Friday, July 18, 2008

Dollar Damaged By Poor Equity Results -Will Citi Compound The Problem?

Daily Forex Fundamentals | Written by DailyFX | Jul 18 08 10:06 GMT |

Talking Points

Japanese Yen: Back down towards 106.00 as US earning results not friendly
Euro: Mildly bullish on anti-dollar bid
British Pound: Borrowing rises to record pace since 1992
US Dollar: No data on tap all eyes on Citi

A relatively quiet and data free night in the currency market as FX trading continues to be influenced by macro rather than micro factors. After the US equity close yesterday Microsoft, Google and most importantly Merrill Lynch reported disappointing results stoking fears that US economy may be on the verge of a recession while the financial sector troubles show no signs of improvement.

The misses in MSFT and GOOG had an instant impact on USDJPY which dropped below the 106.00 level in early European trade before bouncing slightly. Yesterday the pair hit a high of 107.17- its best showing in a week - as risk appetite appeared to have returned to the market. But those flows may be quickly reversed if US equities close negative today and could pull the pair back towards 105.00 figure if investor sentiment sours once again.

On the economic front, German Producer Prices rose the most in 26 years as price pressures continue to plague the 15 member union. The news kept the EURUSD bid on further speculation of more rate hikes. On the other hand EZ Trade Balance deteriorated far worse than expected printing at -4.6 Billion euros versus forecast of -1.5 Billion as higher euro and weaker global demand clearly hit exports hard. The market had absolutely no reaction to the report, preferring to focus on the weakness in US equity results. However, today's EZ trade data shows a troubling trend of increasing trade deficits over the past several months. If that trend intensifies it may damage the euro as time goes on. One of euro's strongest advantages over the greenback has been the much better balance sheet position of EZ vis a vis the US. While US Current Account deficit continues to be massive, the fact that the EZ to is also slipping into a negative trade position weakens the euro bulls argument of euro's financial superiority and could spur some speculative outflow from the currency if the situation worsens as we approach the end of 2008.

Finally, with no economic data on the calendar all eyes will be on Citibank which reports earnings before the US open. If the financial behemoth disappoints it could drag stocks lower and push EURUSD above 1.5900 before the weekend. If on the other hand it surprises to the upside, the buck could close out the week on an uptick as investor sentiment improves.

DailyFX

Europe's Energy Trade Deficit Soars as Oil Costs Jump

By Fergal O'Brien

July 18 (Bloomberg) -- Europe's energy trade deficit soared 42 percent in the four months through April as crude-oil prices jumped to a record.

The euro region's deficit on energy products widened to 99.7 billion euros ($158 billion) from 70.4 billion euros a year earlier, the European Union statistics office in Luxembourg said today. Energy-product imports increased 41 percent.

Surging prices for oil and other commodities are boosting the amount Europe spends on imports and widening the trade deficit of the 15 nations that use the euro. At the same time, cooling global growth is undermining the region's exports, threatening to slow the euro-area economy.

``I'm quite sure we haven't seen the last of the impact of imported raw material prices on the data,'' said Dominique Barbet, an economist at BNP Paribas SA in Paris. ``Although there has be en some improvement in oil in the last few days, we're still looking at another three or four months of an adverse impact on the trade figures.''

The cost of a barrel of oil has jumped almost 75 percent in the past year and reached a record $147.27 on July 11.

Gaining Weight

While long-term contracts mean current crude-oil prices may not directly translate into what companies are paying, the costs are rising. Over the last 12 months, energy products' share of total euro-area imports has risen to around 15 percent from 10 percent due to the increase in price, according to Barbet.

Producer price inflation in Germany, Europe's largest economy, hit a 26-year high of 6.7 percent in June on energy, the country's Federal Statistics Office in Wiesbaden said today.

Today's euro area report also showed the region recorded a seasonally adjusted trade deficit of 1.5 billion euros in May, compared with a 1.4 billion-euro surplus in April. The statistics office publishes data for individual products and countries with a one-month lag.

Economists forecast an 800 million-euro surplus for May, compared with an initially reported April surplus of 2.2 billion euros, according to the median of five estimates in a Bloomberg survey.

Growth to Trough

Overall exports fell 3.4 percent in May from the previous month, the data showed. The outlook for sales abroad is worsening as global economic growth cools and the euro's advance against the dollar makes the region's goods less competitive. Euro-area exports to the U.S., the world's largest economy, fell 3 percent in the four months through April from a year earlier.

The euro has gained 15 percent against the dollar in the last 12 months and was at $1.5869 today.

European Central Bank President Jean-Claude Trichet said in an interview published today that there will be a ``trough in the profile of growth in the euro area in the second and third quarters.'' He expects a ``a progressive return to ongoing moderate growth'' after that.

Exports from Germany dropped the most in almost four years in May, according to national data published July 9. French shipments abroad also dropped in May.

``The double whammy of a strong euro and the sharp slowdown in the U.K. and the U.S., two of the region's key export markets, is making life increasingly difficult,'' said Martin van Vliet, an economist at ING Group in Amsterdam. ``And with high oil prices continuing to boost the oil import bill, the trade balance is likely to remain in deficit over the coming months.''

The detailed data on trading partners also showed that exports to the U.K. rose 3 percent in the January-April period, while those to China increased 19 percent and shipments to Russia rose 24 percent. The deficit with China, which last year overtook the U.K. to become the euro area's biggest supplier, fell 3.7 percent.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.

Read more...

Dollar Gains Momentum As Bank Withstand Credit Crunch

Daily Forex Fundamentals | Written by Finotec Group | Jul 18 08 09:10 GMT |

The greenback headed for a weekly advance against the euro, rebounding from a record low on indications that U.S. investment banks will withstand the credit market losses arising from the nation's subprime mortgage collapse. 'The dollar is getting a boost as the markets correct excessive pessimism about the U.S. financial sector,' said Joseph Kraft, head of capital markets in Tokyo at Dresdner Kleinwort, an investment bank owned by Germany's Allianz SE. 'The financial turmoil, shown by a sharp decline in stocks, was given a reprieve at least. Major Wall Street investment banks can survive.' The EUR/USD currently trading at $1.5841 as of 8:16 am, GMT.

The Dollar also rose against the British pound on speculation the U.K. government will boost borrowing as Chancellor of the Exchequer Alistair Darling introduces new spending guidelines. The pound dropped to $1.9987 from $2.0038. The Financial Times reported, without citing sources, that the U.K. government's new spending rules would allow it to break limits on public sector debt. A Treasury spokesman said the report was pure speculation. 'There's sterling selling on the back of this report and it looks like it will continue,' said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney, referring to another term for the pound. 'The fact that the Treasury would go this far shows that times are desperate and the economy must be in a pretty poor state.' GBP/USD currently trading at $1.9922 as of 8:19 am, GMT.

The U.S currency's advance against the yen may stall at 107.17, said Tomoko Fujii at Bank of America Corp. in Tokyo, citing technical charts that traders watch to predict price movements. The so-called resistance level for the dollar, where sellers may outweigh buyers, is its 200-day moving average, she said. The U.S. currency last closed above the 200-day moving average on Aug. 8. 'That level is becoming an important key resistance,' said Fujii, head of economics and strategy for Japan at the second-largest U.S. bank. 'It should be hard to break through it.' USD/JPY currently trading at 106.37 as of 8:25 am, GMT.

Economic Calendar

Time	Country	Event	Period	Previous	Forecast	Significance
12:30	Wholesale Sales m/m	CAD	May	1.4%	0.5%	***
12:30	Leading Indicators m/m	CAD	Jun	0.2%	0.1%	**
09:00	Trade Balance	EUR	Jun	2.2B	0.9B	**
06:00	PPI m/m	EUR	Jun	1.0%	0.7%	**

Finotec Group Inc.
http://www.finotec.com/

Gieve Sees U.K. Inflation Accelerating `Well Over' 4%

By Svenja O'Donnell and Jennifer Ryan

July 18 (Bloomberg) -- Bank of England Deputy Governor John Gieve said policy makers are balancing the risks of inflation, which will accelerate ``well over'' 4 percent, against the threat from economic growth, which is ``slowing fast.''

