Friday, July 11, 2008

BOJ May Keep Rate at 0.5% as Costs Weaken Spending

By Mayumi Otsuma

July 11 (Bloomberg) -- The Bank of Japan will probably keep interest rates on hold next week as rising energy and commodity costs erode incomes and discourage spending by businesses and households in the world's second-largest economy.

Governor Masaaki Shirakawa and his six colleagues will leave the overnight lending rate at 0.5 percent at a two-day meeting ending July 15, according to all 39 economists surveyed by Bloomberg. The rate, doubled in February 2007, is the lowest among major economies.

Shirakawa says the risk that record commodity prices discourages spending and derails growth is more pressing than tackling inflation. Consumer sentiment is at a six-year low and companies predict profits will fall for the first time in seven years.

``The Bank of Japan is being forced to focus on the economy's downside risks,'' said Kazuhiko Sano, chief strategist at Nikko Citigroup in Tokyo. ``Still, a rate cut could fan inflationary expectations and is out of the question.''

Japan's economy probably shrank last quarter on slower exports and consumer spending, the drivers of the expansion in the first quarter, according to economists surveyed by Bloomberg last month. The central bank lowered its assessment of consumer spending in all of Japan's nine regions in its quarterly regional economic report this week.

`Risk Materializing'

``Growth probably won't make the Bank of Japan's prediction,'' for the year ending March 2009, said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo.

Large companies expect profits to decline 7 percent in fiscal 2008, the first drop since the 2001 recession, the bank's Tankan survey showed July 1.

``A drop in corporate profits, the source for the economy's positive cycle, will definitely discourage companies from making new investment, raising wages and hiring more workers,'' said Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo. ``There's no way the bank will raise rates when incomes are being eroded and domestic demand is worsening.''

Only two of 33 economists who gave predictions through December expect a rate increase this year. The remaining 31 forecast no change. The central bank shelved in April its policy calling for higher interest rates.

April Prediction

The bank will probably say next week that the economy won't expand as much as it predicted in April while consumer inflation will be faster than projected, economists said. Policy makers will review its semi-annual outlook report published in April on July 15 at 3 p.m.

``The bank may have to push back its prediction for when the economy regains momentum,'' said Seiji Shiraishi, chief economist at HSBC Securities in Tokyo.

In April, board members predicted the economy would expand 1.5 percent in the year ending March 2009 and consumer prices excluding fresh food would climb 1.1 percent. The bank doesn't typically release new forecasts in its mid-term review, only describing how the economy and prices have performed since its last semi-annual report.

Core consumer prices rose 1.5 percent in May from a year earlier. Inflation by that measure will surge to about 2.4 percent in the third quarter, said Ryutaro Kono chief economist at BNP Paribas in Tokyo. The central bank regards prices as stable when they are between zero and 2 percent.

``Even if core prices surpass the range, that would be temporary and wouldn't trigger rate action by the bank,'' Kono said.

Shirakawa will hold a news conference at 3:30 p.m.

==============================================================================
As of 07/11/08           BOJ     BOJ     BOJ     BOJ     BOJ     BOJ
                       Rates   Rates   Rates   Rates   Rates   Rates
==============================================================================
Date of Release         07/15   08/19   09/17   10/07   10/31   11/21
Time period             2008    2008    2008    2008    2008    2008
Measure                   %       %       %       %       %       %
------------------------------------------------------------------------------
# of replies             39      33      33      33      33      33
Median Forecast         0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
% Forecast at Median   100.0%  100.0%  100.0%  100.0%  100.0%   97.0%
Average Forecast        0.50%   0.50%   0.50%   0.50%   0.50%   0.51%
Expected change         0.00%   0.00%   0.00%   0.00%   0.00%   0.00%
High Forecast           0.50%   0.50%   0.50%   0.50%   0.50%   0.75%
Low Forecast            0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Previous forecast       0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
==============================================================================
Action Economics        0.50%    ---     ---     ---     ---     ---
Aletti Gestielle        0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
BNP Paribas             0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Bank of America         0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Barclays Capital        0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
CFC Seymour             0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
CPR Asset Management    0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Capital Economics       0.50%   0.50%   0.50%   0.50%   0.50%   0.75%
Credit Suisse           0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
DBS Group               0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
DZ Bank                 0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Dai-Ichi Life Resrch    0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Daiwa Research Inst.    0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Daiwa Sec SMBC          0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Deutsche Bank           0.50%    ---     ---     ---     ---     ---
HSBC                    0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Intesa Sanpaolo         0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Investec                0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
J.P. Morgan             0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Lehman Brothers         0.50%    ---     ---     ---     ---     ---
Lloyd's TSB             0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
M.M. Warburg & Co.      0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Macquarie Securities    0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Merrill Lynch           0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Mitsubishi UFJ Sec      0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Mizuho Securities       0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Morgan Stanley          0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Nikko Citigroup         0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Nomura Securities       0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Norinchukin Research    0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
RBS Securities          0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Shinkin Asset           0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Shinshu Univeristy      0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Stone & McCarthy        0.50%    ---     ---     ---     ---     ---
Tapiola Insurance       0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Totan Research          0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
Unicredit MIB           0.50%    ---     ---     ---     ---     ---
WestLB                  0.50%    ---     ---     ---     ---     ---
Westpac                 0.50%   0.50%   0.50%   0.50%   0.50%   0.50%
==============================================================================

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

India's Inflation Accelerates to Fastest in More Than 13 Years

By Kartik Goyal

July 11 (Bloomberg) -- India's inflation accelerated to the fastest pace since 1995, raising concerns the central bank will increase borrowing costs for a third time this year.

Wholesale prices rose 11.89 percent in the week to June 28, after gaining 11.63 percent in the previous week, commerce ministry spokesman Rajeev Jain told Bloomberg News in an interview today. Economists expected an 11.75 percent increase.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

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New Zealanders' Net Wealth Posts Biggest Decline in 10 Years

By Tracy Withers

July 11 (Bloomberg) -- The average net wealth of New Zealand consumers posted the biggest fall in almost 10 years as house prices and stocks declined while rising interest rates increased debt.

Net wealth, which includes the value of homes, investments and bank deposits less debt, dropped 1.6 percent in the first quarter, according to a report released today by Auckland-based financial adviser Spicers. The value of stocks and pension funds fell 1.8 percent while debt increased 2.2 percent.

Falling net wealth adds to signs household spending may slow, curbing economic growth. Consumer confidence fell to a 17- year low in the first quarter and the economy contracted 0.3 percent, putting the economy on the brink of a recession.

As well as the decline in the value of investments, house prices are falling, Spicers said in the report e-mailed to Bloomberg News. Housing makes up about 80 percent of total assets owned by households.

``We expect the value of housing assets to remain under pressure for the foreseeable future,'' Spicers said. ``Houses are taking longer to sell, prices continue to come under pressure and household budgets are straining.''

Household debt is rising at a slower pace as consumers take a more cautious approach to borrowing, Spicers said. Households no longer have the safety net of rapidly rising house prices to give them comfort when they borrow, it said.

Average net wealth has increased 95 percent the past 10 years.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

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Foreign Direct Investment in China Jumps 45.6 Percent

By Li Yanping and Nipa Piboontanasawat

July 11 (Bloomberg) -- Foreign direct investment in China rose 45.6 percent in the first half from a year earlier, swelling inflows of cash that may stoke inflation in the world's fastest-growing major economy.

Spending by overseas companies increased to $52.4 billion, the Ministry of Commerce said today on its Web site.

China is adding controls to try to stem inflows of speculative capital from investors attracted by a strengthening yuan and interest rates at a decade high. So-called hot money inflows may have reached more than $200 billion in the first five months of this year, according to Michael Pettis, a finance professor at Peking University.

``Foreign direct investment has been one of the major channels for hot money since the beginning of 2007,'' said Shi Lei, an analyst at Bank of China Ltd. in Beijing. ``Speculators can always find a way to circumvent government rules.''

Besides the risk of stoking inflation that reached a 12- year high in February, hot money puts the nation at risk of ``massive outflows'' if expectations for currency gains reverse, according to a central bank report last month.

The yuan has gained 6.9 percent versus the dollar this year and 21 percent since a fixed exchange rate was scrapped in 2005. The key one-year lending rate is 7.47 percent, and the deposit rate is 4.14 percent.

Trade Surplus

The cash from foreign direct investment adds to the $21.4 billion pumped into the economy last month by the trade surplus.

China's foreign-exchange reserves, the world's largest, surged 40 percent to a record $1.68 trillion in March from a year earlier, according to the latest official data. The increase through June may be announced as early as today.

``As long as the yuan continues to appreciate and the economy outperforms other countries, China will remain an attractive destination for funds,'' said Zhu Baoliang, chief economist at State Information Center in Beijing, an affiliate of China's top economic planning agency.

The government is adding measures to try to stop investors from circumventing capital controls.

The State Administration of Foreign Exchange said last week that it will inspect exporters' foreign-exchange settlements from July 14 to try to prevent sham transactions that let hot money in.

China is also drafting regulations to control cross-border payments for services, with the same aim, according to an official at the regulator, who wouldn't be identified.

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net

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India's Industrial Production Grows at Slowest Pace in 6 Years

By Kartik Goyal

July 11 (Bloomberg) -- India's industrial production grew at the slowest pace in more than six years in May as spiraling prices prompted consumers to cut back on purchases of cars, fridges and other manufactured goods.

Production at factories, utilities and mines rose 3.8 percent from a year earlier after gaining a revised 6.2 percent in April, the statistics office said in New Delhi today. Economists expected a 6.5 percent increase.

