Japan's Internet, Phone Stocks Gain; Honda Falls on Forecast

By Masaki Kondo

July 28 (Bloomberg) -- Japan's communication-related shares rose after Yahoo Japan Corp. reported its fastest profit growth in a year. Automakers sank after Honda Motor Co. cut its full- year earnings targets.

Yahoo Japan, operator of the nation's most visited Web site, gained the most in more than three months while Honda, the nation's second-largest automaker, headed for the biggest decline since April 4. Advantest Corp., the world's biggest maker of memory-chip testers, fell the most in four months after forecasting a loss as chipmakers scale back investment.

``Internet companies have little to do with U.S. financial turmoil, and there's still room for them to boost profit,'' said Yoji Takeda, who helps manage the equivalent of $1.1 billion at RBC Investment (Asia) Ltd. in Hong Kong. ``They're in a relatively safe position.''

The Nikkei 225 Stock Average climbed 6.31, or 0.1 percent, to 13,341.07 as of 1:52 p.m. in Tokyo. The broader Topix index dipped 0.64, or less than 0.1 percent, to 1,298.64. Eighteen of 33 industry groups on the Topix rose.

Yahoo Japan said net income rose 19 percent in the three months to June 30, the fastest quarterly gain since June 2007, on increased revenue from online advertising. Analysts at Deutsche Bank AG and KBC Securities raised their ratings on the company.

The shares surged 5 percent to 42,000 yen, set for the sharpest jump since April 7. NTT DoCoMo Inc., the nation's most profitable wireless carrier, rose 3.2 percent to 168,000 yen, while its parent Nippon Telegraph & Telephone Corp. jumped 3.3 percent to 529,000 yen.

`No Surprise'

DoCoMo may report a 23 percent rise in operating profit to more than 250 billion yen ($2.32 billion) for the three months to June 30, the Nikkei newspaper said on July 26. An installment payment plan for handsets helped DoCoMo cut the costs to subsidize phones, the newspaper said.

``It would be no surprise if DoCoMo reports a near 30 percent gain in first-quarter operating profit,'' Daisaku Masuno, an analyst at Nomura Securities Co., wrote in a Japanese-language report today. He has a ``neutral'' rating on DoCoMo and a ``strong buy'' on NTT.

Honda lost 4 percent to 3,610 yen. The company cut its full- year target for operating profit by 3.1 percent because of higher material costs and lower vehicle sales. Hino Motors Ltd., Japan's largest maker of heavy-duty trucks, tumbled 4.1 percent to 633 yen after Mizuho Investors Securities Co. reduced its recommendation from ``neutral plus.''

NGK Insulators Ltd. plunged 6.9 percent to 1,752 yen on a Nikkei newspaper report it will cut production of emission filters for diesel engines by as much as 50 percent as sales of large vehicles are falling in North America.

Automakers were the biggest losers among 33 industry groups on the Topix.

Advantest, Trading Companies

Advantest sank 7.4 percent to 2,140 yen, the most since March 3 and leading declines on the Nikkei. Tokyo Electron Ltd., the world's second-largest maker of chip gear, dropped 4.7 percent to 5,850 yen.

Advantest's first-half loss will probably be 2.5 billion yen compared with a 16.9 billion yen profit for the same period a year ago as orders plunge 62 percent, it said on July 25.

Mitsui & Co. , Japan's second-largest trading company, climbed 5.2 percent to 2,220 yen, making it the biggest winner on the Nikkei. Bigger rival Mitsubishi Corp. added 2.9 percent to 3,150 yen. Prices for gold and silver rose in New York while copper rose a second day in Asia on signs U.S. demand may be recovering.

``Trading houses are in one of the few industries that is set to announce some strong first-quarter earnings, and investors are buying into that,'' said Mitsushige Akino, who oversees about $560 million as chief investment officer of Ichiyoshi Investment Management Co. in Tokyo.

Ricoh, Honda

Ricoh Co., Japan's second-biggest maker of office equipment, climbed 2.8 percent to 1,758 yen, set for the highest since July 9. The company reiterated its annual net income target of a 1.4 percent gain even after posting an earnings drop in the three months to June 30, owing to the stronger yen.

Nikkei futures expiring in September was unchanged at 13,360 in Osaka and rose 0.2 percent to 13,360 in Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.



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China Stocks Gain on Speculation Monetary Tightening Will Ease

By Chua Kong Ho

July 28 (Bloomberg) -- China's stocks rose, led by banks and developers, on speculation the government will ease policies to fight inflation after the government's top decision-making body dropped a reference to ``tight'' monetary policy in a statement.

China Merchants Bank Co. and China Vanke Co., the nation's largest real-estate company, led gains. Yanzhou Coal Mining Co., a unit of China's fourth-largest producer of the fuel, climbed after saying first-half profit may have tripled.

``This is the first signpost for recovery in China's stock market, and we expect sentiment to be better,'' said Mark Tan, a Singapore-based portfolio manager at UOB Asset Management Ltd., which oversees about $3 billion in Asian equities. ``The government is still worried about inflation but it's not going to accelerate for the rest of the year.''

The CSI 300 Index, which tracks yuan-denominated stocks traded in Shanghai and Shenzhen, rose 44.46, or 1.5 percent, to 2,983.66 as of 1:11 p.m. local time, headed for the highest since July 9. About 10 stocks fell for each that advanced, with financial shares contributing the most to the gain.