``We are expecting inflation to be well over 4 percent for much of the rest of the year,'' Gieve said in a speech in London today. ``Timely sources of data suggest the economy is already slowing fast.''

Policy Maker Andrew Sentance said in an interview yesterday he was ``particularly struck'' by the increase in inflation, which reached 3.8 percent in June, the fastest pace in at least 11 years. The Bank of England is trying to curb consumer-price gains while attempting to steer the economy away from a recession.

``With inflation rising well above target we need a period of slower growth to create a margin of spare capacity,'' Gieve said. ``We will do whatever it takes to bring inflation back to target in the medium term.''

Gieve said in response to questions that inflation expectations have risen, an increase which is ``worrying,'' and the central bank ``can't afford for it to get stuck higher.''

Rate Decision

Policy makers kept the U.K. benchmark interest rate unchanged at 5 percent for a third month on July 10. Gieve was among four committee members who told lawmakers in June they had considered raising interest rates, while Sentance said yesterday he also looked at the case for raising rates last month. Minutes showing how they all voted this month will be released on July 23.

Economic growth will slow to a 1 percent annual pace in the first quarter of 2009, the weakest since 1992, the Bank of England predicted on May 14. Governor Mervyn King said then that there may be ``an odd quarter or two of negative growth.''

Gieve said that he ``can't rule out'' the U.K. economy will go into a recession, adding that the economy is ``quite a long way'' from the end of the slowdown.

Faster consumer price gains and the worst housing-market slump since 1992 have eroded consumers' living standards and helped push the support for Prime Minister Gordon Brown's ruling Labour Party close to the lowest since World War II.

``House prices and transaction numbers are falling rapidly with direct effect on house builders and related services,'' Gieve said in the speech. ``There are signs the housing market is affecting consumer confidence.''

Banks are curbing lending following the collapse of the U.S. subprime mortgage market, which so far has cost financial institutions worldwide $423 billion in losses and writedowns.

While Gieve said the first phase of the credit crunch seems to have stabilized, he said the squeeze in lending ``may intensify in coming months.''

Gieve spoke at an event organized by Dow Jones Newswires at the London Stock Exchange.

To contact the reporters on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net; Jennifer Ryan in London at Jryan13@bloomberg.net.

Read more...

Lawmakers Want Fannie-Freddie Aid Tied to Debt Limit

By Brian Faler and Alison Vekshin

July 18 (Bloomberg) -- Democratic lawmakers sought to put a constraint on the Treasury's request for unlimited power to buy and lend to Fannie Mae and Freddie Mac, a step that didn't temper Secretary Henry Paulson's optimism about a deal.

``Any expenditure under this bill would be subject to the debt limit,'' House Financial Services Committee Chairman Barney Frank told reporters in Washington yesterday, referring to the ceiling on federal government borrowing. That ``is a cap in effect on the amount'' of taxpayer funds officials can use to help finance the mortgage firms, he said.

Frank's comments reflect lawmakers' concern that the Paulson proposal may expose the taxpayer to unlimited risk and confer unprecedented authority. The Treasury chief reiterated his optimism about a deal by the end of next week, indicating he may be open to compromise on a measure he said will restore investor confidence in the beleaguered companies.

Paulson spent a second straight day lobbying on Capitol Hill after legislators balked at a July 15 hearing at his initial request, which Treasury officials anticipated would be enacted this week. Paulson is trying to provide a backstop to Fannie Mae and Freddie Mac after their shares fell to the lowest level in more than 17 years this month, threatening to limit their ability to alleviate the mortgage-market collapse.

``I feel even better than I did yesterday in my confidence level that we will come to a very acceptable result, and come to it next week,'' Paulson told reporters yesterday.

Shares Gain

Fannie Mae shares rose for second day, the first back-to- back gain in a month, to $10.93 in New York Stock Exchange composite trading. Freddie Mac advanced to $8.33, also the second consecutive increase.

Freddie Mac may raise as much as $10 billion by selling new shares, a move that might help avoid a government rescue for it and Fannie Mae, the Wall Street Journal reported today, citing people it didn't identify.

Paulson, since announcing his plan Sunday, July 13, has repeatedly called for power to make ``unspecified'' equity purchases in the two companies, which account for about half of the $12 trillion U.S. mortgage market. He wants a similar right to extend the credit lines the firms have with the Treasury.

Paulson has said limits to his power would impede the measure's ability to buttress investor confidence. The Treasury had sought for it to be outside the borrowing ceiling.

``People talk about trillions of dollars,'' said Frank, of Massachusetts. This ``makes it clear that nothing remotely like that order of magnitude is contemplated even in the worst case.''

No Cost Seen

Frank added that he doesn't expect the plan to incur significant costs because it will spur confidence in the lenders, limiting the need for public money. Paulson has said he doesn't anticipate exercising the proposed authority, noting regulators' comments that the firms are already adequately capitalized.

The debt limit is $9.815 trillion and the current outstanding public debt subject to that limit is about $9.4 trillion, according to the Treasury.

``Today the Treasury has enough unused borrowing authority to give Fannie and Freddie all the support they might need,'' said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm.

Paulson will work with House Ways and Means Committee Chairman Charles Rangel, of New York, and Budget Committee chief John Spratt, of South Carolina, on the debt limit issue, Frank said. Paulson declined to respond to a reporter's question on the matter yesterday.

Other Limits

Frank, whose committee oversees housing, said earlier this week that he intended to place other restrictions in the legislation, including limits on dividend payments by the firms and a requirement for regulators to approve top officers' compensation.

House lawmakers are working on adding the measure in an existing housing bill that aims to stem the record surge in mortgage foreclosures and set up a new, stronger regulator for Fannie Mae and Freddie Mac. The legislation would then go to the Senate.

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said lawmakers are considering other ways of trying to assure taxpayers that ``this thing isn't a runaway horse,'' while declining to discuss specifics.

``We're getting close to some ideas that can work that will have negligible, if any, market implications, which is critical,'' Dodd said.

$4 Billion

House Democrats plan to include in their bill a measure that President George W. Bush has threatened to veto, signaling they're prepared to push the administration on the issue.

The proposal would send almost $4 billion to communities to buy up foreclosed properties. The White House has said it would benefit lenders who own the vacated properties, not homeowners.

House Speaker Nancy Pelosi, a California Democrat, said she doubted Bush would make good on the veto threat.

``I don't think the president is going to veto this bill,'' Pelosi said. Foreclosed properties ``are now abandoned properties, taking down communities,'' she said.

Frank said the House will probably vote on the combined measure July 23 before sending it on to the Senate.

House Minority Leader John Boehner, an Ohio Republican who proposed delaying consideration of the plan so that lawmakers could have more time to study it, said two days ago there's no question ``that this will become law and become law very soon.''

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net

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ECB's Trichet Says Economy May Improve After `Trough' This Year

By Simone Meier

July 18 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said the bank expects the euro-region economy to gather strength towards the end of the year after a ``trough'' in the previous six months.

``We will have a trough in the profile of growth in the euro area in the second and third quarters'' before ``a progressive return to ongoing moderate growth,'' Trichet told four newspapers in an interview published on the ECB's Web site today. Trichet said he has ``nothing to add or withdraw from'' the July 3 statement when the bank raised its key rate to 4.25 percent.

The 15-member euro region is losing momentum as record oil prices sap the spending power of companies and consumers just as a stronger euro makes exports less competitive. European economic confidence fell to the lowest in more than three years in June. Still, the ECB is concerned about companies raising prices and wages after inflation surged to a 16-year high in June.

Crude oil prices have increased 70 percent in the past year, reaching an all-time high of $147.27 a barrel on July 11.

