained 3 percent.

‘No Option’

Woolworths had no option but to match Coles and has also vowed to absorb the cost, company spokesman Simon Berger said.

“Woolworths would not have started this price war with milk and shares some of the concerns of the dairy industry,” Berger said in an e-mailed statement. “A price reduction on one brand puts pressure on all brands, which over time can devalue the whole milk category.”

Australia’s dairy industry produces 9.1 billion liters of milk each year, according to industry group Dairy Australia. Even at the equivalent of $1.01 a liter, Australian milk is more expensive than in the U.S., where it costs about 87 cents, or the U.K. where it sells for around 41 cents.

Coles said it has no plans to end the cheap-milk campaign.

‘Incredibly Positive’

“The reaction we are getting from our customers is incredibly positive,” Wesfarmers’s Goyder told reporters on a Feb. 17 conference call. “Our milk sales are up 15 to 20 percent since we put this in place.”

One winner is the shopper, who saw Australian consumer prices rise last quarter at the slowest pace in almost two years as a stronger currency lowered the cost of imported goods. Consumer spending makes up half the $1.3 trillion economy.

“I spare a thought for farmers, but I have three children under four and we go through about 8 liters of milk a week,” said Eloise Parry, a stay-at-home mother, as she shopped at Coles in the Canberra suburb of Curtin. “The cheaper prices are too attractive.”

To contact the reporter on this story: Gemma Daley in Canberra at

To contact the editor responsible for this story: Peter Hirschberg at