The benchmark index has declined 44 percent this year, the most among the world's 20 biggest equity markets, on concern measures to fight inflation and record crude oil prices will erode earnings. China's Politburo, the Communist Party's top decision-making body, said maintaining growth and fighting inflation were the top priorities in the second half of 2008.

`More Cautious'

The Politburo statement, reported by state-run China Central Television on July 25, omitted the mention of ``tight'' monetary policy, a term used in previous government statements. China's economic growth slowed to 10.1 percent in the second quarter as the government curbed lending this year. The central bank has imposed loan quotas and ordered lenders to set aside a record 17.5 percent of deposits as reserves to soak up liquidity in the economy.

``The government will be more cautious in imposing additional tightening measures, which will help stabilize investor confidence in stocks in the near term,'' wrote Zhang Dongyun, a strategist at Shanghai-based Haitong Securities Co., in a note today.

Merchants Bank, a Shenzhen-based lender, gained 3.1 percent to 25.48 yuan. Shanghai Pudong Development Bank, the Chinese partner of Citigroup Inc., climbed 2.5 percent to 24.51 yuan.

Shenzhen-based China Vanke added 2.2 percent to 9.35 yuan, while rival Poly Real Estate Group Co. advanced 1.5 percent to 17.16 yuan.

Profit Forecast

Yanzhou Coal gained 2.9 percent to 19.46, the most since July 21, after the Shandong-based mining company said first-half profit will likely triple in the first half from 1.11 billion yuan ($161 million) in the year-earlier period. China Shenhua Energy Co., the nation's largest coal supplier, advanced 2.9 percent to 33.11 yuan.

The Shanghai Composite Index, a measure of stocks on the larger of China's two exchanges, gained 1.7 percent to 2,913.094. The Shenzhen Composite Index advanced 1.4 percent.

The following stocks also rose or fell in China. Stock symbols are in parentheses after company names:

Guangzhou Shipyard International Co. (600685 CH), a unit of China's biggest shipbuilder, advanced 0.60 yuan, or 2.3 percent, to 27.18, after agreeing to pay 3.04 billion yuan to buy an affiliate to boost its capacity and expand into making smaller container ships.

PetroChina Co. (601857 CH), the country's largest oil company, gained 0.27 yuan, or 1.8 percent, to 15.34, after its units received licenses to sell crude oil and refined oil products in the country.

Shanghai Yuyuan Tourist Mart Co. (600655 CH), a Chinese shopping mall operator, fell 3.24 yuan, or the 10 percent daily limit, to 29.20 after scrapping plans to sell shares.

To contact the reporter responsible for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net



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South Korean Won Gains on Current-Account Surplus; Bonds Fall

By Kim Kyoungwha and Judy Chen

July 28 (Bloomberg) -- South Korea's won rose after the nation posted a current-account surplus for the first time in seven months in June as exports increased. Government bonds fell.

The won is headed for its strongest month since January 2006 after the government bought the currency to help curb inflation at the fastest in a decade. The won also gained as oil prices traded near a seven-week low and exporters purchased the currency to repatriate their overseas earnings before the end of the month, said Ko Yun Jin, a dealer at Kookmin Bank in Seoul.

``Despite steady bids for the dollar from foreign stock sales, the atmosphere is turning favorable for the won,'' said Ko at the nation's largest bank. ``Month-end export settlements may give an additional boost to the currency.''

The currency rose 0.3 percent to 1,005.95 per dollar as of 11:36 a.m. local time, according to Seoul Money Brokerage Services Ltd. It gained 4 percent this month, the best performer of the 10 most-active currencies in Asia outside Japan.

The won climbed as high as 1,004.90, the strongest since July 16, as the Bank of Korea reported a current-account surplus of $1.82 billion for June, compared with a deficit of $378 million in May. The current account is the broadest measure of trade, tracking goods, services and investment income.

The government this month forecast a trade surplus of $3.8 billion in the second half of 2008, led by exports to China and other emerging markets. It posted a trade deficit of $5.7 billion in the first six months.

Bonds Fall

Five-year bonds declined on speculation a government report will show inflation accelerated, eroding the purchasing power of the fixed payments from debt.

Consumer prices may have risen 5.7 percent in July from a year earlier, after gaining 5.5 percent in May, according to a Bloomberg News survey of economists before the report Aug. 1.

The yield on the 5.25 note due March 2013 rose 2 basis points to 5.84 percent, according to Korea Exchange. The price fell 0.06, or 6 won per 10,000 won face amount, to 99.64. A basis point is 0.01 percentage point.

The government today sold 376 billion won ($374 million) of 20-year bonds at an average yield of 5.85 percent, the Ministry of Strategy and Finance said.

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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Malaysian Ringgit May Lose 2008 Gains on Surprise Rate Decision

By David Yong

July 28 (Bloomberg) -- Malaysia's ringgit may fall by up to 1 percent, erasing its gain in 2008, after the central bank unexpectedly kept interest rates on hold, according to Sumitomo Mitsui Banking Corp. and Citigroup Inc.