Manufacturing output may weaken further as the fastest inflation since 1995 dents spending and makes it more likely the central bank will raise interest rates for a third time this year. Maruti Suzuki India Ltd., which produces half the cars sold in Asia's third-largest economy, and truck maker Tata Motors Ltd. trimmed output in May as higher borrowing costs discouraged buyers.

``With continued interest rate hikes, weakening foreign demand and rising costs of production, we are becoming more concerned about the outlook for industrial output,'' said Sonal Varma, an economist with Lehman Brothers Inc. in Mumbai. ``We expect production to moderate this year.''

Accelerating inflation, fuelled by soaring oil and commodities prices, and weaker global demand are hurting industrial production across Asia. Manufacturing in Singapore posted its biggest fall in two years in May. South Korea's output increased 8.3 percent in the same month, easing from a 10.4 percent gain in April.

Concern over weaker industrial output has contributed to a 31 percent decline in the Bombay Stock Exchange's benchmark Sensitive Index this year. Higher interest rates are also damping investor confidence.

Interest Rates

The Reserve Bank of India last month raised its benchmark interest rate twice to a six-year high of 8.5 percent and lifted its cash reserve ratio to 8.75 percent, aiming to tame inflation that reached 11.89 percent last month.

The increased cost of funds prompted lenders such as State Bank of India Ltd., the nation's biggest, ICICI Bank Ltd. and HDFC Bank Ltd. to raise lending rates. Higher borrowing costs may discourage consumer borrowing in a country where the majority of automobiles and apartments are bought on loans.

Maruti, Ford India Private Ltd. and Honda Siel Cars India Ltd. produced fewer cars in May, according to the Society of Indian Automobile Manufacturers. Ford produced 3,414 cars in May, about four times less from a year ago. Honda Siel Cars made 43 percent fewer vehicles.

`Tremendous Pressure'

``Profit margins of automakers are under tremendous pressure,'' said Sugato Sen, director of the Society of Indian Automobile Manufacturers. ``Production may decline in the coming months on higher interest rates and record inflation.''

Manufacturing, which accounts for about 80 percent of India's industrial production, gained 3.9 percent in May. Electricity output rose 2 percent, mining grew 5.5 percent. Consumer-goods production increased 7.2 percent.

Cement sales by companies such as Grasim Industries Ltd., India Cements Ltd. and other producers grew 4 percent in May, less than April's 7.2 percent gain, according to the Cement Manufacturer's Association.

A slowdown in exports of Indian clothes, steel and electronics goods may also have contributed to the drop in factory output. India's overseas sales rose 13 percent in May from a year ago, less than half of April's 31.5 percent growth.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

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Nukaga Says Japan to Increase Pension Burden on Time

By Keiko Ujikane

July 11 (Bloomberg) -- The Japanese government will increase its contribution to the national pension program as scheduled, Finance Minister Fukushiro Nukaga said, after the Nikkei newspaper reported it may postpone the plans.

``The government is not thinking of delaying its promise for now,'' Nukaga said at a press conference in Tokyo today. Japan has pledged to increase its contribution to the program to half from the current third by the year starting April 1.

The Nikkei said the plan may be postponed by at least six months because of opposition to raising the sales tax to fund it, citing Hiroyuki Sonoda, deputy policy chief of the ruling Liberal Democratic Party. The government estimates it may need 2.3 trillion yen to raise the contribution, equivalent to revenue earned by a 1 percentage-point increase in the sales tax.

``The LDP would have to have a political death wish to increase the consumption tax at this time,'' John Richards, head of debt markets strategy at RBS Securities Japan Ltd. in Tokyo, wrote in a report today. ``A cigarette tax hike is now more likely than a consumption tax hike to fund increased government contributions to the public pension fund.''

Prime Minister Yasuo Fukuda said last month that he will consider whether to raise the 5 percent sales tax ``over the next two to three years.'' Fukuda's popularity has slumped since he took office last September, and his LDP-led coalition must defend its two-thirds majority in lower house elections due by September 2009.

Cigarette Tax

Lawmakers from ruling and opposition parties began meeting last month to discuss raising tobacco taxes. Hidenao Nakagawa, a former LDP secretary-general, wants the government to consider tripling the retail price of a pack of cigarettes to 1,000 yen to help fund rising social welfare costs.

Richards of RBS Securities said a 200 yen increase ``would produce enough revenue to more than cover the required pension contribution, since the demand for cigarettes is highly inelastic.''

Economic and Fiscal Policy Minister Hiroko Ota also told reporters today that the government wasn't discussing delaying the plan to increase the pension burden.

Nukaga said the government has promised the public that it will secure stable funding based on the assumption it will raise the government's pension contribution from April 2009.

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

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Yuan's Advance This Year Matches Gains for All 2007; Bonds Rise

By Judy Chen and Kim Kyoungwha

July 11 (Bloomberg) -- The yuan's advance this year matched its gains for all of 2007 as China pledged to maintain efforts to strengthen the currency to stem inflation and narrow the trade surplus. Bonds rose.

The local currency climbed to the highest since authorities abandoned a dollar link in July 2005 as U.S. Treasury Secretary Henry Paulson yesterday urged China to accelerate the yuan's appreciation that is ``a key'' to the country's economic progress. The yuan rose 2.5 percent in the past three months, the best performance among the 10 most-active currencies in Asia outside Japan, as Premier Wen Jiabao reaffirmed in July that the battle against inflation remains his government's top priority.

``Inflation is still a huge issue,'' said Naomi Fink, a Tokyo-based senior currency strategist at Bank of Tokyo- Mitsubishi UFJ Ltd. ``China cannot afford to support exports by stopping the yuan rise. The dollar's strength would only aggravate already existing inflationary pressure.''

The yuan strengthened 0.34 percent this week to 6.8359 a dollar as of 3:05 p.m. in Shanghai, from 6.8589 on July 4, according to the China Foreign Exchange Trade System. It touched 6.8352 today, the strongest since the end of the dollar peg, increasing this year's gain to 6.86 percent this year.

Quicker Inflation

Inflation accelerated to 8.1 percent in the first five months of the year, from 4.8 percent for all of 2007, posing a threat to economic stability as the nation prepares to host the Olympics next month. The strengthening of the yuan has helped lower import costs as oil prices reached a record $145.85 a barrel on July 3 and narrow a record trade surplus that has flooded the economy with cash.

The June trade surplus narrowed 21 percent to $21.4 billion from a year earlier, the customs bureau said yesterday. The yuan is ``obviously substantially undervalued,'' Dominique Strauss- Kahn, managing director of the International Monetary Fund, said on July 9.

``Solid export growth and the still-large trade surplus should support a stronger effective yuan exchange rate going forward,'' Song Yu, an economist at Goldman Sachs Group Inc. in Hong Kong, said in a report yesterday.

The Westpac Nominal Effective Exchange Rate, a trade- weighted index for the yuan, has climbed 6 percent this year, almost double the 3.4 percent gain last year.

`Biggest Challenge'

``The biggest challenge for the central bank is to deter bets on yuan gains while allowing its steady appreciation,'' said Liu Dongliang, a foreign-exchange analyst in Shenzhen at China Merchants Bank Co., the country's sixth largest lender. ``Wider fluctuations would keep some hot money out of the country by raising speculators' transaction costs.''

Liu said the currency won't rise more than 5 percent versus the dollar in the second half of this year.

In its efforts to tighten controls on speculative capital, the State Administration of Foreign Exchange, said July 2 that it will require exporters to deposit foreign-currency income, including prepayments, into designated bank accounts from July 14 before the currency regulator confirms authenticity of the revenue and allows it to be converted.

``Exporters are hurrying to repatriate earnings from overseas and convert the money to the yuan before the start of the new rules, which boosted the demand for the local currency in the past two days,'' said Liu Hantao, a foreign-exchange trader at China Construction Bank Corp. in Beijing.

Bonds Advance

One-year non-deliverable forward contracts show traders are betting on a 5.7 percent advance in the yuan to 6.465 in the next 12 months. The currency will reach 6.65 per dollar by year- end, according to the median estimate of 27 analysts surveyed by Bloomberg News.

Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date. Non-deliverable contracts are commonly used for currencies that aren't freely convertible and are settled in dollars.

Local-currency bonds rose after the finance ministry sold debt at a lower-than-expected yield today. The government sold at least 24 billion yuan ($3.5 billion) of three-year bonds at a yield of 3.92 percent, compared with 3.95 percent traders expected, said Nie Shuguang, a fixed-income trader at Industrial Bank Co. in Shanghai.

The yield on the 4 percent note due in October 2012 fell 10 basis points to 4.05 percent, according to the China Interbank Bond Market. The price climbed to 99.79 from 99.41. A basis point is 0.01 percentage point.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.

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Lehman Takes `Pounding' Again as Speculation Drags Down Shares

By Yalman Onaran

July 11 (Bloomberg) -- Lehman Brothers Holdings Inc., the securities firm that lost almost 75 percent of its market value this year, sank to the lowest since 2000 in New York trading as customers' votes of confidence failed to halt speculation that the stock may drop further.

Lehman, once the biggest U.S. underwriter of mortgage bonds, fell $2.44, or 12 percent, to $17.30 in New York Stock Exchange composite trading yesterday. Shares of the New York- based investment bank lost 22 percent in the last two days.

Yesterday's speculation centered on two clients backing away from the firm. Pacific Investment Management Co., manager of the world's biggest bond fund, and hedge fund SAC Capital Advisors LLC both said publicly that they continued to do business with the company. Pimco fund manager Bill Gross said in an interview with CNBC that there's ``no question'' about the firm's solvency.