Still, some labor unions are already pushing for more pay to compensate workers for faster inflation. Deutsche Lufthansa AG, Europe's second-largest airline, earlier this month offered German baggage handlers and cabin crews a 6.7 percent pay increase after employees staged strikes. The Frankfurt-based carrier previously offered 5.5 percent more pay.

In Germany, Europe's largest economy, producer-price inflation accelerated to the fastest pace in 26 years in June, the Federal Statistics Office in Wiesbaden said today.

`Relatively Hawkish'

Trichet in the interview reiterated that the 21-member governing council is ``never pre-committed'' to a definite rate plan and ``will do in the future what is appropriate to deliver price stability.'' The ECB aims to keep inflation just below 2 percent.

``The overall message in my view is still relatively hawkish,'' said James Nixon, an economist at Societe Generale SA in London. ``The ECB could well hike rates again even as the economy skirts falling into an outright recession.''

Investors have nevertheless scaled back bets on the ECB raising interest rates further this year, Eonia swap contracts show. The December contract is at 4.36 percent today, down from 4.55 percent on June 16. The April contract is at 4.40 percent.

``Today price setters and social partners must take into account that we will be back to price stability -- in line with our definition -- say over 18 months,'' Trichet said. The ECB has ``no further indication'' for ``future interest rates.''

The interview was published in France's Le Figaro, Ireland's Irish Times, Germany's Frankfurter Allgemeine Zeitung and Portugal's Jornal de Negocios.

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

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U.K. Budget Deficit Widens as Slowing Economy Saps Tax Receipts

By Mark Deen

July 18 (Bloomberg) -- The U.K. budget deficit widened to 9.2 billion pounds ($18.4 billion) in June, more than economists expected, as the economic slowdown sapped tax receipts.

The shortfall, the most for the month since records began in 1993, was up from 6.3 billion pounds a year earlier, the Office for National Statistics said today in London. Economists predicted a deficit of 7.4 billion pounds, the median of 17 forecasts in a Bloomberg survey showed.

Chancellor of the Exchequer Alistair Darling may find it hard to meet his March forecast of a 43 billion-pound deficit this year as the economic slowdown cuts tax receipts. In emergency moves since then, Darling has given away 3.25 billion pounds to spur growth and revive support for his ruling Labour Party. Darling may change Britain's decade-old rules for government spending later this year, the Treasury said yesterday.

``What we've witnessed so far this year is a deterioration of the public finances, and it's likely to get worse going forward,'' said Philip Shaw, chief economist at Investec Securities in London.

In the first three months of the fiscal year, the budget deficit was 24.4 billion pounds, the highest quarterly deficit since records began 1946. A year earlier, the deficit was 14.7 billion pounds. Taxes rose 2.5 percent and spending grew 6.9 percent.

A cash-based measure showed the deficit was 15.5 billion pounds in June, the highest for the month since records started in 1984, compared with 10 billion pounds a year earlier. Economists forecast a shortfall of 12.6 billion pounds.

Fiscal Rules

Economists say Prime Minister Gordon Brown is at risk of breaching the fiscal rules he created as finance minister in 1997, when he promised to borrow only for investment over the economic cycle and keep debt below 40 percent of economic output.

Treasury officials will decide whether to change the rules when the ONS publishes annual revisions to economic growth in September, which may show when the current economic cycle ends.

Forecasting growth of more than 2 percent this year and next, Darling is more optimistic than economists. Bank of England Governor Mervyn King says Britain may slip into a recession as the worst housing slump since the early 1990s deepens.

The slowdown threatens to cut revenue from consumer spending, housing transactions and company profits. An increase in receipts from North Sea companies, which are profiting from oil prices that reached a record above $147 a barrel last week, may not be enough to make up the loss, according to the London- based Institute for Fiscal Studies.

Slowing Tax Receipts

In June alone, taxes increased just 2.5 percent, with receipts of value-added tax falling 4.6 percent. Corporation tax rose just 0.3 percent and income tax gained 1.7 percent. Spending rose 6.9 percent.

Opposition parties say Prime Minister Gordon Brown has left little room to help the economy with tax cuts after almost a decade of rapid public spending growth left Britain with one of the highest budget deficit in Europe. The Organization for Economic Cooperation and Development predicts a shortfall of 3.5 percent of gross domestic product in the fiscal year from next April.

``Things aren't looking good in the short term,'' George Osborne, Treasury spokesman for the Conservative Party, said in a Bloomberg Television interview yesterday. ``We are going to face some very difficult choices around the budget deficit. We've got to make sure the government lives within its means.''

In May, Darling announced a 2.7 billion-pound emergency tax for 22 million people, and this week he postponed for six months an increase in fuel duty to cushion motorists from the surge in oil prices. The delay will cost the Treasury 550 million pounds this year.

Poll Ratings

The prospect of a recession is eroding support for Brown, who has until June 2010 to hold the next general election. The Conservatives, led by David Cameron, had a 22 percent point lead over Labour in a YouGov Plc survey published on July 13.

Net debt stood at 38.3 percent of GDP in June, the highest since July 1999, the statistics office said. Including the liabilities of Northern Rock Plc, the mortgage lender taken into temporary state ownership in February after its funding dried up, debt was 44.2 percent of GDP.

The current budget, which excludes investment, showed a deficit of 7.6 billion pounds in June and 20.4 billion pounds for the first three months of the fiscal year, up from 12.5 billion pounds a year earlier and the highest quarterly shortfall since 1946.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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German June Producer Prices Increase Most in 26 Years

By Bernd Bergmann

July 18 (Bloomberg) -- German producer prices rose at the fastest pace in 26 years in June, adding to pressure on the European Central Bank to keep interest rates high even as economic growth slows.

Prices for goods from newsprint to plastics increased 6.7 percent from a year earlier, the most since March 1982, after rising an annual 6 percent in May, the Federal Statistics Office in Wiesbaden said today. Economists expected a 6.5 percent gain, the median of 25 estimates in a Bloomberg News survey shows.

As record oil makes production more expensive, companies are under pressure to pass on higher costs to consumers. The European Central Bank this month raised its benchmark interest rate by a quarter point to 4.25 percent to try to prevent faster inflation from becoming entrenched in the 15-nation euro region.

``This rise in producer prices is not surprising,'' said Matthias Rubisch, an economist at Commerzbank AG in Frankfurt. ``Inflation will remain very high until the end of the year. It may even increase, which is why we expect another interest rate rise by the ECB, possibly in September.''

Oil has risen more than 70 percent over the past year and reached a record of $147.27 a barrel on July 11. Inflation in Germany accelerated to 3.4 percent in June, the fastest pace in 12 years, and consumer prices in Europe gained an annual 4 percent, the most since 1992.

Energy Jump

German energy prices rose 17.9 percent from a year earlier and prices for mineral oil products were 28 percent higher, the statistics office said. Excluding energy, producer prices rose 3 percent. From May, including energy, prices rose 0.9 percent.

BASF SE, the German chemicals maker, last month raised prices for paper and cardboard chemicals by as much as 20 percent because of higher raw-material, energy and freight costs.

``Our message is that we should avoid second-round effects,'' ECB President Jean-Claude Trichet said in an interview with four European newspapers published on the ECB's Web site today. ``Price setters and social partners must take into account that we will be back to price stability -- in line with our definition -- say over 18 months,''

Rising prices are boosting wage demands and pushing up expectations for inflation in the future. Expectations, as measured by the so-called breakeven on five-year French inflation- indexed bonds, were at 2.4 percent yesterday, up from 2.1 percent in March. They fell from a record 2.83 percent after the ECB raised rates on July 3.

Whatever's Necessary

The ECB ``will continue to take any action necessary to ensure the firm anchoring of inflation expectations,'' Greece's ECB council member, George Provopoulos, said this week.

The ECB, which aims to keep inflation just below 2 percent, predicts it will average about 3.4 percent this year and 2.4 percent in 2009.

Higher prices are eroding purchasing power and curbing growth in an economy already burdened by a stronger euro and the U.S. slowdown. German investor confidence plunged to a record low this month, the ZEW Center for European Economic Research said July 15.