The currency may decline to 3.295 against the dollar by year-end, the lowest since Jan. 23, Sumitomo Mitsui Banking, Japan's second-biggest lender, forecast after borrowing costs were left at 3.5 percent on July 25. Citigroup, the biggest financial services group, and Brown Brothers Harriman & Co. said the currency may weaken to 3.28.

The ringgit dropped as much as 0.5 percent today, the most in more than a month, on concern that inflation will accelerate from the highest in 26 years last month after the government raised fuel prices on June 5. Economic growth may slow to between 4.5 percent and 5 percent this year, the central bank said on June 30, from 6.3 percent in 2007.

``There's some loss of market confidence in the ringgit,'' said Tetsuo Yoshikoshi, a Singapore-based currency analyst at Sumitomo Mitsui Banking in Singapore. ``I was surprised, considering that they did hike after the fuel price was increased in February 2006. This will disappoint investors. We will see a sell-off in the ringgit and stocks.''

Bank Negara Malaysia has kept its overnight policy rate unchanged in 18 straight meetings since April 2006, citing risks to an economic slowdown and unemployment. The latest decision came with a two-hour delay after the market closed on July 25. Fourteen of 20 economists surveyed by Bloomberg News expected central bank Governor Zeti Akhtar Aziz to lift the benchmark rate to 3.75 percent.

`Negative for Ringgit'

Higher fuel prices pushed inflation to 7.7 percent in June, the most since January 1982, while consumer sentiment fell to a record low last quarter, government and private reports showed.

Bank Negara didn't issue a new estimate for this year's economic growth, though it lifted the inflation forecast to as much as 6 percent, versus 2 percent in 2007.

``This is negative for the ringgit,'' Win Thin, a senior currency strategist at Brown Brothers, wrote in a July 25 research note, referring to the decision to keep rates on hold. ``We see dollar-ringgit moving higher as markets have punished countries that are considered behind the inflation curve.''

The ringgit fell 0.4 percent to 3.2630 per dollar as of 9:57 a.m. in Kuala Lumpur, according to data compiled by Bloomberg. The currency may weaken to about 3.28 ``near-term'' and a break would next target the 3.329 level, he said.

Forwards Contracts

Non-deliverable forwards contracts show traders pared bets on how much the ringgit will advance in the next 12 months. The implied rate for the currency was 3.2473 compared with 3.2130 two weeks ago. Forwards are agreements in which assets are bought and sold at current prices for future delivery.

The decline today erased all the ringgit's advance in July. The currencies of India, the Philippines, Indonesia and Vietnam have strengthened this month as central bankers increased borrowing costs to quell inflation sparked by higher oil and food prices.

``The sell-off reflects the market's disappointment with the decision,'' said Kit Wei Zheng, a Singapore-based economist at Citigroup, the fourth-largest currency trader. ``This will increase the likelihood that they will spend some reserves to defend the currency'' near 3.28, he said.

Malaysia may still raise its benchmark rate to 4 percent by year-end because second-round effects from surging food and energy prices will show up later, said Kit.

Political factors may have come into play for now and Malaysia's decision is likely a case of delayed, rather than a refusal to raise interest rates, he said.

Political Factors

The ruling National Front coalition government is trying to regain public support after its worst electoral performance in March elections since independence in 1957. Malaysia's ringgit plunged the most in nine months and stocks had the biggest fall in a decade after the poll showed the Front lost its two-thirds majority in parliament and ceded control in five of 13 states.

Prime Minister Abdullah Ahmad Badawi may face a leadership fight in December, when the United Malay National Organization holds its general assembly, Sumitomo's Yoshikoshi said. UMNO is the dominant party in the Front coalition.

Bank Negara's decision must have been reached after taking into consideration the political turmoil, he said.

``My forecast factored in the UMNO internal election in December,'' he said. ``In addition, I expect commodity prices to plunge around the end of the year which is ringgit-negative.''

Malaysia is the world's second-largest palm oil exporter and the second-biggest oil producer in the region.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net.



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Investors Despair as India's Budget Hemorrhages: Andy Mukherjee

Commentary by Andy Mukherjee

July 28 (Bloomberg) -- Investors and businessmen are discovering to their horror just how empty the Indian government's rhetoric of responsible budgeting has been.

The damaging implications of fiscal indiscipline have so far been masked by a high rate of economic growth.

With Fitch Ratings cutting India's debt outlook to negative, the veneer is now peeling off.

The Federation of Indian Chambers of Commerce and Industry, a New Delhi-based lobby group, yesterday came out with a four- point agenda for governmental action over the next 100 days. One of its key demands is that the administration ``address the perception of a looming fiscal crisis.''

A crisis it may not be, at least not yet.

However, this is no time for complacency.

Pork-laden spending policies may quickly become unsustainable if the economy and tax collections slow down before inflation and interest rates on government borrowings have had a chance to recede.

The government must start acknowledging the grim fiscal reality in order to seek political consensus for reviving asset sales. It has a ready blueprint of what needs to be done from the previous administration's experience six years ago. For now, it seems to be in no mood to even take a look at it.

Assuming the price of crude oil at $120 a barrel, Morgan Stanley economist Chetan Ahya estimates the total budgetary gap to be 10.4 percent of gross domestic product in the year ending March 31, 2009, up from just 7.7 percent last fiscal year.