Pimco and SAC's endorsements were overwhelmed as Lehman, led by Chief Executive Officer Richard Fuld, dropped alongside home-loan financing companies Fannie Mae and Freddie Mac. Both face pressure to raise more capital amid a credit contraction that has saddled banks with $408 billion of writedowns. Lehman has taken a ``pounding'' from traders betting the shares will drop since rival Bear Stearns Cos. collapsed in March, according to Richard Bove, an analyst at Ladenburg Thalmann & Co.

``People are worried about Fannie and Freddie, Lehman falls; people aren't worried about them, Lehman falls again,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. ``This is one where you scratch your head and ask `what's going on?' It's fear and over-reaction.''

`Concentrated Effort'

Fuld, 62, declined to comment through a firm spokesman.

Short-sellers, who borrow shares betting that they'll decline, are spreading rumors about the bank in an organized attempt to depress the stock, according to Bove.

``There's a concentrated effort to break Lehman,'' Bove said. `` And I can't say it won't work because it worked with Bear.''

Similar speculation may have contributed to the demise of Bear Stearns when clients and creditors stopped doing business with the firm. The Federal Reserve has since allowed brokers to borrow from the central bank, as commercial lenders do. Since Bear Stearns's failure and takeover by JPMorgan Chase & Co. in March, Lehman has boosted its cash holdings and reduced dependence on short-term funding.

U.S. Representative Paul Kanjorski, a Democrat from Pennsylvania, said he wasn't convinced the sinking share prices resulted from wrongdoing.

`Disrupt the Balance'

``There are winners and losers in the market,'' said Kanjorski, chairman of the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. ``We've got to be very careful not to disrupt that balance because if we do we're effectively destroying the market.''

Freddie Mac shares dropped 22 percent yesterday to $8, extending its drop in two days to 41 percent. Fannie Mae has sunk 25 percent in the last two days.

The cost of protecting debt sold by Lehman Brothers from default rose to the highest in almost four months, according to traders of credit-default swaps.

Contracts on the New York-based broker jumped 40 basis points to 325 yesterday, according to Phoenix Partners Group in New York. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

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Fannie, Freddie Too Critical to Fail, Lawmakers Say

By Dawn Kopecki

July 11 (Bloomberg) -- Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, are too big for the government to allow them to fail, leading Republican and Democratic lawmakers said.

A government takeover of one or both companies is one of several options that have been considered by White House officials, according to a person familiar with the discussions who spoke on condition of anonymity. Senior Bush administration officials are considering placing either or both firms in a conservatorship if their problems get worse, the person said.

The companies, which own or guarantee about half of the $12 trillion of U.S. mortgages, can count on a federal lifeline, said Republican Senator John McCain, and Democratic Senator Charles Schumer. Fannie Mae and Freddie Mac would have to post pretax losses and writedowns of about $77 billion before the U.S. would be compelled to start a rescue, according to estimates by Fox-Pitt Kelton and Friedman, Billings, Ramsey & Co.

``They must not fail,'' McCain, of Arizona, said yesterday during a campaign stop in Belleville, Michigan. Fannie Mae and Freddie Mac ``are vital to Americans' ability to own their own homes,'' he said at an earlier stop in the state, one of the worst affected by the surge in foreclosures.

The remarks by the presumptive Republican presidential candidate and Schumer, head of the Joint Economic Committee, indicate Congress would push the administration to use government funds to prevent the companies from failing.

The New York Times earlier today reported the government is considering a takeover of the companies, citing people briefed on the plan whom it didn't name.

`Critical Capital'

Under a 1992 law, the Office of Federal Housing Enterprise Oversight can put Fannie Mae or Freddie Mac into a conservatorship if their ``critical capital'' falls below guidelines. White House and Treasury Department spokespeople didn't immediately return calls seeking comment on whether the administration has considered plans to invoke the authority.

Shares in Washington-based Fannie Mae and Arlington, Virginia-based Freddie Mac shares slid to the lowest level since 1991 this week on concern the firms don't have enough capital to offset writedowns. Their failure would deepen a housing recession that already is the worst in a quarter century.

``They are adequately capitalized, holding capital well in excess of the'' requirements, James Lockhart, the director of Ofheo, said in a statement yesterday. ``They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.''

Estimates of Losses

Fannie Mae would need to lose $40 billion ``immediately'' and Freddie Mac $37 billion to be considered insolvent, New York- based Fox-Pitt analyst Howard Shapiro said in a report this week. Arlington, Virginia-based Friedman Billings analyst Paul Miller estimates losses of about $45 billion and $30 billion before they would fail.

Central banks, pension funds and other investors hold $5.2 trillion in debt sold by the companies.

While bondholders can count on a backstop, equity investors can't expect the government to halt a tumble in the companies' shares, Representative Spencer Bachus, the senior Republican on the House Financial Services Committee, said yesterday.

Fannie Mae slid 14 percent yesterday to close at $13.20 in New York, down 67 percent this year. Freddie Mac declined 22 percent to close at $8, bringing its slump since the end of December to 77 percent.

Stockholders should be prepared for more ``difficulties,'' said Kevin Flanagan, a fixed-income strategist in Purchase, New York, for Morgan Stanley's individual investor clients. ``Continued woes, continued difficulties are the expectation, and this is going to take a while to play itself out.''

Fair Value

Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair-value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, former St. Louis Federal Reserve President William Poole said.

``Markets should be assured that the federal government will stand by Fannie Mae and Freddie Mac,'' Schumer, of New York, said in a statement yesterday. They ``are too important to go under,'' and Congress ``will act quickly'' if necessary, he said.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson, while noting the central role of Fannie Mae and Freddie Mac in ending the mortgage-finance crisis, yesterday refrained from endorsing any extra federal backing for the companies.

The firms ``are playing a very important and vital role right now,'' Paulson said in testimony to the House Financial Services Committee. They ``need to continue to play an important role in the future,'' he said.

`Expand' Capital

Fannie Mae and Freddie Mac ``are well capitalized now'' in ``a regulatory sense,'' Bernanke told the panel. Still, the companies, like all financial institutions, need ``to expand their capital bases,'' the Fed chief said.

The federal government can't afford to take over all of Fannie Mae's and Freddie Mac's operations, because such a move would more than double federal government debt outstanding and ``have disastrous consequences for the dollar,'' said Joshua Rosner, an analyst with Graham Fisher & Co. Inc. in New York.

Instead, the government could move the companies' combined $1.5 trillion investment portfolios into a separate limited liability corporation that would gradually liquidate the assets, Rosner said. Fannie Mae and Freddie Mac would still be able to support the U.S. housing market by packaging home loans into securities they guarantee.

The U.S. Treasury, which analysts said would play a central role in any rescue of the firms, currently has the authority to buy $2.25 billion in each of the companies' debt.

Great Depression

Congress created Fannie Mae during the Great Depression to revive the housing market and formed Freddie Mac in 1970. While a federal rescue is ``premature,'' Representative Paul Kanjorski said lawmakers and officials should prepare for more trouble.

``I don't think any of us could anticipate all the contingencies that can happen,'' said Kanjorski, a Democrat from Pennsylvania. ``We recognize that we're in very dangerous waters, very stormy. We should have contingencies.''

A taxpayer-funded rescue shouldn't be an option, said Representative Jeb Hensarling, chairman of the fiscally conservative Republican Study Committee.

``The government should not be supporting the system as is,'' said Hensarling, of Texas. Fannie Mae and Freddie Mac ``no longer helps the market in the way that it once did'' while posing ``a huge systemic risk'' to the economy, he said.

In a sign that bondholder confidence is more stable, the difference in yields between Fannie Mae's 10-year notes and 10- year U.S. Treasuries narrowed by 2.2 basis points yesterday from a four-month high of 89.9 basis points July 7. Freddie Mac's yield premium diminished 2 basis points, from a four-month high of 96 basis points this week.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net

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U.S. Trade Gap Probably Widened in May on Record Oil Prices

By Bob Willis

July 11 (Bloomberg) -- The U.S. trade deficit widened in May as record oil prices pushed up the value of imports faster than American companies expanded their exports, economists said before reports today.

The gap grew 2.6 percent to $62.5 billion, according to the median forecast in a Bloomberg survey of 74 economists before a Commerce Department report, compared with a shortfall of $60.9 billion the prior month. Another report from the Labor Department may show the cost of imported goods increased in June for a sixth month, as commodity prices surged.

Rising prices for oil, metals and other imported commodities are boosting the trade deficit. Still, the dollar's six-year slide, coupled with stronger growth in Asia, Latin America and the Middle East, is spurring demand for equipment made by companies such as Caterpillar Inc., helping to keep the economy from contracting.

``It's the high energy prices that are causing the trade deficit to widen,'' said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina. ``Beneath the surface, our sense is that trade will contribute positively to growth again in the second quarter.''

The Commerce Department will issue the report at 8:30 a.m. in Washington. Economists' estimates of the deficit ranged from $59.5 billion to $65 billion.

Another report at the same time from the Labor Department may show import prices rose 2 percent last month, according to a Bloomberg survey of economists. That would bring the year-over- year gain to 18.6 percent, and compares with a 2.3 percent rise in May from the prior month.

Consumer Confidence

Gasoline over $4 a gallon helped push consumer confidence in July to near-three-decade lows, economists surveyed said before another report today. The University of Michigan/Reuters preliminary confidence index for July probably came in at 55.5, the lowest since 1989, from 56.4 at the end of June. The survey will be released at 10 a.m. New York time.

The economy probably grew 1.5 percent in the second quarter, as growing exports helped counter weakness in manufacturing and construction, according to a Bloomberg survey of economists taken the first week of July. The economy grew 1 percent in the first quarter, when net exports contributed 0.8 percentage point to the expansion.