Germany's Finance Ministry predicts economic growth will slow to 1.7 percent this year and 1.2 percent next. Germany accounts for about a third of the euro-region economy.

``Facing record oil prices, higher borrowing costs and a grossly overvalued currency, the euro-zone economy has exhausted its resilience'' said Holger Schmieding, chief European economist at Bank of America in London. ``Although oil-driven headline inflation is still heading up,'' the ``no longer negligible risk of a recession will probably prevent any further ECB rate hike.''

To contact the reporter on this story: Bernd Bergmann in Frankfurt at bbergmann1@bloomberg.net

Read more...

Oil prices plunge $5. Financial market turmoil has weighed on Dollar.

Daily Forex Fundamentals | Written by AC-Markets | Jul 18 08 08:13 GMT |

Forex Market Issues and Risks

Oil prices plunge $5. Financial market turmoil has weighed on Dollar.

News and Events:

The Dollar surged against the Yen on Thursday and erased earlier losses versus the Euro as Oil prices plunged and investors worried that high energy costs and financial market turmoil were slowing global growth. US stocks also rallied as Oil fell for a third straight day. That helped the Dollar post its biggest daily gain against the yen in more than three months. As well, better-than-expected Q2 results from JPMorgan Chase & Co helped eased concern about the stability of the US financial sector that has weighed on the Dollar. The Euro, which set a record above 1.6000 on Tuesday, at one point fell below 1.5800 for the first time this week as investors began focusing on the headwinds facing the euro zone economy.

Oil has gained 35% this year alone, at one point hitting a record high 147.27. It fell more than $5 on Thursday to 129.29, its lowest level in six weeks. UsdJpy last traded at 106.24, up 1.08%, its best daily performance since early June. It touched a session high of 107.09 earlier in the session. EurUsd rose only 0.18% at 1.5853 after falling to a session low of 1.5783. UsdChf rose 0.23% to 1.0200. GbpUsd went 0.11% lower at 1.9974.

Analysts said the Dollar's gains remained tentative, particularly given the state of uncertainty surrounding US financial markets and the slumping housing market. The US currency wobbled on Thursday when Kuwait's finance minister said it had no plans to buy more Fannie or Freddie debt and was looking to invest in Japan, China and India instead.

European Central Bank governing council member Nout Wellink also provided a Euro boost when he said slower Euro-zone growth would not necessarily reduce high inflation. Record high euro zone consumer price inflation prompted the ECB to hike rates to 4.25% this month.

Advanced Currency Markets - Forex Issues and Risks

Today Key Issues:

08:05 GBP BoE’s Gieve speaks on the financial system, London
08:30 GBP June PSNB £7.4B vs £11B
08:30 GBP June PSNCR £12.6B vs £10.99B
09:00 EUR May Eurostat trade €-1B vs €2.3B
12:30 CAD June Lead indicators 0.1% vs 0.2%
12:30 CAD May Wholesale trade 0.5% vs 1.4%

The Risk Today:

EurUsd Market hit 1.6039 high on Tuesday. This marks initial resistance over 1.6000 Pivot point resistance. A break there would open the way to key resistance 1.6200. On the downtrend, return below 1.5800 will undermine the recent uptrend. Any weakness may bring back 1.5400 - 1.5800 consolidation range. Below, strong support holds 1.5304 13th June low.

GbpUsd Cable is again in 1.9400 - 2.0000 trading range. It hit 2.0158 high on Tuesday. Key level holds again 2.0100. On the downside, only a return below 1.9649 might bring again focus on 1.9337 January low and 1.9105 (50% retracement of 1.7049 - 2.1162 advance). Initial support holds 1.9649 July 7th low. Strong support holds 1.9363 20th February and 14th May low.

UsdJpy Last 3-month up-trend has been ended as market broke down 105 level. Further profit taking would push the market into 100 - 104 consolidation trading range and toward 100 level. Yesterday, return over 105 would put mid-June 108.59 resistance and 110.10 strong resistance (Trendline) into focus ahead of 111.92 early January high.

UsdChf Market hit 1.0013 low on Tuesday. Further weakness below 1.0000 may open the way toward 0.9637 17th March low. Renewed strength over 1.0200 would reopen the 1.0200 - 1.0600 consolidation range. Initial resistance holds 1.0353 9th July high.

EURUSD		GBPUSD		USDJPY		USDCHF
1.6200	T	2.1162	S	111.92	K	1.1191	K
1.6039	M	2.0158	M	110.10	T	1.0625	T
1.6000	K	2.0100	K	105.66	M	1.0353	S
1.5875		1.9985		106.05		1.0185
1.5800	M	2.0000	S	103.92	M	1.0013	M
1.5304	S	1.9649	S	102.73	S	1.0000	P
1.5000	K	1.9337	T	100.00	P	0.9637	K
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot

ACM FOREX

Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

Philippine Peso Has Biggest Weekly Gain Since 2001; Bonds Drop

By Lilian Karunungan

July 18 (Bloomberg) -- The Philippine peso had its best week since 2001 after the central bank yesterday raised its benchmark interest rate twice as much as economists forecast to quell inflation. Government bonds fell.

The currency gained 2.6 percent against the dollar, the most since August 2001 and Asia's best performance of the week. A record drop in crude oil costs also helped support the peso, reducing dollar demand in a nation that imports almost all of the fuel it consumes.

``The market is rewarding the central bank's hawkishness,'' said Nizam Idris, a Singapore-based currency strategist at UBS AG, the second-biggest currency trader in the world. ``The rate differential helps. For a more sustained strength in the peso, inflation numbers need to start to ease. You need to see sentiment recovering, investments recovering.''

The currency rose as high as 44.440 per dollar, the strongest level since June 26, before trading at 44.455 as of the 4:00 p.m. close in Manila, compared with 45.030 late yesterday, according to Bankers Association of the Philippines.

Bangko Sentral ng Pilipinas increased the rate it pays banks for overnight deposits by 0.5 percentage point to 5.75 percent, the biggest increase since 2000, after inflation accelerated to a 14-year high of 11.4 percent in June. The rate increase was predicted by four of the 20 economists surveyed by Bloomberg News, with the rest forecasting a quarter-point rise.

That widened the Philippines' rate advantage over the U.S. to 3.75 percentage points, the most since 2005.

Five-year bonds fell the most in more than two months, with the yield rising to the highest since July 2006.

Surprise Decision

``It's a knee-jerk reaction to yesterday's surprise 50- basis-point decision,'' said Virgil Esguerra, an interest-rate strategist at HSBC Holdings Plc in Hong Kong. ``Further tightening is expected. It shows that the BSP is responsive to the threat of second-round inflation.''

The yield on the 9.625 percent note due June 2013 jumped 33 basis points to 9.69 percent as of the 11:15 a.m. fixing at the Philippine Dealing & Exchange Corp. The price declined 1.2932, or 129 pesos per 10,000 pesos face amount, to 99.7286. A basis point is 0.01 percentage point.

To contact the reporter on this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net.

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Asian Currencies: Peso Set for Weekly Gain, Korean Won Declines

By Aaron Pan and Lilian Karunungan

July 18 (Bloomberg) -- The Philippine peso led gains among Asian currencies this week after the central bank yesterday raised its benchmark interest rate by more than most economists forecast to quell inflation.

The peso headed for its first weekly gain in more than three months, as crude oil was poised for a record weekly slump in dollar terms. Lower energy prices may help reduce import costs for the Philippines, which buys almost all its fuel needs overseas. Five of the 10 most-traded Asian currencies rose this week, including Thailand's baht and Taiwan's dollar.

``The market is rewarding the central bank's hawkishness,'' said Nizam Idris, a Singapore-based currency strategist at UBS AG, the second-biggest currency trader in the world. ``The rate differential helps. For a more sustained strength in the peso, inflation numbers need to start to ease.''