Budget Deficit

If instead of $120, the average price of oil is assumed to be, say, $135 a barrel, the deficit estimate would rise to 11.4 percent, Ahya wrote in a July 17 note to investors.

Ahya's calculation combines federal and state-level data with the so-called off-budget spending items.

Apart from the subsidies on energy, food and fertilizers, off-budget items include the cost of a government-sponsored farm- debt waiver program as well as the expenditure to be incurred on a pay increase for civil servants.

The last time the overall deficit exceeded 11 percent in India was in the year ended March 31, 2002. Back then, the economy was growing at an annual pace of just about 5.8 percent, as against the central bank's forecast of at least 8 percent expansion for the current fiscal year. The inflation rate was less than 2 percent, compared with about 12 percent now.

`An Imperative'

The government of then Prime Minister Atal Bihari Vajpayee turned the bleak fiscal situation into an opportunity to sell state ownership of key assets to private investors, in the process raising $5 billion in three years.

``Disinvestment in public sector enterprises is no longer a matter of choice, but an imperative,'' Indian President K.R. Narayanan said in his address to parliament on Feb. 25, 2002, setting the government's agenda.

In May 2004, the government changed. Prime Minister Manmohan Singh's Congress Party obliged his Marxist backers' demand to halt privatization by formally scrapping the previous administration's policy of selling controlling stakes to strategic investors.

In the four years that ended March 31, 2008, asset-sale revenue dwindled to a total of $1.5 billion, even as the benchmark stock-market index almost tripled in this period.

Missed Chance

It's too late to make good on the opportunity that has been squandered. But now that the Marxists aren't dictating economic policy, and the government has survived a vote of confidence, it's both possible and crucial to revive the asset-sale program.

That, it seems, is unlikely to happen.

``We're not selling any assets,'' Finance Minister P. Chidambaram said last week. ``What we plan to do -- this is what I said in the budget speech -- is that we want to list unlisted public sector enterprises.''

It may be too late for that. The benchmark stock index is down more than 34 percent in U.S. dollar terms this year. Traders expect the turbulence to continue. The National Stock Exchange Volatility Index has risen 73 percent from its mid-May level.

Instead of running enterprises with a view to providing employment to people, the government has to spend its energy on education, health care and law and order. The July 25 terror attack in Bangalore ought to be a fresh reminder of the consequences of wrongheaded governmental priorities, which have left India with a bulging -- yet largely dysfunctional -- state.

Making Common Cause

It takes time to create a pipeline of deals. So even if the strategic-sale program is restored now, this government won't be able to sell anything before its term expires in May next year.

That doesn't matter. What's important right now is to send a signal to investors that the two major national parties in the country -- the Congress and the Bharatiya Janata Party -- agree on the need to shrink the balance sheet of the Indian state.

If that message is credible, it would assuage investors' concerns about what Mumbai-based brokerage Enam Securities Pvt. calls the government's ``fiscal mess.''

The BJP, as the opposition party is known, has snubbed the Congress by not supporting it on the proposed civilian nuclear- energy agreement with the U.S.; therefore, it's unrealistic to assume that the Congress would make common cause with the BJP on asset sales, even when -- just like the nuclear deal -- it is very obviously the right thing to do.

(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Andy Mukherjee in Singapore at amukherjee@bloomberg.net



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Greenpeace Paints Slogans on Queensland Coal Ships

By Angela Macdonald-Smith

July 28 (Bloomberg) -- Greenpeace climate activists painted slogans on the sides of ships queuing outside the largest coal export harbor in Queensland, the latest in a series of protests in Australia against the use of the fuel.

The activists this morning painted messages including ``Stop Coal Expansion,'' ``Barrier Reef Gone'' and ``Ice Caps Gone'' on 20 carriers waiting outside Hay Point to load, Greenpeace Australia Pacific said in an e-mailed statement. Shipping hasn't been disrupted, said Simon Roz., a campaigner.

Australia, the world's biggest coal exporter, generates more than 80 percent of its electricity from the fuel, which emits more greenhouse gases when burnt than natural gas. Coal exports from Queensland may double by 2030, State Premier Anna Bligh said July 9, as ports and railroads are expanded and mining companies boost output amid record prices.

``The plans to double Queensland's export capacity contradict the stated intentions of Prime Minister Rudd and Premier Bligh to be urgently reducing greenhouse pollution,'' Roz said from Greenpeace's MV Esperanza ship, about 20 nautical miles from the harbor. ``Greenhouse pollution knows no borders.''

Spot prices for power-station coal exported from Australia's Newcastle port reached a record $194.79 a metric ton this month, buoyed by constraints at eastern Australian ports. Annual contract prices for coking coal used in steelmaking, tripled to a record $300 a ton this year.

BHP, Mitsubishi

The Hay Point harbor includes two coal ports, Babcock & Brown Infrastructure Group's Dalrymple Bay terminal and an adjacent site owned by BHP Billiton Mitsubishi Alliance, the world's largest exporter of coking coal. Neither Greg Smith, general manager for operations at Dalrymple Bay, nor Nicole Ireland, a spokeswoman for BHP Billiton Mitsubishi, could be reached for comment. Queensland Police said it was getting details on the incident from its local unit.

Greenpeace posted photographs of the protest on its Web site.