Tax Rebates

About $78 billion in tax rebates probably gave consumer spending a boost in the second quarter, helping to spur purchases of foreign televisions and cars. Economists surveyed by Bloomberg forecast consumer spending rose 2 percent in the April-to-June period, compared with a 1.1 percent gain in the first quarter.

Faster growth overseas is spurring exports of U.S.-made goods, ranging from Boeing Co. aircraft, to mining and construction equipment, steel and grains. China's economy grew 10.6 percent in the first quarter from a year earlier. India's expanded 8.8 percent, Argentina's 8.4 percent and Brazil's 5.8 percent.

In response to growing demand from China, Caterpillar, the world's biggest maker of earthmoving equipment, will build a factory in eastern China to make light hydraulic excavators for the world's largest earthmover market after the U.S.

``Our customers in China are demanding a greater variety of construction equipment,'' Mary Bell, Caterpillar's global vice president for construction machines, said in a statement June 30.

Dollar's Decline

U.S. exporters are also getting a boost from the dollar, which was down 8.3 percent against a trade-weighted basket of currencies of major trading partners in the 12 months ended in May. The dollar is down by about 27 percent since February 2002, and that has helped push up the price of commodities.

Charlotte, North Carolina-based Nucor Corp., the largest U.S.-based steelmaker by market value, is working to keep up with surging demand from emerging economies, many of them profiting from gains in prices of oil and other commodities, Chief Executive Officer Dan DiMicco said on June 25.

``Because of the global shortage of steel, we have a strong ability to export,'' DiMicco said in an interview in New York. Demand for steel and other commodities is in a ``30-plus-year bull market,'' he said, as emerging economies including China and India expand infrastructure.

Bloomberg Survey

================================================================
                            Trade   ImportU of Mich
                          Balance   Prices    Conf.
                           $ Blns     MOM%    Index
================================================================

Date of Release              07/11    07/11    07/11
Observation Period             May     June   July P
----------------------------------------------------------------
Median                       -62.5     2.0%     55.5
Average                      -62.6     2.0%     55.3
High Forecast                -59.5     3.0%     57.0
Low Forecast                 -65.0     0.6%     51.0
Number of Participants          74       52       60
Previous                     -60.9     2.3%     56.4
----------------------------------------------------------------
4CAST Ltd.                   -63.9     2.5%     54.5
Action Economics             -63.5     2.4%     55.0
AIG Investments              -63.0     ---      57.0
Aletti Gestielle SGR         -63.3     ---      55.0
Argus Research Corp.         -62.5     0.6%     ---
Banc of America Securitie    -62.1     ---      ---
Bank of Tokyo- Mitsubishi    -62.6     1.6%     55.0
Bantleon Bank AG              ---      2.1%     55.0
Barclays Capital             -63.5     2.3%     53.5
BBVA                         -62.0     1.6%     51.0
BMO Capital Markets          -61.9     1.7%     55.5
BNP Paribas                  -62.4     1.5%     55.5
Briefing.com                 -61.0     ---      55.0
Calyon                       -61.5     ---      55.5
CFC Group                    -61.7     ---      57.0
CIBC World Markets           -63.0     ---      ---
Citi                         -65.0     2.4%     56.0
ClearView Economics          -61.5     ---      ---
Credit Suisse                -62.7     1.5%     56.0
Daiwa Securities America     -61.5     ---      55.0
DekaBank                     -62.0     2.1%     55.0
Desjardins Group             -64.1     1.5%     53.0
Deutsche Bank Securities     -61.0     2.5%     56.0
Deutsche Postbank AG         -62.0     2.0%     56.0
Dresdner Kleinwort           -64.3     2.2%     55.0
DZ Bank                      -61.5     1.9%     54.5
First Trust Advisors         -62.1     1.8%     56.0
Fortis                       -63.2     ---      56.0
GCI Capital                   ---      2.0%     ---
Global Insight Inc.          -62.8     ---      56.0
Goldman, Sachs & Co.         -61.5     ---      ---
H&R Block Financial Advis    -62.0     1.8%     ---
Helaba                       -59.5     1.5%     54.0
High Frequency Economics     -63.0     3.0%     53.0
Horizon Investments          -63.0     2.2%     54.0
HSBC Markets                 -63.5     1.5%     56.0
IDEAglobal                   -61.5     2.0%     55.5
Informa Global Markets       -64.3     1.5%     56.0
ING Financial Markets        -62.5     ---      56.0
Insight Economics            -63.0     2.5%     55.0
Intesa-SanPaulo              -62.5     2.3%     55.0
J.P. Morgan Chase            -61.1     1.9%     56.0
Janney Montgomery Scott L    -62.0     2.1%     ---
JPMorgan Private Client      -60.5     ---      ---
Landesbank Berlin            -63.0     1.6%     53.0
Lehman Brothers              -62.5     2.2%     55.0
Lloyds TSB                   -62.0     2.0%     56.0
Maria Fiorini Ramirez Inc    -63.0     2.8%     ---
Merrill Lynch                -64.4     1.0%     56.0
Moody's Economy.com          -61.7     1.9%     57.0
Morgan Keegan & Co.          -62.5     1.6%     ---
Morgan Stanley & Co.         -64.0     ---      ---
National Bank Financial      -64.0     ---      57.0
National City Corporation    -62.9     1.4%     56.4
Natixis                      -64.6     2.5%     54.0
Newedge                      -61.8     ---      55.2
Nomura Securities Intl.      -62.0     ---      ---
Nord/LB                      -63.0     3.0%     57.0
PNC Bank                     -64.0     ---      ---
RBS Greenwich Capital        -64.0     ---      55.0
Ried, Thunberg & Co.         -63.5     2.8%     56.0
Schneider Trading Associa    -61.2     2.1%     53.8
Scotia Capital               -63.5     2.1%     ---
Societe Generale             -62.5     ---      56.0
Stone & McCarthy Research    -63.2     1.5%     55.5
TD Securities                -62.0     ---      55.0
Thomson Financial/IFR        -62.3     1.8%     56.0
Tullett Prebon               -62.7     ---      55.5
UBS Securities LLC           -63.5     2.0%     56.0
Unicredit MIB                -62.5     1.5%     54.0
University of Maryland       -60.9     0.7%     55.5
Wachovia Corp.               -62.5     ---      ---
Wells Fargo & Co.            -63.5     2.4%     54.0
WestLB AG                    -62.0     2.0%     56.0
Westpac Banking Co.          -62.5     2.0%     55.0
Wrightson Associates         -63.5     2.8%     56.0
================================================================

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net

Deflation May Return to World Economy, Say SocGen, Deutsche

By Simon Kennedy

July 11 (Bloomberg) -- Societe Generale SA's Albert Edwards, who predicted the Asian currency crisis a decade ago, is warning central bankers that deflation may soon overtake surging prices as the biggest risk to the world economy.

``Inflation fears are overdone and the deflation threat could reappear, prompted by a global recession and collapse in the commodity bubble,'' London-based Edwards, 47, said in an interview. He has been ranked Europe's top global strategist for the last seven years by the Thomson Extel survey of investors.

While his forecast that prices in the U.S. and Europe will be falling by the end of 2009 is dismissed by most economists, it echoes last week's acknowledgement from the Bank for International Settlements that a ``greater'' global slowdown risks triggering deflation. As central banks from Mumbai to Frankfurt raise interest rates, policy makers could yet be forced into a U-turn, say economists at Deutsche Bank AG.

``Far-fetched as it may sound at present, fears of deflation could return and interest rates could drop again toward the lows reached earlier this decade,'' said economists Peter Hooper, Thomas Mayer and Torsten Slok in a July 7 report. While it's not part of their central forecast, a period of declining prices is more likely than runaway inflation, they say.

Just over four years ago, the Fed's benchmark interest rate was at a 45-year low of 1 percent as it fought the last deflation scare. Japan's escape from a decade of declining prices remains fragile with prices excluding those for food and energy dropping 0.1 percent in May.

Deflation Worry

``The fact that people are worrying about inflation now doesn't mean they won't be worrying about deflation in a year,'' said Edwards.

Most economists are still raising their forecasts for consumer prices as food and fuel costs set records. Larry Kantor, head of research at Barclays Capital in New York, estimates global inflation of 5 percent this year, the fastest pace since 1983.

Central bankers are ratcheting up their inflation-fighting rhetoric. European Central Bank President Jean-Claude Trichet said July 9 that he sees the ``first signs'' of inflation pushing up wages. Federal Reserve Bank of Richmond President Jeffrey Lacker said the previous day the central bank should consider acting to limit inflation as the threat of a steep economic downturn fades.

Long Way

The ECB already lifted its key rate last week to a seven-year high of 4.25 percent and the Fed left its main rate at 2 percent on June 25 amid ``upside risks to inflation.'' Merrill Lynch & Co. economists predict 78 percent of the central banks they monitor will increase rates.

``We're a long way from deflation,'' said Dario Perkins, an economist at ABN Amro Holding NV. ``We have to get through the inflation problem first.''

Edwards counters that such concerns are exaggerated because weaker global growth will prevent workers from winning pay increases and companies from raising prices. That will depress so- called core inflation, which strips out oil and food prices, he says.

``The market would then wonder why central bankers spent so long jumping at inflationary shadows,'' said Edwards, who in May recommended investors cut their exposure to stocks and boost holdings of government bonds. In the U.S., core prices rose 2.3 percent in May, less than the 4.2 percent headline advance.

Inflation Bout

The current bout of global inflation may itself contain the key to a spiral of falling prices, says Mark Cliffe, chief economist at ING Financial Markets in London.