The currency strengthened 2.6 percent this week to 44.485 as of 11:19 a.m. in Manila, from 45.662 a week ago, according to Tullett Prebon Plc. The peso will trade at 44.50 in the next month, Nizam forecast.

The central bank increased its borrowing cost by 0.5 percentage point, the most since 2000, to 5.75 percent. Bangko Sentral ng Pilipinas boosted the rate it pays banks for overnight deposits for the second straight month after inflation accelerated to a 14-year high of 11.4 percent in June.

The rate increase was predicted by 4 of the 20 economists surveyed by Bloomberg News, with the rest forecasting the central bank would match last month's quarter-point increase.

Korean Won Drops

Singapore's dollar has advanced 0.5 percent this week to S$1.3526, Vietnam's dong has added 0.3 percent to 16,795 and Thailand's baht gained 0.7 percent to 33.43. Taiwan's dollar strengthened 0.2 percent to NT$30.337 and Indonesia's rupiah rose 0.1 percent to 9,150.

South Korea's won led losses in the region as foreign investors reduced their holdings of local shares for the 30th straight day.

The currency pared last week's advance, the biggest in a decade, as the sale of stocks boosted demand for dollars and on speculation the central bank ended purchases of the won. Vice Finance Minister Kim Dong Soo said on July 15 that inflation may burden the economy as the government trimmed its economic growth estimate for this year to 4.7 percent from 6 percent.

``Foreign investors have to convert won into dollars after selling shares,'' which limited the won's strength this week, said Kim Yule, a foreign-exchange trader at BNP Paribas in Seoul. ``Another reason is that the Bank of Korea didn't come out to support the won this week.''

Curbing Inflation

The won declined 1 percent to 1,012.25 per dollar from a week ago, according to Seoul Money Brokerage Services Ltd. It rose 0.1 percent today, its first gain this week.

The won has slid 9.7 percent in the past year, the worst performance among the 16 most-traded currencies. It gained 4.8 percent last week as the central bank bought the currency to make imports cheaper and slow inflation.

A surge in oil prices and food costs quickened South Korea's inflation to the fastest in almost a decade, pushing the benchmark Kospi index down 19 percent this year.

Malaysia's ringgit fell for a third day on concern that a leadership struggle will distract the government from taking measures to tackle inflation and spur economic growth.

The currency traded near the lowest in a week after the Malaysian Institute of Economic Research cut its economic growth forecast for this year because of accelerating inflation and doubts over the country's political future.

`Ringgit Headwinds'

Malaysian police are considering legal options to compel opposition leader Anwar Ibrahim to give a DNA sample following an allegation he had sex with a male aide.

``The political noises will create headwinds for the ringgit and local asset markets because it affects investor sentiment,'' said Goh Puay Yeong, a Singapore-based currency strategist at Barclays Capital Plc. ``These are likely short- term concerns and we still remain bullish in the long term.''

The ringgit fell to 3.2410 per dollar from 3.2317 late yesterday, according to data compiled by Bloomberg. The currency is up 0.1 percent from a week ago.

To contact the reporters on this story: Aaron Pan in Hong Kong at apan8@bloomberg.net; Lilian Karunungan in Singapore at lkarunungan@bloomberg.net.

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Lehman Says Sell Australian Dollar Versus Yen on Growth Outlook

By Ron Harui

July 18 (Bloomberg) -- Investors should sell the Australian dollar against the yen on prospects economic growth will slow and the central bank will cut interest rates, according to Lehman Brothers Holdings Inc.

The local dollar may trim this year's 5.6 percent gain as the yield differential between two-year Australian and Japanese government debt narrowed for a fourth week after Reserve Bank of Australia Governor Glenn Stevens signaled borrowing costs are high enough to curb inflation. The currency, known as the Aussie, also may decline as prices of commodities the nation exports head for the largest weekly drop in almost four months.

``Yield spreads have been turning less Australian dollar positive, a trend that has been helped along by dovish comments from Stevens,'' analysts led by Jim McCormick, London-based global head of currency strategy at Lehman Brothers, the fourth- largest U.S. securities firm, wrote in a research note yesterday.

The Australian dollar traded at 103.19 yen as of 3:17 p.m. in Sydney from 102.95 yen in Asia yesterday. It reached 103.69 yen, the highest since June 26. The Aussie is the third-best performer among the 16 most-active currencies versus the yen this year. Lehman said it sold the Australian dollar at 103.03.

Australia's currency pared the past week's gain to 0.5 percent as the UBS Bloomberg Constant Maturity Commodity Index of 26 commodities headed for a 6 percent decline this week, the most since the week ended March 21, diminishing the outlook for the nation's economic growth. The economy expanded 0.6 percent, the least in almost two years in the first quarter, as consumers cut spending to pay higher mortgage, fuel and food costs.

`Increasingly Negative'

``The sharp drop in coal, energy and most metals prices means the Aussie-yen terms-of-trade dynamic is moving in the yen's favor,'' according to the Lehman report.

The rising terms of trade, a measure of income from exports, ``meant there remained considerable uncertainty about the outlook for demand and inflation,'' the Reserve Bank of Australia said in minutes of its July 1 meeting, which were released on July 15. Commodity prices influence the Australian dollar because raw materials account for 60 percent of Australia's exports.

``The story for Australia is increasingly negative,'' wrote McCormick and Steven Englander, a New York-based currency strategist at Lehman. ``The RBA will stay on hold until it starts cutting in 2009.''

A Credit Suisse Group index based on interest-rate swaps shows investors expect the RBA will cut its 7.25 percent benchmark interest rate by 11 basis points in the next 12 months. At the start of this week, the probability was for a 2 basis- point increase.

Spreads Support Aussie

The Bank of Japan is likely to keep interest rates unchanged this year at 0.5 percent, the lowest in the industrialized world, and will probably increase borrowing costs in 2009 because of accelerating inflation, according to Lehman.

A Japanese government report last month showed core consumer prices, which exclude fruit, fish and vegetables, climbed 1.5 percent in May from a year earlier, the fastest pace in a decade. The median estimate of 40 economists surveyed by Bloomberg News was for a 1.4 percent gain.

There is a 14 percent chance the Bank of Japan will raise its benchmark interest rate to 0.75 percent by the end of this year, according to calculations by JPMorgan Chase & Co. using interest-rate swaps.

The yield premium on two-year Australian government bonds over similar-maturity Japanese debt fell to 5.79 percentage points from 5.91 percentage points on July 11.

``Interest-rate differentials favor short Aussie-yen,'' the analysts said, referring to a trade where investors sell an asset in anticipation of making a profit by buying it back after its price has fallen. ``We short the Aussie against the yen as the latter still looks cheap.''

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

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Turkish Lira Climbs to Highest Since February as Rates Raised

By Emma O'Brien

July 18 (Bloomberg) -- Turkey's lira rose to the highest level in 4 1/2 months against the dollar after the central bank raised its key interest rate for the third time in as many months, boosting the appeal of the country's higher-yielding assets.

The Turkish currency climbed for the third day, its longest run of increases in a month, after borrowing costs were lifted yesterday by 50 basis points to 16.75 percent, a nine-month high and the most among major developing economies. Policy makers have raised the rate by 1.50 percentage points since May as surging oil and food prices forced them to revise inflation targets higher.

``The central bank is trying to regain its credibility,'' said Jon Harrison, an emerging-markets currency strategist at Dresdner Kleinwort in London. ``The high interest rates obviously make the lira appealing among the regularly traded currencies.''

The lira rose 0.3 percent to 1.1995 per dollar as of 9:56 a.m. in Istanbul, from 1.2032 yesterday. It earlier advanced to the highest since Feb. 29. The currency is up 2 percent this week, which would be the most since the week ended June 20.

Rising rates can make currencies a target for so-called carry trades, where cheaply borrowed funds are invested in nations where the returns on assets such as bonds and bills are higher.

The half-point rate increase was predicted by 11 of 21 economists surveyed by Bloomberg.