Queensland Rail, Australia's biggest rail transporter of coal, said today at a coal conference in Brisbane, the state capital, that it plans to increase capacity for deliveries to Dalrymple Bay to 130 million tons a year by late 2009. BHP Billiton Mitsubishi is planning up to 11 projects to meet demand as part of its growth strategy, Michael Lambourne, chief financial officer at the alliance, said at the same conference.

The Esperanza, the largest vessel in Greenpeace's fleet, is on a six-week tour up Australia's eastern coast, part of a campaign to support renewable energy and energy efficiency and in opposition to the use of fossil fuels. Last week it led a protest against Queensland Energy Resources' proposed shale oil mine, claiming pollution from the project threatens the Great Barrier Reef.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net



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U.K. May Have to Open Antitrust Probe of Utilities, Panel Says

By Mark Deen and Ben Farey

July 28 (Bloomberg) -- The U.K. government should consider pursuing an antitrust investigation in Britain's wholesale gas and electricity markets, as retail prices head ``significantly'' higher, a panel of lawmakers said.

The Business and Enterprise Committee in the House of Commons, which includes members of Parliament from the nation's three main political parties, concluded in a report today that the U.K. has higher natural gas prices than other European countries. The panel said this suggests a lack of competition, though it didn't find proof of price-fixing.

``Just because we have found no evidence of collusion does not mean we have given the Big 6 energy companies a clean bill of health,'' said Peter Luff, a lawmaker from the Conservative opposition who leads the committee. ``Far from it.''

The report reflects mounting pressure on politicians to tackle record energy prices as slowing economic growth and accelerating inflation squeeze household budgets. In the U.S., the Senate is debating a bill to curb energy-market speculation.

The U.K. lawmakers said Ofgem, the industry regulator, should have first crack at reining in the industry. If that doesn't curb prices, then the Competition Commission, an independent agency that can order companies broken up, should step in.

Any probe into wholesale gas prices would send a ``chill'' through the energy industry and lead to reduced investment, Richard Guerrant, a director of European operations for Exxon Mobil Corp., told the committee when he testified last month.

Committee Recommendations

The panel has no authority to enforce its recommendations, which the government and regulators are free to ignore. The government will respond to the report in the next few weeks.

Ogfem, the regulator, said in a statement in ``welcomed'' the committee report, saying it will contribute to its own ongoing investigation into a link between wholesale and retail energy pricing.

U.K. gas prices have risen more than fourfold to about 60 pence a therm from a low in April last year of 13.5 pence a therm. Gas for delivery this winter reached an all-time high of 105 pence a therm last month.

The report said producers' unwillingness to sell gas on forward markets, which let buyers and sellers lock in prices at delivery in the future, was pushing prices higher. It urged Ofgem to investigate the lack of price transparency in forward markets.

Rising Prices

The lawmakers' committee, which monitors the performance of the government on energy matters, said it expects gas and electricity bills to rise ``significantly'' in the near future.

Electricite de France SA's U.K. unit on July 25 raised electricity and natural gas bills for households because of rising wholesale costs. Power bills will be increased by 17 percent and gas charges by 22 percent from today, according to company spokesman Rajan Lakhani.

The lawmakers urged Ofgem to show a ``greater sense of urgency'' in its work and to ``look again'' at the way wholesale markets work in the U.K. The report said a competition inquiry should be avoided if possible.

``Our view is that changes can best be made through improving market design, by taking specific regulator steps and by continue to work for liberalization of European markets,'' Luff said. ``Such an approach is more likely to bring real and lasting investment the U.K. needs so urgently.''

To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.net; Ben Farey in London at bfarey@bloomberg.net



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Australian Dollar Falls on Concerns Banking Losses Will Spread

By Ron Harui

July 28 (Bloomberg) -- The Australian dollar fell after Australia & New Zealand Banking Group Ltd. set aside more funds for bad debts linked to U.S. credit-market losses. The New Zealand dollar was little changed.

Australia's currency dropped to a two-week low after ANZ said provisions for bad debts are likely to be about A$1.2 billion ($1.1 billion) in the current half. National Australia Bank Ltd. last week set aside an additional A$830 million for potential mortgage-related losses. New Zealand's dollar may weaken as the country's three-year swap-rate advantage over the U.S. narrowed to a 10-month low.

``The Australian dollar is looking vulnerable,'' said Tony Morriss, a currency strategist at ANZ in Sydney. ``The run of announcements highlights the risks that losses from the U.S. are spreading.''

Australia's dollar dropped to 95.34 U.S. cents as of 11:25 a.m. in Sydney from 95.62 cents late in New York on July 25. It earlier reached 95.27 cents, the lowest since July 9. The currency traded at 102.96 yen from 103.11 yen.

New Zealand's dollar bought 74.20 U.S. cents from 74.18 cents late last week, when it touched 73.87 cents, the weakest since Jan. 22. The currency was at 80.08 yen from 80.01 yen.

The Australian dollar extended its loss against the U.S. dollar in the past five days to 1.6 percent, the second-worst performance among the 16 most-traded currencies behind New Zealand's dollar, after Melbourne-based ANZ said in a statement profit will drop as much as 25 percent on bad debts.