A jump in the oil price to $200 per barrel could generate a global slump, sparking a plunge in the price of crude and ``outright deflation in the U.S.,'' he says. Oil cost $136 a barrel yesterday, down from a record $145.85 on July 3.

At the Basel, Switzerland-based BIS, the bank for central banks, the concern is the present ``global slowdown could be much greater and longer-lasting than would be required to keep inflation under control,'' it said June 30. ``Over time, this could potentially even lead to deflation. Such an outcome, even if unlikely, cannot be ruled out entirely.''

David Owen, chief economist at Dresdner Kleinwort in London, says deflation may be some way off yet, but may develop in three to five years if the world economy remains sluggish.

``Whatever is happening with inflation at the moment, the outlook for growth is pretty grim,'' said Owen. ``You can build a fairly convincing case that deflation will return to the agenda.''

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net.

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Deflation May Return to World Economy, Say SocGen, Deutsche

RBS in Talks to Sell ABN Assets to National Australia

By Stuart Kelly

July 11 (Bloomberg) -- Royal Bank of Scotland Group Plc, seeking to restore capital depleted by writedowns, is in talks to sell assets in Australia and New Zealand to National Australia Bank Ltd.

National Australia said today it's in discussions to buy the investment and corporate banking units that RBS acquired in last year's 14.3 billion-euro ($23 billion) purchase of part of ABN Amro Holding NV. There is ``no certainty'' that a deal will happen, Australia's biggest bank said in a statement.

RBS led the ABN takeover, the biggest banking acquisition on record, just as credit markets froze up, and the transaction resulted in about 2 billion pounds ($4 billion) of writedowns at the Edinburgh-based bank this year. A sale to National Australia could fetch as much as A$450 million ($430 million), said Wilson HTM analyst Brett Le Mesurier.

``After the past year, RBS will want to get as many of their non-core assets out of the way as quickly as they can so they can rebuild their reserves,'' said Angus Gluskie, who helps oversee the equivalent of $500 million at White Funds Management in Sydney. ``At the time of the ABN acquisition, it was flagged that the Australian operations may be hived off.''

Melbourne-based National Australia would get a business ranked sixth in underwriting stock sales in Australia and New Zealand, adding about 750 employees. The bank's shares slipped 0.6 percent at 3:38 p.m. in Sydney, bringing declines this year to 27 percent.

ABN Picked Apart

RBS has posted $15.4 billion of asset writedowns and credit losses amid the global credit squeeze, ranking it seventh among the biggest losers in slumping financial markets. Last month it raised 12.3 billion pounds in Europe's biggest rights offering. Financial Services AG, Switzerland's biggest insurer, yesterday pulled out of bidding for RBS's insurance unit.

The talks with National Australia come as Zurich Financial Services AG yesterday pulled out of bidding for RBS's insurance unit, a deal valued at as much as 7.5 billion pounds.

RBS and Fortis, partners in the ABN acquisition, have been selling assets of the Amsterdam-based company in Europe and Asia. Deutsche Bank AG this month agreed to pay 709 million euros for the Dutch commercial-lending units Fortis got in the takeover.

Fortis is also auctioning its stake in a Chinese fund manager that accompanied the ABN purchase, seeking as much as $250 million, people familiar with the matter said last month.

Bad Idea?

ABN Amro Australia Holdings Pty spokeswoman Jill Valentine said the bank appointed Lazard Carnegie Wylie in March to advise on its businesses. She declined to comment on today's statement by National Australia.

ABN Amro advised on 11 Australian deals valued at $5.1 billion over the past year, Bloomberg data show. It has a 7.9 percent market share in Australia and New Zealand of equity underwritings worth $1.26 billion in 2008.

National Australia might struggle to digest the ABN businesses, said Wilson HTM's Le Mesurier.

``I'm not convinced that commercial banks should be buying investment banks,'' he said. ``They're very different types of businesses.''

More Provisions

In a separate statement, National Australia said it may have to increase provisions for $1.1 billion of investments in collateralized debt obligations as the global economy weakens.

The economic environment has deteriorated since March 31, when an A$181 million provision was made against the CDO investments, which include some U.S. subprime mortgage securities, said Brandon Phillips, a spokesman for the company.

``It tells us that National Australia is more exposed than it and the market previously thought,'' said Hans Kunnen, head of investment market research in Sydney at Colonial First State Global Management, which holds about $128 billion of assets.

To contact the reporter for this story: Stuart Kelly in Sydney skelly22@bloomberg.net

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U.K. Banks Want More Liquidity Help From BoE, Telegraph Says

By David Altaner

July 11 (Bloomberg) -- U.K. banking officials will meet today with the Bank of England to seek broader terms for a liquidity funding plan that was started in April, the Daily Telegraph reported, citing people familiar with the matter.

The bankers will say that the Special Liquidity Scheme hasn't brought down Libor, the lending rate between banks, or mortgage rates, the newspaper said.

The plan accepts triple A-rated securitized bonds backed by mortgages and credit-card debt and the underlying business must have been transacted by the end of last December, the Telegraph said.

Some bankers may press for the plan to include mortgages written this year, the newspaper said, adding that it started at 50 billion pounds ($99 billion) and may need to go to 100 billion pounds. The Bank wouldn't comment, the Telegraph said.

To contact the reporter on this story: David Altaner in London at daltaner@bloomberg.net

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Asian Currencies Set for Weekly Gain, Led by South Korea's Won

By Aaron Pan and Kim Kyoungwha

July 11 (Bloomberg) -- Asian currencies headed for a weekly gain, led by South Korea's won as policy makers there pledged to shore up the local currency and tame inflation.

The won's 4.7 percent gain this week, the most since March 1998, makes it the world's best performer. Finance Minister Kang Man Soo yesterday announced the government will tackle risks stemming from oil costs and inflation, while Bank of Korea Governor Lee Seong Tae said the bank may intervene if necessary because the currency market ``overreacts.'' Six out of the 10 most-traded currencies in Asia outside of Japan rose this week.

``Few market participants are willing to run counter to the government that remains so steadfast in stopping the dollar's ascent,'' said Ko Yun Jin, a currency dealer with Kookmin Bank in Seoul. ``Still, there's pent-up demand for the dollar from importers in need of settlements.''

South Korea's currency traded at 1,001.60 against the dollar at 12:26 p.m. in Seoul, from 1,002.90 yesterday, according to Seoul Money Brokerage Services Ltd. The weekly advance trims its loss this year to 7 percent.

The currency rallied this week as President Lee Myung-Bak dismissed the nation's currency policy chief, signaling the end of his support for a weaker won. Industrial Bank of Korea estimated the government sold as much as $7 billion on July 9 alone to shore up the won.

Elsewhere, the Singapore dollar added 0.2 percent this week to S$1.3604, Indonesia's rupiah advanced 0.5 percent to 9,164 and Vietnam's dong rose 0.2 percent to 16,821.50.

Malaysia's Ringgit

Malaysia's ringgit climbed on speculation investors will shun the U.S. currency as the prospect of widening credit-market losses gives the Federal Reserve less room to raise interest rates. The two largest buyers of U.S. home loans, Fannie Mae and Freddie Mac, may need to be bailed out, former St. Louis Fed President William Poole said this week.

The ringgit headed for its first weekly gain in three after U.S. stocks entered a bear market this week for the first time since 2002. Six of Asia's 10 most-traded currencies climbed this week after traders said central banks from South Korea to Malaysia bought their own currencies to help stem inflation.

``The dollar is on a weak footing and the flows are slowly coming for the ringgit,'' said Suresh Kumar Ramanathan, a rates and currency strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. ``Asia's inflation is still a problem and the authorities are looking for currency strength to soak up the price pressure.''

The ringgit traded at 3.2455 per dollar compared with 3.2465 late yesterday, according to data compiled by Bloomberg. The currency has risen 0.7 percent this week.

Philippine Peso

The Philippine peso headed for a third week of declines on speculation higher oil costs will stoke inflation and spur demand for the U.S. currency to meet the cost of fuel imports.

The peso, the worst performer of the past three months among the 10 most-active Asian currencies excluding the yen, fell after crude oil rose 4 percent yesterday. The Philippines imports almost all of the oil it needs and the cost of these purchases jumped 58 percent in the first four months of the year, official figures show. Inflation in the Southeast Asian nation accelerated to a 14-year high of 11.4 percent in June.

``Because of the Philippines dependency on imports, it's been performing worse'' than most currencies in the region as higher oil prices boost demand for dollars, said Dwyfor Evans, a currency strategist at State Street Global Markets in Hong Kong. While ``others have come out strongly to defend their currencies, this seems to be lacking in the Philippines,'' he said.

The currency fell 0.5 percent to 45.820, according to Tullett Prebon Plc. It's set for a 1 percent drop this week.

Taiwan's dollar slid 0.1 percent to NT$30.427 this week and Thailand's baht declined 0.7 percent to 33.73.

To contact the reporters on this story: Aaron Pan in Hong Kong at apan8@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.

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Korean Won Completes Biggest Weekly Gain Since 1998; Bonds Fall

By Kim Kyoungwha and Judy Chen

July 11 (Bloomberg) -- South Korea's won had its biggest weekly gain in a decade as President Lee Myung Bak vowed to ``get rid of factors'' in the foreign-exchange markets that are pushing up inflation. Bonds declined.

The won rose 4.8 percent this week, the world's best performer, after the Ministry of Finance and central bank said they would use the nation's $258 billion of foreign reserves to support the currency. Industrial Bank of Korea estimated they spent as much as $7 billion buying the won on July 9 alone.