To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net

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Trichet Sees Euro-Zone Growth Stalling in 2Q, 3Q, Figaro Says

By Albertina Torsoli

July 18 (Bloomberg) -- European Central Bank President Jean-Claude Trichet sees economic growth in the euro zone stalling in the second and third quarter, before a gradual return to ``moderate'' growth, Le Figaro said.

The ECB remains committed to guaranteeing medium-term price stability and getting inflation back to ``below 2 percent, close to 2 percent,'' Trichet said in a joint interview with the French daily and three other European newspapers.

``It is necessary to avoid second-round effects'' of inflation, Trichet told the newspaper, adding that while policy makers can't change the price of oil, they can limit the inflationary impact of the price of services or wage increases.

To contact the reporter on this story: Albertina Torsoli in Paris at atorsoli@bloomberg.net

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Daily FX Report

Daily Forex Technicals | Written by Varengold Bank | Jul 18 08 08:01 GMT |

Good morning from Hamburg. Last night the oil price decreased, and for the first time since the beginning of June, traded at under $130 a barrel. That must be good news for the gas bill, and raises hopes for further price drops. But what can we do against the high gas bill? The best is to earn enough money in Forex that it doesn't matter.

Markets review

ECB chairman Trichet outlined a base-line scenario of reduced growth in the second and third quarters of 2008, and laid out projections for moderate growth in the following quarters. Along with these growth projects, he gave descriptions of current growth risks, including 'significant financial market correction, the possible further increases in oil and commodity prices, and the possible unwinding of global financial imbalances.' Furthermore, Trichet said that the ECB was committed to control inflation, with a target of below 2 percent, from the record 4 percent in June, and hinted that future interest rate hikes might not be out of the question. The EUR/USD was nearly unchanged, increasing 0.26% and closing at 1.5864.

The USD has begun to stabilize, likely supported by relaxed oil prices. It is, however, still capped due to recent shakeups in the financial system. On Thursday, the USD had the best day against the JPY in over 3 months, with a high of over 107, after hitting 1 ½ month low of 103.75 on Wednesday.

Australia's Q2 export prices beat expectations and soared 13.5 % qtr/qtr, caused by a boom from rising commodity prices, while import prices rose 1.4%, slightly below expectation of around 1.7%. The data had a little impact on the Aussie, which nurses slight losses on the day at 0.9711 and is near the session low at 0.9708.

Technical analysis

EUR/USD

After reaching a new all time high on Tuesday, the EUR has since been retreating against the USD. The 1.58 level developed into a hard mark, as it first provided resistance in May and June, and now it has become a support. If this trend continues, the EUR/USD could reach a new high next week.

USD/CHF

The USD/CHF had a support line at 1.0125 throughout June. However, it seems to currently be caught in a downward trend channel, and that the top of the trend channel was touched yesterday. If this turns out to be a real trend, it will open an attack on the 1-even level, which could be the next support.

Pivot Points - Daily FX Support and Resistance Levels

Daily Calendar & Key FX Events

Varengold Bank

IMPORTANT NOTIFICATION TO BE READ IN CONJUNCTION WITH THE CONTENTS OF THIS DOCUMENT

This document is issued and approved by Varengold WPH Bank AG. The document is only intended for market counterparties and intermediate customers who are expected to make their own investment decisions without undue reliance on the information set out within the document. It may not be reproduced or further distributed, in whole or in part, for any purpose. Due to international laws/regulations not all financial instruments/services may be available to all clients. You should have informed yourself about and observe any such restrictions when considering a potential investment decision. This electronic communication and its contents are intended for the recipient only and may contain confidential, non public and/or privileged information. If you have received this electronic communication in error, please advise the sender immediately, and delete it from your system (if permitted by law). Varengold does not warrant the accuracy, completeness or correctness of any information herein or the appropriateness of any transaction. Nothing herein shall be construed as a recommendation or solicitation to purchase or sell any financial product. This communication is for informational urposes only. Any market or other views expressed herein are those of the sender only as of the date indicated and not of Varengold. Varengold reserves the right to consider any order sent electronically as not received unless it is confirmed verbally or through other means.

Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Jul 18 08 08:05 GMT |
Danske Daily
Today's Key Points

* Stock markets and bond yields are higher. JPY is weaker, as some risk appetite returns to the market on positive earnings reports and another plunge in crude oil prices
* Crude oil prices take another dive on surprise increase in US inventories. However, broad weakness within commodities
* It will be difficult to maintain the positive momentum because of disappointing earnings reports released after market close

Markets Overnight

US stock markets finished on a strong note yesterday evening on the back of both positive earnings reports and another plunge in crude oil prices. S&P 500 and Nasdaq both closed up 1.2%. Financial stocks performed particularly well after JPMorgan Chase delivered better-than-expected Q2 earnings. However, it will be difficult to maintain the positive sentiment on the stock market today, as Merrill Lynch, Microsoft and Goggle all published very disappointing Q2 earnings after the markets closed. Hence it has been difficult for Asian stock markets market to build on the positive momentum from Europe and the US this morning. Asian stock markets are down, with the Nikkei down 0.6% and the Hang Seng down 0.2%.

Crude oil prices took another dive yesterday, declining by about 4.0% just after US data showed an unexpectedly large increase in both crude oil and natural gas inventories. Crude oil has since recovered slightly and is trading just above USD 130 this morning. Commodity prices in general showed weakness yesterday, with the broad CRB commodity index declining 2.7%.

In the US, bond yields yesterday took their lead from the stock market and initially rose sharply. However, after the release of disappointing earnings reports after market close, US bond yields retreated and are largely unchanged compared to the European market close. This morning 2Y and 10Y US bond yields are trading at 3.98% and 2.48%, respectively.

On the FX market, EUR/USD is trading largely unchanged at 1.5865. With some risk appetite returning, JPY has weakened against both USD and EUR, and is this morning trading at 106.24 and 168.49, respectively. The Scandinavian currencies have benefitted from the increased risk appetite in financial markets. This morning EUR/SEK is trading at 9.4681 and EUR/NOK is trading at 8.0566.
Global Daily

Except for German producer prices at 08:00 and the Eurozone trade balance at 11:00, the calendar offers very little interesting macro data out of G7 today.

Elsewhere, focus will be on Q2 earnings announcements from financials. Citigroup publish Q2 results at 12:30, and this is likely to be the most important event of the day.

Bond markets are again today likely to follow general financial market sentiment - particularly equity/credit markets. However, it might also be wise to keep an eye on whether the oil price continues to trend down.
Scandi Daily

There are no major releases in Scandinavia today, and the Scandinavian markets are expected to take their lead from European markets.

Danske Bank
http://www.danskebank.com/danskeresearch

Disclaimer

This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets' research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

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Pound Falls on Speculation U.K. Treasury to Break Debt Limits

By Stanley White

July 18 (Bloomberg) -- The British pound fell against the dollar on speculation the U.K. government will increase borrowing as Chancellor of the Exchequer Alistair Darling introduces a new set of spending guidelines.

The U.K. currency declined versus the euro for the first day this week after the Financial Times reported, without citing sources, that the new framework would allow for the breaking of limits on public-sector debt. A Treasury spokesman said that this was ``pure speculation.''

``There's sterling selling on the back of this report and it looks like it will continue,'' said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney, referring to another term for the pound. ``The fact that the Treasury would go this far shows that times are desperate and the economy must be in a pretty poor state.''

The pound fell to $1.9972 at 1:08 p.m. in Tokyo from $2.0038 late yesterday in New York. Sterling rose to $2.0157 on July 15, the highest in almost four months. Against the euro, it declined to 79.33 pence from 79.16 pence. The pound may weaken to $1.9800 in the next few days, Callow forecast.

Government borrowing is on course to exceed the existing plan's limit of 40 percent of gross domestic product, the FT reported.

Darling's current rules call for a balanced budget over the course of the economic cycle, though there isn't yet agreement on the length of that period. Treasury officials are waiting for the Office for National Statistics to deliver its annual revisions to economic growth estimates in September, which will help show when the current economic cycle ends.