Credit-Market `Deterioration'

``As the deterioration in global credit markets continues and the slowing of the global economy plays out in Australia and in New Zealand, there are flow-on effects for our'' business, ANZ's Chief Executive Officer Mike Smith said.

Australia's dollar traded near its lowest in more than a week versus the yen after John Stewart, chief executive officer of National Australia Bank, said yesterday losses from the U.S. housing slump may more than triple.

The world's largest banks and securities firms have posted about $468 billion in losses and writedowns since the subprime crisis started last year, Bloomberg data shows. Australian companies including Babcock & Brown Ltd. and Allco Finance Group Ltd. are selling assets to cope after credit-market turmoil boosted debt costs.

Six months after correctly identifying the Australian dollar as one of the best bets in the foreign exchange market, the biggest investor in the nation's debt says the rally is coming to an end.

`Rally is Finished'

Daiwa Asset Management Co., which holds 4 percent of the government's bonds, expects the currency to close the year at $1 after earlier forecasting a surge to $1.10.

``The rally is finished as the best days for the economy may be over,'' said Tsutomu Komiya, a money manager in Tokyo at Daiwa, a unit of Japan's second-largest brokerage. Daiwa, which manages the equivalent of $93 billion, isn't buying the currency because cash flowing into Australia funds ``has stopped in recent days,'' he said.

The New Zealand dollar may extend its five-day 2.4 percent decline versus the U.S. dollar as the difference between three- year New Zealand and U.S. swap rates narrowed to 3.29 percentage points today, the least since Sept. 18.

``Further narrowing of interest-rate differentials will likely undermine the local currency going forward,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington.

RBNZ Rate Bets

The currency fell 2.6 percent last week after Reserve Bank of New Zealand Governor Alan Bollard cut the official cash rate a quarter-percentage point to 8 percent. Bollard, in a July 24 statement, said further rate cuts are likely unless there is ``excessive depreciation'' in the currency or a larger-than- expected surge in inflation.

The chance of a quarter-point cut at a review in September is 100 percent, suggesting it's a certainty, according to a Credit Suisse Group index based on interest-rate swaps.

Australian two-year government debt rose for a fourth day. The yield on the two-year bond fell 4 basis points, or 0.04 percentage point to 6.40 percent. The price of the 5.25 percent bond maturing in August 2010 rose 0.074, or A$0.74 per A$1,000 face amount, to 97.823.

New Zealand's government bonds fell, pushing the yield on the 10-year note up 2 basis points to 6.12 percent. The price of the 6 percent security maturing in December 2017 declined 0.169 to 99.131. Yields move inversely to prices.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Chris Young in Sydney at cyoung12@bloomberg.net.



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Korea Won Gains After First Current Account Surplus in 7 Months

By Kim Kyoungwha and Judy Chen

July 28 (Bloomberg) -- South Korea's won strengthened after the nation posted a current-account surplus for the first time in seven months in June as exports increased.

The Korean currency has risen 3.9 percent this month, the best performance among the 10 most-active currencies in Asia outside of Japan, as the government bought the won to help curb inflation at a decade high. The won was also supported by oil prices near a seven-week low and demand for the currency from exporters repatriating overseas earnings before the end of the month, Ko Yun Jin, a dealer with Kookmin Bank said.

``Despite steady bids for the dollar from foreign stock sales, the atmosphere is turning favorable for the won,'' Seoul- based Ko said.

The Korean currency rose 0.3 percent to 1,006.55 against the dollar as of 9:20 a.m. in Seoul, compared with 1,009.20 at the end of last week, according to Seoul Money Brokerage Services Ltd.

It gained to as strong as 1,004.90, the highest level since July 16, as the Bank of Korea reported that the current account surplus was $1.82 billion last month, compared with a deficit of $377.5 million in May. The current account is the broadest measure of trade, tracking goods, services and investment income.

The government this month forecast a trade surplus of $3.8 billion in the second half of 2008, led by exports to China and other emerging markets. It posted a trade deficit of $5.7 billion in the first six months.

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 Dollar Peak Pushes Traders to Yen on Growth

By Wes Goodman and Stanley White

July 28 (Bloomberg) -- Six months after correctly identifying the Australian dollar as one of the best bets in the foreign exchange market, the biggest investor in the nation's debt says the rally is coming to an end.

Daiwa Asset Management Co., which holds 4 percent of the government's bonds, expects the currency to close the year at $1, compared with 95.30 U.S. cents today, after earlier forecasting a surge to $1.10. Daiwa cut its estimate as the country's benchmark S&P/ASX 200 Index of stocks dropped to a 2 1/2-year low this month and the Reuters/Jefferies CRB Index of commodities fell 13 percent from its record high on July 3.

``The rally is finished as the best days for the economy may be over,'' said Tsutomu Komiya, a money manager in Tokyo at Daiwa, a unit of Japan's second-largest brokerage. Daiwa, which manages the equivalent of $93 billion, isn't buying the currency because cash flowing into Australia funds ``has stopped in recent days,'' he said.

Mizuho Asset Management Co., State Street Global Advisors and Putnam Investments are also turning into bears as the U.S. economic slowdown spreads, curtailing the rally in coal, oil and metals that fueled Australia's expansion. Lehman Brothers Holdings Inc., which recommended the currency in February, now predicts it will depreciate 20 percent by 2009.