``Few market participants are willing to run counter to the government that remains so steadfast in stopping the dollar's ascent,'' said Ko Yun Jin, a currency dealer with Kookmin Bank in Seoul. ``Still, there's pent-up demand for the dollar from importers in need of settlements.''

South Korea's currency rose 0.1 percent to 1,002.30 against the dollar at the 3 p.m. close of trading, compared with 1,002.90 yesterday, according to Seoul Money Brokerage Services Ltd. Its weekly advance was the most since March 1998 and trimmed its loss this year to 6.6 percent.

``I will do my utmost to revive the economy, a task which was entrusted to me,'' Lee said in a speech delivered at the National Assembly today in Seoul. ``The government will gradually get rid of factors in the financial and foreign exchange markets that are putting upward pressure on prices.'' Lee dismissed the nation's currency policy chief on July 7, signaling the end of his support for a weaker won.

Finance Minister Kang Man Soo pledged yesterday the government will tackle risks stemming from oil costs and inflation, while Bank of Korea Governor Lee Seong Tae said the bank may intervene if necessary because the currency market ``overreacts.''

`Poor Fundamentals'

Record oil prices caused inflation to accelerate in June to a 10-year high of 5.5 percent, widening the nation's current- account deficit and triggering a truckers' strike.

New York-based Brown Brothers Harriman & Co. recommended buying the dollar at 1,000 with a target of 1,030, citing the nation's weak economic conditions.

``We think Korea fundamentals remain poor, and that foreign-exchange intervention without a supportive rate hike will not have any lasting impact,'' the firm's currency strategists led by Marc Chandler wrote in a note to clients yesterday.

Central banks intervene in currency markets by arranging sales or purchases of foreign exchange.

Local-currency bonds fell for a second day, keeping the benchmark five-year yield near the highest since 2002 on speculation the Bank of Korea will raise borrowing costs.

Governor Lee, after leaving the benchmark interest rate unchanged at a seven-year high of 5 percent yesterday, said the pace of inflation won't slow quickly.

Lee's comments ``turned hawkish,'' DBS Group Holdings Ltd.'s economist Ma Tieying said in a report today. That ``raises market expectations that the Bank of Korea may hike rates in the next few months.''

The yield on the 5.25 percent note due March 2013 rose 5.3 basis points to 6.16 percent, according to Korea Exchange. The price fell 0.16, or 16 won per 10,000 won face amount, to 98.13. A basis point is 0.01 percentage point.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Judy Chen in Shanghai at xchen45@bloomberg.net;

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Australia, New Zealand Dollars Gain on Outlook for U.S. Rates

By Ron Harui and Candice Zachariahs

July 11 (Bloomberg) -- The Australian and New Zealand dollars gained speculation credit-market losses in the U.S. will deepen, undermining the case for the Federal Reserve to raise interest rates.

Australia's dollar traded near a 25-year high and New Zealand's dollar headed for a third day of gains after Treasury Secretary Henry Paulson told lawmakers that markets will take ``additional time'' to stabilize Fannie Mae and Freddie Mac, the largest U.S. providers of home-mortgage financing. Prospects the two nations will retain their interest-rate advantage over the U.S. spurred investors to put funds into higher-yielding assets.

``A Fed rate hike may no longer be on the cards as the U.S. financial market turmoil hasn't ended yet,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``High-yielding currencies such as the Australian and New Zealand dollars are likely to appeal to investors.''

Australia's dollar traded at 96.04 U.S. cents at 4:31 p.m. in Sydney from 96.03 cents late in Asia yesterday. It reached 96.68 cents on June 30, the strongest since February 1983. It was poised for its first weekly loss in four. The currency bought 103.03 yen from 102.94 yen yesterday and 102.89 yen late in New York on July 4.

New Zealand's dollar advanced to 75.80 U.S. cents from 75.72 cents late in Asia yesterday. The currency traded at 81.32 yen from 81.18 yen yesterday and 81.07 yen on July 4.

Near 25-Year High

The Australian dollar gained for a second day after former St. Louis Fed President William Poole said there is a growing chance the government will need to bail out Fannie Mae and Freddie Mac, contributing to respective slides of 14 percent and 22 percent in the stocks. Paulson said the regulator that oversees the two mortgage-financing companies told him they have enough capital.

Benchmark interest rates are 7.25 percent in Australia and 8.25 percent in New Zealand, compared with 2 percent in the U.S. and 0.5 percent in Japan, making them popular destinations for international investors seeking higher returns.

Futures on the Chicago Board of Trade show an 86 percent probability that the Fed will keep borrowing costs unchanged at 2 percent at the next meeting on Aug. 5, compared with 34 percent odds a month ago.

The Australian dollar, known as the Aussie, also was supported after the UBS Bloomberg Constant Maturity Commodity Index gained 2 percent, the most in nine days. Gold, Australia's third-most valuable raw material export, climbed the most in a week as investors bought the metal as a safe haven.

`Pretty Positive Story'

``Oil, gold and aluminum prices moved sharply higher,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``That's a pretty positive story for the Aussie. It reflects U.S. dollar weakness as much as supply and demand dynamics.''

Exports of raw materials contribute about 17 percent to Australia's economy. The Australian government last month forecast sales of coal, iron ore and other commodity exports will generate a record A$212 billion ($204 billion) windfall for the economy in the year ending June 30, 2009, compared with A$151 billion estimated sales in 2008.

Gold futures for August delivery climbed $13.40, or 1.4 percent, to $942 an ounce yesterday on the Comex division of the New York Mercantile Exchange, the biggest percentage gain for a most-active contract since July 1. Gold is Australia's third- biggest export earner.

Australian 10-year government bonds headed for a fourth weekly gain, with the yield falling to 6.37 percent from 6.42 percent on July 4. The price of the 5.25 percent bond maturing in March 2019 rose 0.405, or A$4.05 per A$1,000 face amount, to 91.430 from 91.025 a week earlier. Yields move inversely to prices.

New Zealand 10-year government debt was poised for a third weekly advance. The yield on the 10-year note dropped 22 basis points to 6.11 percent from 6.33 percent on July 4. A basis point is 0.01 percentage point.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net.

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Crude Oil Rises on Concern About Brazilian, Nigerian Supplies

By Nesa Subrahmaniyan

July 11 (Bloomberg) -- Crude oil rose for a third day in New York, building on its largest one-day gain for more than a month yesterday, after Brazilian oil workers threatened a strike and on concern that Middle East and Nigerian supplies may be disrupted.

Oil gained 4.1 percent yesterday after Brazil's Oil Workers Confederation said it is planning a five-day strike from July 14 against Petroleo Brasileiro SA on platforms in the offshore Campos Basin, the source of 80 percent of the country's supply. Iran test-fired more missiles in the Persian Gulf and a Nigerian militant group said it will end a cease-fire this week.

``It's a supply-focused market and trading has become very volatile,'' said Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne. ``Right now, geopolitical events are critical supply-related drivers.''

Crude oil for August delivery rose as much as $1.54, or 1.5 percent, to $143.19 a barrel on the New York Mercantile Exchange and was trading at $143.10 at 3:09 p.m. in Singapore. Yesterday, it soared $5.60 to settle at $141.65 a barrel, the biggest one- day increase since June 6. Prices had risen to an intra-day high of $142.13 a barrel. Nymex crude oil touched a record $145.85 on July 3. Futures are up 96 percent from a year ago.

In the last hour of floor trading in New York yesterday, prices jumped more than $5 a barrel as investors bought contracts based on technical trends indicating a rally in futures. The increase accelerated after futures broke through the July 9 high of $138.28 at 2:09 p.m. New York time yesterday after approaching it at least five times.

Oil may rise next week because of threats to supply from Iran and Nigeria and falling stockpiles in the U.S., the biggest energy-consuming country, according to a Bloomberg News survey.

Supply Threats

About 4,500 employees of state-controlled Petrobras in the Campos Basin will take part in the protest to get full pay for the day they return to the mainland after a 14-day shift at sea, Jose Maria Rangel, the Brazil Oil Workers Confederation coordinator for the basin, said yesterday.

Iran, the second-biggest producer in the Middle East, this week tested missiles capable of reaching Israel, increasing concern that a conflict may cut supply. Iran's military yesterday fired the missiles during a third day of war games, Agence France-Presse reported, citing the Web site of Iranian state-run television. Missiles were also launched on July 9.

Iran has ignored United Nations efforts to halt its uranium-enrichment program and says further sanctions won't affect its plans to develop nuclear energy. The U.S. has led international efforts to force Iran to give up enrichment because of concern the technology may be used to develop nuclear weapons.

Iran's Exports

The standoff has led to concern that Iran may come under attack from the U.S. or Israel, disrupting exports from OPEC's second-biggest producer.

OPEC Secretary-General Abdalla El-Badri said at a press conference in Vienna yesterday that ``if something were to happen, it is impossible to replace the production of Iran.''

The Movement for the Emancipation of the Niger Delta said attacks will resume on oil facilities. The Nigerian militant group will call off its unilateral cease-fire beginning midnight on July 12, the group's spokesman, Jomo Gbomo, said yesterday.

MEND's attacks on pipelines and other installations have cut more than 20 percent of Nigeria's oil exports since 2006. MEND says it is fighting for a greater share of oil wealth for the impoverished inhabitants of the Niger Delta.

The group declared a cease-fire after a June 19 attack on Royal Dutch Shell Plc's Bonga deep-water oilfield, located 120 kilometers (75 miles) offshore that cut 190,000 barrels a day of oil output.