Final Nail

``If this is true, it puts the final nail in the coffin of U.K. Prime Minister Gordon Brown's reputation for economic competence,'' the opposition Conservative Party said in a statement. ``He repeatedly staked that reputation on his fiscal rules.''

Later today, the Treasury will report a deficit of 7.4 billion pounds ($14.8 billion) for June, more than the 6.36 billion pound shortfall in the same month a year ago, according to a survey of 17 economists by Bloomberg News. The statistics office will release the data at 9:30 a.m. in London.

The pound also weakened on speculation a housing slowdown and credit-market losses in the financial sector will push the U.K. economy into a recession.

Claims for jobless benefits rose 15,500 in June from a month earlier, the most since the aftermath of the last recession in 1992, the Office for National Statistics said yesterday.

U.K. Economy

Homebuilders announced more than 4,000 job cuts since the start of July. HBOS Plc, the U.K.'s biggest mortgage lender, said last week that house prices fell in June from a year earlier by the most since 1992.

The collapse of the U.S. subprime mortgage market has cost financial institutions worldwide about $436 billion in losses and writedowns and led them to shed almost 94,000 staff.

``We're bearish on the pound,'' said Thomas Harr, a senior currency strategist in Singapore at Standard Chartered Plc, the U.K. bank that gets most of its profit from Asia. ``We expect the U.K. economy to go into a recession. It's a combination of the housing market and financial market stress.''

The pound may decline to $1.7700 by the end of September 2009, he said.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net

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Freddie Mac Mulls $10 Billion Share Sale, WSJ Says

By David Altaner and Bei Hu

July 18 (Bloomberg) -- Freddie Mac may raise as much as $10 billion by selling new shares to investors, the Wall Street Journal reported, citing people familiar with the situation.

The government-backed U.S. mortgage finance company's plan to raise cash, which comes after regulatory actions spurred a two-day recovery in its shares, might avoid an immediate government rescue and stricter oversight that would come with such a bailout, the newspaper said.

Freddie Mac and Fannie Mae, its sister company, own or guarantee about $5.2 trillion of home mortgages, nearly half of those outstanding in the U.S. Goldman Sachs Group Inc. analysts estimated that Freddie Mac faces $21 billion of default-related losses, and Fannie Mae $32 billion, the report said.

``They would have to sell new shares if they were to raise the capital they need immediately,'' said Mo Jae Sung, who helps manage the equivalent of $1 billion at Hanwha Investment Trust Management Co. in Seoul. ``If the government were to buy those new shares, it would deepen moral hazard and that's not healthy.''

Both companies' share prices plummeted about 45 percent last week amid concerns about whether they had enough capital to cover mortgage losses. It prompted the Treasury Department to unveil a plan July 13 to temporarily extend an unspecified line of credit to both companies and may buy stock in them if necessary, a proposal that has met opposition in the legislature.

Freddie Mac's board met Thursday to review various options for selling new shares, including a possible rights offering targeting existing investors. The sale may fetch $5 billion to $10 billion, the report said, citing people close to the discussions whose names it didn't identify.

Freddie Mac Chief Executive Officer Richard Syron has been talking to investment bankers from Goldman Sachs and Morgan Stanley and called two board meetings this week, the report said. Main buyers in any new share sale by the company will likely be existing shareholders.

To contact the reporter on this story: David Altaner in London at daltaner@bloomberg.netBei Hu in Hong Kong at bhu5@bloomberg.net

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Daily FX Report

Daily Forex Technicals | Written by Varengold Bank | Jul 18 08 08:01 GMT |

Markets review

Technical analysis

EUR/USD

USD/CHF

Pivot Points - Daily FX Support and Resistance Levels

Daily Calendar & Key FX Events

Varengold Bank

IMPORTANT NOTIFICATION TO BE READ IN CONJUNCTION WITH THE CONTENTS OF THIS DOCUMENT

Mixed News From US Banks Keeps USD View In Limbo Once Again

Daily Forex Fundamentals | Written by Saxo Bank | Jul 18 08 07:43 GMT |

Forex Market Update: Mixed News From US Banks Keeps USD View In Limbo Once Again. Oil Drop Does Little To Strengthen The Greenback. Range Trading Continues To Predominate

JPY weakens further, then snaps back a bit. USDCAD survives another test of parity. Quiet calendar today once again.

MAJOR HEADLINES - PREVIOUS SESSION

US Jul. Philadelphia Fed out at -16.3 vs. -15.0 expected and -17.1 in Jun.
Australia Q2 Import Price Index out at 1.4% vs. 2.2% expected
Japan Jun. Nationwide Department Store Sales out at -7.6% vs. -2.7% in May
Germany Jun. Producer Prices out at 0.9% vs. 0.7% expected

THEMES TO WATCH - UPCOMING SESSION

Key event risks today (all times GMT):

Norway Q2 Existing Homes Sales (0800)
Bank of England's Gieve to Speak (0805)
EuroZone May Trade Balance (0900)
Canada Jun. Leading Indicators (1230)

Market Comments

US financial stocks continued to squeeze higher yesterday and the JPY crosses followed suit, but then a further enormous writedown from Merrill Lynch and bad news from major tech bellwethers pushed the sentiment back down and USDJPY corrected 100 pips from its blow-off rally late yesterday. This was clearly a short squeeze - but how long it will last is the key question for the moment. Let's see if the 200-day moving average in USDJPY continues to survive, it has been the key resistance area since the pair topped out a month ago and now comes in around 107.20.

A story emerged late last night in the FT about Gordon Brown and the UK Treasury seeking to change/eliminate rules that prevent the UK Treasury from borrowing more than 40% of GDP, but sources within the Treasury are apparently denying that this is the case this morning. This was the likely cause of the dip in GBP late yesterday. On a long-term basis, this is a sensitive area for the pound as the powers that be did little or nothing to rectify excessive budget deficits even when the times were good in recent years in the UK, so the pound will likely be vulnerable on this issue going forward when tax revenues are falling in a weaker economy while stimulus spending is likely to increase. The 1.9950 area gave way briefly overnight in GBPUSD on the story, and this is a key support area as it is also near the 200-day moving average (Update: this level was taken out as we were writing, so it now serves as resistance zone...)

The US housing starts/building permits numbers yesterday looked impressive on the face of things, but this development was apparently due to some new building code regulations in the NYC area that provoked a one-off boost for July. The worst ever NAHB survey (probably the most forward looking new housing indicator in the US) from the previous day should remind us that not all is well in the US housing market, nor will it be for some time to come. The only hope at this point is a deceleration in the rate at which it is deteriorating.

We have a virtually empty calendar again today, with the Citigroup earnings probably one of the key events considering all of the recent noise about US banks. Also, the equity market in general may be a key driver of moves in FX with the disappointing tech earnings bellwethers. It is a bit surprising that the equity market hasn't seen even more strength considering the enormous drop in oil prices this week.

Technical Impressions

EURUSD continues its rangebound ways. After a brief drop to a new low, likely on the oil price drop, the pair rebounded back into the key 1.5820 (10-day EMA) to 1.5892 (yesterday's highs) zone. These may be the range markers/break points of the day. In USDJPY, the 0.382 of yesterday's frantic rally comes in at 105.83 and the downside reversal level is all the way down at 105.00. Again, the key upside resistance level comes in at 107.20, the 200-day moving average. USDCAD saw a reversal yesterday after another try through parity that failed to hold, but found resistance right at the 10-day EMA (around 1.0082 at present) which has been serving as resistance for over a week now.

Chart: USDCAD

USDCAD is perking up and has twice avoided a dip through parity (and the 200-day moving average just below) in recent days. Yesterday the pair snapped higher on the oil drop and a BoC report that showed Carney and company reasonably optimistic that inflation will ease (though they were also a bit bullish on growth we must add in contrast to Bernanke's recent and rather dour countenance). the 10-day EMA looks like a key threshold if the pair wants to have a try higher.