The Aussie gained 8.9 percent against the greenback this year, lagging behind only the Brazilian real and the Swiss franc among the 16 most-traded currencies. It touched 98.49 cents on July 16, the highest since 1983. The Australian dollar soared 44 percent over the past five years, on demand from China for the country's coal, iron ore and nickel.

Record Exports

Commodities exports were poised to set a record for the fourth-straight year in the 12 months to June 30, 2008, reaching A$145.6 billion ($139 billion), the government's Australian Bureau of Agricultural and Resource Economics said in March.

The $1 trillion economy is slowing after the central bank increased its target interest rate to a 12-year high of 7.25 percent in March to stem inflation. Home loan approvals fell by the most in eight years in May and consumer confidence slumped to a 16-year low this month. Growth may decelerate to 2.95 percent this year from 4.23 percent in 2007, according to the median estimate of 14 economists surveyed by Bloomberg News.

Australia's dollar slumped 1.5 percent last week, even after a government report showed consumer prices climbed 4.5 percent from a year earlier, the most since 2001. It fell another 0.6 percent today.

Cooling Economy

The Reserve Bank of Australia increased its target rate 12 times from 4.25 percent in April 2002 to curb inflation. Governor Glenn Stevens will cut rates by 0.25 percentage point at least once in the coming 12 months, a Credit Suisse Group index shows.

The Aussie will slide 4.5 percent this year to 91 U.S. cents, according to the median of 30 currency strategist forecasts in a Bloomberg survey. Lehman predicts 85 U.S. cents as commodity prices fall and losses linked to subprime mortgage defaults slow global growth.

``Parity is out of the question,'' said Akira Takei, the general manager for international bonds at Mizuho in Tokyo, part of Japan's second-largest publicly traded bank. ``For the past several years, people were eager to take risks. Now things have changed as the U.S. subprime issue spills over into other regions. The Australian dollar will be sacrificed.''

Mizuho, which oversees the equivalent of $37 billion, sold last week. The currency may fall to 85 cents this year and 75 the next, Takei said.

Yen to `Soar'

The biggest beneficiary of a weaker Aussie may be the yen. Australian dollar securities rose to 12 percent of Japanese overseas investments between November and April, compared with an average of 6 percent since 2005, according to Japan's Ministry of Finance. Investors took advantage of the difference between Australia's interest rates and Japan's, where the benchmark borrowing cost is 0.5 percent.

As Japanese bring home proceeds of their sales, the yen will gain 1 percent this year after closing last week at 107.84 to the U.S. dollar, a separate Bloomberg survey showed.

``The yen should broadly soar if commodity prices were to fall,'' Taisuke Tanaka, Lehman's chief Japan currency strategist wrote in a July 17 report.

Japanese individuals already started to reduce bets, according to figures from the Tokyo Financial Exchange Inc. Net long positions that the Australian dollar will gain against the yen fell to 39,449 contracts on July 22, less than half the record of 79,920 contracts on July 1.

Trade Balance

Investors should be wary of betting too soon on the yen, according to UBS AG, the world's second-biggest foreign exchange trading firm. Japan's exports fell in June for the first time in more than four years as demand for cars and electronics dropped, the Finance Ministry reported last week. The yen and the trade balance have consistently moved together over the last couple of decades, UBS said.

``The downside risks to Japan's currency are growing sharply,'' said Mansoor Mohi-uddin, a Zurich-based strategist at UBS, in a research note on July 25.

The Aussie remains the favorite of Kokusai Asset Management Co. because of growth in China's economy, which is expanding at an annual rate of more than 10 percent, said Masataka Horii, one of four investors for the firm's $53 billion Global Sovereign Open fund in Tokyo.

``Australia will profit from China,'' said Horii. ``Its economy is relatively better than that of Japan or the U.S.''

Australia & New Zealand Banking Group Ltd., the country's third-biggest bank, predicts the currency will rise to $1.04, after reaching parity for the first time since 1982.

Commodity Impact

Australia relies on raw material exports for 9 percent of its economy, ranking behind Gulf Arab states, Chile and Russia, according to research by Morgan Stanley.

Investors started to question the outlook for Australia after oil prices tumbled 15 percent since reaching a record on July 3 on concern demand from the U.S., Japan and China will wane. Gold fell 5.8 percent from this month's high as the drop in fuel prices gave investors less need for the metal as a hedge against inflation.

Gold, Australia's biggest raw-material export after coal and iron ore, may drop to $825 in 2010 from $924 now, according to a Bloomberg survey of 11 analysts. Crude oil, the No. 4 raw- material export, may slump to $112 a barrel in 2010 from $124, a separate survey shows. China's economy grew 10.1 percent in the second quarter from a year earlier, compared with the 11.9 percent pace in 2007.

`Too Expensive'

``Oil and commodities are too expensive,'' said Kensuke Niihara, head of foreign-exchange management in Japan at State Street, which manages $100 billion in assets worldwide. ``Within this year, there is good potential the Australian dollar will come down.''

Putnam, which forecast the Aussie would reach 95 U.S. cents when it was trading at 88 cents on Jan. 10, is also turning negative.

``We've been bullish the Australian dollar all year long but we have reduced some in the last few weeks,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president in Boston. ``If you believe we're in a period of weaker global growth then it would seem the Australian dollar has some risk of falling.''