Market Boiling

``Anything supply-related is going to keep this market boiling over,'' said Anthony Nunan, Tokyo-based assistant general manager for risk management at Mitsubishi Corp. ``Brazil's domestic disruption only adds to a bigger supply problem with MEND back in the news.''

The Organization of Petroleum Exporting Countries, which supplies more than 40 percent of the world's oil, cut its forecast of demand for its crude oil through 2030, as record prices and environmental considerations encourage consumers to conserve fuel and rely more on biofuels.

OPEC lowered demand forecasts by 4.4 percent to 32.3 million barrels a day in 2015, and by 12 percent to 43.6 million a day in 2030, the group's secretariat said yesterday in its World Oil Outlook report. This means OPEC may unnecessarily commit $300 billion to new fields over the next 12 years, it said.

``This is the danger that OPEC may not invest because they are probably worried about a crash in demand and prices,'' said Mitsubishi's Nunan. ``The market now focuses on the medium to long term and if they don't invest in new capacity, that's obviously bullish.''

Brent crude oil for August settlement rose as much as $1.53 a barrel, or 1.1 percent, to $143.56 a barrel and was trading at $143.23 at 3:10 p.m. Singapore time on London's ICE Futures Europe exchange. Yesterday, the contract gained $5.45, or 4 percent, to $142.03 a barrel. Prices climbed to a record $146.69 on July 3.

To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net.

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Gold Heads for Fourth Weekly Gain on Inflation Concern, Dollar

By Iris Leung and Feiwen Rong

July 11 (Bloomberg) -- Gold headed for a fourth weekly gain on concern high commodity prices and a weakening U.S. dollar are likely to spur more demand for the precious metal as hedge against inflation.

Gold was boosted after crude oil climbed 4 percent yesterday as Iran test-fired more missiles in the Persian Gulf and a Nigerian militant group said it will end a cease-fire this week. Aluminum prices rose to a record yesterday while lead prices jumped more than 10 percent. The dollar headed for a weekly loss against the euro.

``We saw a bit profit-taking this morning, but gold looks supported between $938-$940 as all the factors are in favor of the metal right now,'' K C Wong, trader at Standard Bank Asia Ltd., said today by phone from Singapore. ``The U.S. dollar in the long-term will have to weaken against other currencies, while the inflation fear will be here for a while.''

Bullion for immediate delivery traded at $942.29 an ounce at 9:29 a.m. in Singapore, down from $947.66 yesterday in New York. Silver traded little changed at $18.2900 an ounce.

Signs of a weakening U.S. economy may deter the Federal Reserve from increasing borrowing costs this year, diminishing the allure of dollar-denominated assets. The dollar traded at $1.5789 against euro at 9:31 a.m. in Singapore.

The dollar is also under pressure as a report today may show U.S. consumer confidence fell to the lowest level in 28 years, adding to concern the economic slowdown will be prolonged. Crude oil in New York traded at $141.61 a barrel at 9:33 a.m. in Singapore.

`Critical Factor'

``Oil has become the critical factor driving up the gold prices.'' Dick Poon, manager of precious metals trading desk at Heraeus Ltd., said today by phone. ``Political tensions in Iran and instability in the stock market have brought capital into commodities.''

Gold for August delivery was little changed at $943.10 an ounce in after-hours electronic trading on Comex at 9:33 a.m. Hong Kong time, while gold for December delivery traded in Shanghai gained 1.1 percent to 207.92 yuan a gram ($945 an ounce) at the same time.

Gold for June 2009 delivery rose 1.3 percent to 3,270 yen a gram ($950 an ounce) on the Tokyo Commodity Exchange at 10:35 a.m. local time.

To contact the reporters for this story: Iris Leung in Hong Kong at ileung7@bloomberg.net; Feiwen Rong in Singapore at frong2@bloomberg.net

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Aluminum Heads for Second Weekly Gain on China Output Cut Plan

By Feiwen Rong

July 11 (Bloomberg) -- Aluminum in London headed for a second weekly gain after China's top producers agreed to cut output by as much as 10 percent, sending the light metal to a record yesterday.

Aluminum Corp. of China Ltd. and another 19 companies in China, the world's largest producer, signed an accord yesterday to cut output by 5-10 percent because of a power shortage in the country, a government official said. Prices rallied as much as 6 percent to an all-time high at $3,380 a ton yesterday.

``Because of the large energy component of the production cost, aluminum remained a favored metal in the medium-to-long term outlook despite a short-term supply glut,'' Li Rong, chief analyst at Great Wall Futures Co. in Shanghai, said by phone.

Aluminum for delivery in three months traded unchanged at $3,290 a ton at 10:54 a.m. in Singapore in after-hours electronic trading on the London Metal Exchange.

The metal, used in aircraft and beverage cans, has more than doubled in five years as rising power prices buoy output costs, queezing profit margins at companies including Alcoa Inc., the largest U.S. producer. Energy accounts for 30 percent to 40 percent of the cost of producing aluminum.

Lost Production

The top 20 aluminum smelters in China account for about 70 percent of the country's capacity of about 14 million tons, Leon Westgate, a London-based analyst at Standard Bank Plc wrote in a report yesterday. A 10 percent cut would amount to just under 1 million tons of lost production annually, or around 80,000 tons per month, he said.

``A prolonged cutback would see the market shift from surplus to deficit quite easily,'' said Westgate, who estimated the global surplus of the metal at 284,000 tons this year.

Still, aluminum prices are subject to selling pressure in the short-term from Chinese smelters looking to lock in profit at a time of domestic market oversupply, said Great Wall's Li.

``If the aluminum futures in Shanghai rally to above 20,000 yuan ($2,925) a ton, I think a lot of the smelters would be enticed to sell their output in advance,'' Li said.

China's exports of aluminum and alloys surged 43 percent to 123,538 tons in June, from a month earlier, preliminary customs data showed yesterday. That's the highest since August 2006, according to Bloomberg data.

Aluminum for September delivery traded in Shanghai gained 0.7 percent to 19,705 yuan a ton at 10:56 a.m. local time. It has gained 11 percent this year, lagging behind the 37 percent gain in the London benchmark.

Among other metals traded on the LME, lead fell 1.9 percent to $1,946 a ton, copper added 0.4 percent to $8,266 a ton and zinc fell 3.4 percent, to $1,922 a ton. Nickel and tin had not traded as of 10:42 a.m. in Singapore.

To contact the reporter for this story: Feiwen Rong in Singapore at frong2@bloomberg.net

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Corn Rallies as Recent Declines Seen Overdone, Crude Oil Jumps

By Jae Hur

July 11 (Bloomberg) -- Corn rose for the first time in six days on speculation that losses were overdone and as an increase in energy costs may boost demand for biofuel made from the grain.

The price of corn, used to feed livestock and produce grain- based ethanol, fell 9.4 percent this week before today, heading for a second weekly decline, on favorable crop weather in the U.S. Midwest. The Department of Agriculture will update its supply and demand estimates today. Oil rose more than $5 a barrel yesterday.

``It's a simple technical correction for corn,'' Kazuhiko Saito, strategist at Interes Capital Management Co. in Tokyo, said today by phone. ``In today's USDA report we may see bearish data for corn, and bullish data for soybeans.''

Corn for December delivery added 1.25 cents, or 0.2 percent, to $7.055 a bushel as of 11:51 a.m. in Singapore after trading as high as $7.1075 in after-hours trading on the Chicago Board of Trade and traded at $7.08. The contract declined 1.2 percent yesterday after touching $7.01, the lowest since June 12.

Corn prices have almost doubled in the past year, reaching a record $7.9925 on June 27, as global reserves were forecast to fall to a 24-year low before the start of the U.S. harvest later this year.

The grain market also gained after crude oil gained 4.1 percent yesterday, the biggest one-day increase since June 6, boosting demand prospects for biofuel.

USDA Report

The U.S. Department of Agriculture today may increase its estimate of corn reserves on Aug. 31 to 1.52 billion bushels, up 6.1 percent from a June forecast, according to the average estimate of 14 analysts in a Bloomberg survey. That would be up 17 percent from a year ago. Supplies before the 2009 harvest will total 839 million bushels, 25 percent larger than the previous estimate, the analysts said.

The USDA will peg the surplus before the 2009 harvest at 141 million bushels, below a forecast of 175 million in June, said the analysts. Stockpiles will fall 78 percent to 125 million this year from a record 574 million last year, the USDA said in June.

Soybeans for November delivery fell 1 cent, or 0.1 percent, to $15.86 a bushel as of 11:54 a.m. Singapore time. The contract yesterday rose 1.9 percent on speculation that the USDA report will show falling U.S. inventories after flooding last month reduced acreage.

Most-active futures have risen 78 percent in the past year, reaching a record $16.3675 on July 3.

The oilseed market was also supported by the possibility that farmers in Argentina will resume a strike to protest against grain export taxes proposed by the government.

Argentina Farmers

Farmers plan to resume roadblocks they have manned for the past four months, which have disrupted Argentine grains exports and emptied supermarket shelves in Buenos Aires this year. Protesters will march to Buenos Aires on July 16, when the Senate is set to vote on the new tax, farm group leader Eduardo Buzzi told reporters on July 9.

Wheat for September delivery gained 0.5 cent to $8.185 a bushel as of 11:42 a.m. Singapore time after losing 0.9 percent yesterday on speculation the USDA will raise its output estimate as favorable weather improves prospects for the winter crop now being harvested.

The USDA today will project a total wheat crop of 2.476 billion bushels, up 0.2 percent from a June forecast, according to the average estimate of 11 analysts surveyed by Bloomberg News. Dry weather is helping farmers collect what may be the biggest winter crop since 1998.