SEC Poised to Exempt Market-Makers From `Naked-Short' Sale Ban

By Jesse Westbrook and Edgar Ortega

July 18 (Bloomberg) -- The U.S. Securities and Exchange Commission is poised to exempt market makers in stocks from an emergency rule aimed at preventing manipulation in shares of Fannie Mae, Freddie Mac and 17 Wall Street firms.

The agency's staff, after conference calls to discuss the rule that limits the ability of traders to use abusive tactics when betting on a drop in share prices, agreed to requests by exchanges and brokerages to modify the terms. Exchange officials had told regulators that without an exemption, market makers responsible for pairing off investor orders will struggle to keep transactions flowing and may raise costs for investors.

``The staff is recommending exceptions to the short-sale order for market makers of the 19 stocks and their derivatives from arranging to borrow in advance for short sales in their market-making and related hedging activities, to avoid constraining the market makers' provision of liquidity,'' SEC spokesman John Nester said in an e-mail from Washington. The full commission may vote as soon as today.

SEC Commissioner Christopher Cox, who announced the order July 15, is seeking to make it harder for traders to illegally drive down stocks of the two mortgage buyers and Wall Street firms and prevent another collapse like Bear Stearns Cos. The rule takes effect July 21.

Investors will be required to borrow stock that they plan to sell short as a bet on a decline in prices. Prior to the order, which applies to shares of Fannie Mae, Freddie Mac and 17 brokerages, investors were only required to locate shares that they had reason to believe were available for borrowing.

Options Exchanges

Options exchanges asked the SEC to ease the restriction for market makers, who rely on quickly shorting stocks to hedge their trades, said three people familiar with the matter who declined to be identified. Market makers must quote bids to buy and offers to sell contacts on their assigned stocks.

``Without a market-maker exemption, I could see this having a profoundly negative impact on the liquidity that would be provided in stock and derivatives,'' said Steve Sosnick, an equity risk manager in Greenwich, Connecticut, for Timber Hill LLC, one of the largest options market makers in the U.S. ``The SEC has to be very careful not to craft a rule that has undesirable impacts on liquidity in various sectors of the marketplace.''

In a short sale, an investor borrows and then sells the shares in anticipation of a price decline. If the trade works as planned, the investor is able to buy back the stock at a lower cost and return the shares to the lender, pocketing the difference as profit.

`Naked' Short Sales

Traders are sometimes unable to actually borrow the shares and complete a ``naked short-sale.'' If the loaned shares are never repaid, investors can sell more shares short than legally allowed and put pressure on a stocks' price.

Freddie Mac and Fannie Mae shares, the two largest mortgage lenders in the U.S., and Lehman Brothers Holdings Inc., the No. 4 securities firm, have lost more than 70 percent of their market value this year. Citigroup Inc., the largest bank by assets, has lost 43 percent; Merrill Lynch & Co., the No. 3 securities firm by market value, has lost 39 percent.

``They are certainly on the political hot seat, but this is their response and you have to give them the benefit of the doubt for the time being,'' Bill Brodsky, chairman of the Chicago Board Options Exchange, the largest U.S. options market, said in an interview July 16. ``I'm hopeful that it won't be that bad. Right now it's limited both on scope and timeframe and we'll continue to work with the SEC.''

Costs Rise

Options market makers engage in short selling to reduce the risk they assume when pairing off customer orders. Forcing them to pre-borrow the shorted shares could make it harder for them to trade, making it more expensive for investors, said Peter Bottini, a former CBOE market maker.

``The cost for customers to trade these products could go up dramatically,'' said Bottini, who is now executive vice president of Chicago-based online brokerage OptionsXpress Holdings Inc. ``Our customers are going to have a tougher time taking a bearish stance in these companies.''

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.
Last Updated: July 18, 2008 00:01 EDT
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Dollar Heads for Weekly Gain as Banks Weather Credit Turmoil

By Stanley White and Kosuke Goto

July 18 (Bloomberg) -- The dollar headed for a weekly advance against the euro, rebounding from a record low on signs U.S. investment banks will withstand credit-market losses arising from the nation's subprime mortgage collapse.

The U.S. currency also rose versus the pound on speculation the U.K. government will boost borrowing as Chancellor of the Exchequer Alistair Darling introduces new spending guidelines. The yen was set for a weekly loss against the South African rand as a rally in U.S. stocks following JPMorgan Chase & Co.'s better-than-expected earnings encouraged so-called carry trades.

``The dollar is getting a boost as the markets correct excessive pessimism about the U.S. financial sector,'' said Joseph Kraft, head of capital markets in Tokyo at Dresdner Kleinwort, an investment bank owned by Germany's Allianz SE. ``The financial turmoil, shown by a sharp decline in stocks, was given a reprieve at least. Major Wall Street investment banks can survive.''

The dollar rose to $1.5855 per euro at 2:28 p.m. in Tokyo from $1.5863 late yesterday and $1.5938 at the end of last week. It hit an all-time low of $1.6038 on July 15. The currency was at 106.26 yen from 106.28 yen, little changed from a week ago.

Against the euro, the yen traded at 168.49 from 168.58 yesterday and 169.46 on July 11. The dollar may rise to 110 yen by the end of September, Kraft said.

The pound dropped to 79.36 pence per euro, from 79.16 yesterday, and to $1.9992 from $2.0038. The Financial Times reported, without citing sources, that the U.K. government's new spending rules would allow it to break limits on public sector debt. A Treasury spokesman said the report was pure speculation.

Weaker Yen

The yen fell 1.4 percent this week to 14.0800 against the South African rand. It also declined 0.6 percent to 103.28 per Australian dollar and weakened by 0.3 percent versus the New Zealand dollar to 81.12.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The Bank of Japan held its target lending rate at 0.5 percent this week, the lowest among major economies. Benchmark rates are 12 percent in South Africa, 7.25 percent in Australia and 8.25 percent in New Zealand. The Standard & Poor's 500 Index increased 1.2 percent yesterday.

``Currency traders are likely to take their cue from the stock market,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Earnings season isn't as bad as many had feared. There will be some pressure on the yen to weaken.''

The yen may decline to 107 per dollar today, Ishikawa forecast.

Bank Earnings

Profit at JPMorgan, the largest U.S. bank by market value, fell 52 percent on mortgage-related writedowns and costs from the takeover of Bear Stearns Cos. Second-quarter net income of 54 cents a share compared with expectations for 44 cents in a Bloomberg survey of analysts.

Citigroup Inc. reports quarterly earnings later today. Wells Fargo & Co., the second-biggest U.S. mortgage lender, on July 16 announced profit that beat analyst estimates. Merrill Lynch & Co., the third-biggest U.S. securities firm, fell after it yesterday reported a fourth straight quarterly loss.

The S&P index lost 3.8 percent in the seven trading days ended July 15, the day the dollar reached its worst level against the euro, on speculation a government plan to shore up Fannie Mae and Freddie Mac would fail to restore confidence in the two largest buyers of U.S. home loans.

More Confidence

``We were extremely bearish,'' said Alan Kabbani, senior currency trader at Wachovia Corp. in Charlotte, North Carolina. ``Now the market is taking some of that bearishness out and becoming a little more confident about the economy and the financial sector.''

The dollar pared its gains today after the Wall Street Journal reported Freddie Mac may raise as much as $10 billion by selling new shares. The article cited unidentified people familiar with the situation.

``The Freddie Mac story will likely add to risks of a softer U.S. equity open,'' said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia's fourth-biggest lender. ``And thus a softer U.S. dollar.''

Global banks and securities firms have reported losses and writedowns of $436 billion related to subprime loans to U.S. homeowners with poor credit, weighing on both stocks and the nation's currency this year.

Still, cheaper oil is helping support the greenback against the euro. Crude oil for August delivery is set for a record weekly drop in dollar terms, having lost more than $14 a barrel since July 11 in New York.

The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netKosuke Goto in Tokyo at kgoto2@bloomberg.net

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