The most active contract declined 39 percent from a record $13.495 set on Feb. 27 as world farmers planted more to take advantage of higher prices.

To contact the reporter on this story: Jae Hur in Singapore at jhur1@bloomberg.net

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Platinum Futures Gain as Oil Stokes Concern Inflation Rising

By Dave McCombs

July 11 (Bloomberg) -- Platinum futures in Tokyo had the biggest gain in a month as oil yesterday surged more than $5 a barrel, spurring speculation that higher energy prices will fuel demand for precious metals as a hedge against inflation.

Precious metals including platinum have drawn investors seeking protection against climbing consumer prices and a weakening dollar. Oil jumped 4 percent yesterday in New York amid concern a threatened strike in Brazil may disrupt supply.

``Oil was sharply higher in New York, so platinum is being bought today,'' Kazuhiko Saito, a commodity strategist at Interes Capital Management, said today in Tokyo by telephone.

Platinum for June delivery in Tokyo gained 160 yen, or 2.4 percent, to 6,884 yen a gram ($2,001 an ounce) at the 11 a.m. break on the Tokyo Commodity Exchange. The most-active contract earlier jumped as much as 2.9 percent, the biggest gain since June 6.

Metal for immediate delivery advanced $20.50 to $2,027 an ounce at 12:07 p.m. in Tokyo, 1 percent higher than late yesterday in New York.

Gains in platinum may be limited as higher oil prices raise concern that demand for autos and exhaust filters that use platinum may decline, said Saito. Prices for platinum futures in New York may drop below $2,000 an ounce and ``target'' $1,950 next week, he said.

Platinum futures for October delivery rose $32.60, or 1.6 percent, to $2,031 an ounce at 11:37 a.m. Tokyo time, in after- hours trading on the New York Mercantile Exchange.

Brazil's Oil Workers Confederation is planning a five-day strike from July 14 against Petroleo Brasileiro SA on platforms in the offshore Campos Basin, the source of 80 percent of the country's supply, a union official said. Oil also rose after Iran test-fired more missiles in the Persian Gulf and a Nigerian militant group said it will end a cease-fire this week.

To contact the reporter for this story: Dave McCombs in Tokyo at dmccombs@bloomberg.net

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Commodity Investments Advanced 19% Last Quarter, Barclays Says

By Stuart Wallace

July 11 (Bloomberg) -- Commodity assets under management rose 19 percent to $270 billion in the second quarter, a ``sub- optimal performance,'' Barclays Capital said.

Investment related to commodity indexes advanced 26 percent to $175 billion, ``all of which was due to price appreciation, as we estimate inflows remained largely flat,'' the bank said in a report e-mailed late yesterday.

Investments in commodity-linked medium-term notes and exchange-traded products climbed about 10 percent to $50 billion and $45 billion respectively, Barclays Capital said.

To contact the reporter on this story: Stuart Wallace in London at swallace6@bloomberg.net

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Forex Market Update: If The US Housing Crisis Reaching Its Climax?

Daily Forex Fundamentals | Written by Saxo Bank | Jul 11 08 07:11 GMT |

Forex Market Update: If The US Housing Crisis Reaching Its Climax? US Government Apparently Weighing Effective Nationalization Of Mortgage Giants Fannie And Freddie.

Any takeover of the two companies by the government could mark the low of the housing crisis and turning point for the USD.

MAJOR HEADLINES - PREVIOUS SESSION

US ICSC Chain Store Sales rose 4.3% YoY vs. 3.3% expected
New Zealand Jun. REINZ House Sales fell -42.4% YoY vs. -52.9% in May
Japan Jun. Consumer Confidence fell to 32.9 vs. 33.0 expected and 34.1 in May
Germany Jun. Wholesale Price Index rose 8.9% YoY as expected.

THEMES TO WATCH - UPCOMING SESSION

Key event risks today (all times GMT):

Canada Jun. Employment Rate and Net Change in Employment (1100)
Canada May International Merchandise Trade (1230)
Canada May New Housing Price Index (1230)
US May Trade Balance (1230)
US Jun. Import Price Index (1230)
US July Preliminary University of Michigan Confidence (1400)

Market Comments

An article from the New York Times is making the rounds this morning, explicitly describing how the US government might take over (effectively nationalize) the key mortgage lenders Fannie Mae and Freddie Mac, who together represent in the neighborhood of half of the US mortgage market. The market has been nervous about the financial health of these companies for some time as rumors have swirled, home price indexes have been falling relentlessly and their stock prices have dropped. If they were simply allowed to fail, we would have a 19th-century style liquidity crisis on our hands as the US housing market would effectively grind to a halt. But this is obviously not the 19th century and these institutions are truly too big to fail with activist governments ever at the ready to bail out almost any mess, particularly one with systemic implications.

The US government will step in if necessary, and it is likely that stepping in will be necessary soon. The only final question may be how much Fannie's and Freddie's "nationalization" will cost US taxpayers and the US economy. This story is inseparable from the fall in overall US house prices. After all, as Fannie and Freddie are going down the tubes, their credit costs are rising dramatically and creating a vicious circle for their balance sheet. A more explicit government backing sooner rather than later could reduce credit costs more quickly for the institutions, which could be passed on to qualified buyers and help stabilize home prices more quickly and shore up confidence. It's a sad state of affairs, but the final capitulation of these institutions into the government's arms could finally mark the climax of the fall in housing prices and the bottom for the US dollar. For now, the market has hardly reacted to this story, despite its huge long term implications. Stabilization of these institutions is eventually a USD bullish story, however.

Oil snapped higher on a series of stories playing on supply fears, though it seems that the market reacts less and less to the short term moves in energy prices, with NOK as a possible exception. Any move to new highs just tightens the inflation thumbscrews already cinching off growth around the globe. Oil has certainly shown little effect on CAD, which today sees employment and trade numbers releases. USDCAD is at the lower end of the range within the range with a small tipping point support down around 1.0050. In the bigger picture, we like buying USDCAD, but six months of range trading do not a compelling short term view make. We need to see the pair all the way back above 1.0300 before we can talk about an uptrend again.

Volatility in the major FX crosses is collapsing. While some say that this could continue for some time as we pass through the lower volume summer months of July and August, it feels like something needs to happen soon and something often does happen when volatility begin rising from low levels - a development we must keep an eye out for. Carry trades keep drifting higher and higher on apparent complacency and despite complete lack of support from fundamental inputs (risk spreads and interest rate differentials), so we view that phenomenon with suspicion and we're unwilling to chase it higher. Perhaps we should focus on a high momentum turnaround in these trades as a sign that a new cycle is beginning. And a new cycle would certainly be welcome as we are tiring of this morass of range-trading, which is certainly no fun from an analytical standpoint! Come on, market: throw us a bone already.

Chart: EURUSD

We set up 1.5800 as an important break level to the upside. This level was touched yesterday. The rally to get to this level has been so slow, however, and the bout of range trading so persistent, and overall volatility so low, that we are beginning to wonder whether break-outs of price levels are especially significant in this environment. Perhaps instead we should look for a pick up in volatility as a sign of which way things are headed. Still, enormously negative EUR news of late has failed to trigger a sell-off in the currency, so it's hard to be bearish EUR until we get a chunky sell-off. We raise the bar for the bulls and now would like to see a strong 1.5900 breakout to the upside before getting excited about potential for a new high. And a sharp move back to 1.5600 and break is needed for the bears to shows signs of asserting control. Note that the 20-period ATR is edging back toward the lows of the year.

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Friday, July 11, 2008

BOJ May Keep Rate at 0.5% as Costs Weaken Spending

India's Inflation Accelerates to Fastest in More Than 13 Years

New Zealanders' Net Wealth Posts Biggest Decline in 10 Years

Foreign Direct Investment in China Jumps 45.6 Percent

India's Industrial Production Grows at Slowest Pace in 6 Years

Nukaga Says Japan to Increase Pension Burden on Time

Yuan's Advance This Year Matches Gains for All 2007; Bonds Rise

Lehman Takes `Pounding' Again as Speculation Drags Down Shares

Fannie, Freddie Too Critical to Fail, Lawmakers Say

U.S. Trade Gap Probably Widened in May on Record Oil Prices

Deflation May Return to World Economy, Say SocGen, Deutsche

Deflation May Return to World Economy, Say SocGen, Deutsche

RBS in Talks to Sell ABN Assets to National Australia

U.K. Banks Want More Liquidity Help From BoE, Telegraph Says

Asian Currencies Set for Weekly Gain, Led by South Korea's Won

Korean Won Completes Biggest Weekly Gain Since 1998; Bonds Fall

Australia, New Zealand Dollars Gain on Outlook for U.S. Rates

Crude Oil Rises on Concern About Brazilian, Nigerian Supplies

Gold Heads for Fourth Weekly Gain on Inflation Concern, Dollar

Aluminum Heads for Second Weekly Gain on China Output Cut Plan

Corn Rallies as Recent Declines Seen Overdone, Crude Oil Jumps

Platinum Futures Gain as Oil Stokes Concern Inflation Rising

Commodity Investments Advanced 19% Last Quarter, Barclays Says

Forex Market Update: If The US Housing Crisis Reaching Its Climax?

Forex Market Update: If The US Housing Crisis Reaching Its Climax? US Government Apparently Weighing Effective Nationalization Of Mortgage Giants Fannie And Freddie.

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Friday, July 11, 2008

Forex Market Update: If The US Housing Crisis Reaching Its Climax? US Government Apparently Weighing Effective Nationalization Of Mortgage Giants Fannie And Freddie.

MAJOR HEADLINES - PREVIOUS SESSION

THEMES TO WATCH - UPCOMING SESSION

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