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net.



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Japan's Stocks Rise on Yahoo Earnings; Trading Houses Advance

By Masaki Kondo

July 28 (Bloomberg) -- Japan's stocks rose after Yahoo Japan Corp. reported the fastest profit growth in five quarters and as rising metals prices boosted the earnings prospects of commodities producers.

Yahoo Japan, operator of Japan's most visited Web site, sent Internet and communications companies higher. Mitsui & Co., which gets more than half its earnings from commodities, advanced. Ricoh Co., the nation's second-biggest maker of office equipment, jumped to a three-week high after maintaining its full-year earnings targets despite a profit decline in the first quarter.

``So far, earnings at Japanese companies overall weren't as bad as we had thought,'' Tomochika Kitaoka, a Tokyo-based strategist at Mizuho Securities Co., said in an interview with Bloomberg Television. ``Once the companies adjust to the effects of the stronger yen and rising oil prices, earnings will likely recover faster than has been anticipated.''

The Nikkei 225 Stock Average climbed 106.54, or 0.8 percent, to 13,441.30 as of 10:30 a.m. in Tokyo. The broader Topix index rose 9.83, or 0.8 percent, to 1,308.11. Twenty-eight of 33 industry groups on the Topix rose.

Yahoo Japan, the third most profitable company included in the Nikkei, surged 3.6 percent to 41,450 yen, set for the highest since July 10. Softbank Corp., which owns 40 percent of Yahoo Japan, added 1.9 percent to 1,975 yen. Telecommunications and Internet-related shares accounted for more than a 10th of the Topix's gain.

Ricoh, Honda

Mitsui, Japan's second-largest trading company, climbed 4.5 percent to 2,205 yen, the highest since July 7. Mitsubishi Corp., the largest, added 2.3 percent to 3,130 yen. Gold and silver rose in New York on speculation the dollar will weaken against the euro, boosting the appeal of the precious metals as alternative investments.

Ricoh climbed 3.8 percent to 1,775 yen, en route to the highest since July 9. The company reiterated its annual net- income target of a 1.4 percent gain even after posting an earnings drop in the three months to June 30, owing to the stronger yen.

Honda Motor Co., Japan's second-largest automaker, slumped 4 percent to 3,610 yen after slashing its full-year target for operating profit by 3.1 percent because of higher material costs and lower vehicle sales. Automakers were the biggest losers among 33 industry groups on the Topix.

Nikkei futures expiring in September added 0.6 percent to 13,440 in Osaka and gained 0.8 percent to 13,435 in Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.



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Dollar Trades Near 1-Month High on Fannie, Freddie Rescue Bill

By Kosuke Goto and Stanley White

July 28 (Bloomberg) -- The dollar traded near a one-month high against the yen after Congress passed legislation to prop up Fannie Mae and Freddie Mac, the two largest providers of U.S. mortgage financing.

The currency was also near a three-week high versus the euro on speculation a government report this week will show the U.S. economy expanded last quarter at more than twice the annual pace of the prior three months. The Australian dollar fell on concern losses linked to U.S. home loans are spreading after Australia & New Zealand Banking Group Ltd. said full-year profit will drop as much as 25 percent on bad debts.

``The rescue plan is supportive for the dollar,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``It relieves the anxiety about the U.S. housing slump.''

The dollar traded at 107.96 yen at 10:06 a.m. in Tokyo, from 107.84 on July 25 in New York. It was at $1.5698 a euro, from $1.5709. The euro traded at 169.49 yen and approached a record low of 169.96 set on July 23, compared with 169.40 on July 25. The greenback may rise to as high as 108.60 yen should it break through 108.30 yen today, Saito forecast.

The U.S. Congress sent to the president legislation to stem foreclosures for 400,000 homeowners and aid Fannie Mae and Freddie Mac, its most sweeping effort to halt the biggest housing slump since the Depression. President George W. Bush will sign the measure into law, a spokesman said.

The U.S. economy grew at a 2.3 percent annual rate from April to June, compared with 1 percent growth in the first quarter, according to the median estimate in a Bloomberg News survey before the July 31 report.

Bad Debts

The Australian dollar fell for a fifth day after ANZ, the nation's fourth biggest bank by market value, joined National Australia Bank Ltd., the nation's largest, in warning of increased provisions for non-performing loans.

The Australian dollar slid to 95.30 U.S. cents compared with 95.63 cents in late New York. It has fallen 2.3 percent the past week, the second-biggest decline among the 16 most-traded currencies.

Six months after correctly identifying the Australian dollar as one of the best bets in the foreign exchange market, the biggest investor in the nation's debt says the rally is coming to an end.

Funds Turning Bears

Daiwa Asset Management Co., which holds 4 percent of the government's bonds, expects the currency to close the year at $1, after earlier forecasting a surge to $1.10. Daiwa cut its estimate as the country's benchmark S&P/ASX 200 Index of stocks dropped to a 2 1/2-year low this month and the Reuters/Jefferies CRB Index of commodities fell 13 percent from its record high on July 2.

Mizuho Asset Management Co., State Street Global Advisors and Putnam Investments are also turning into bears as the U.S. economic slowdown spreads, curtailing the rally in coal, oil and metals that fueled Australia's expansion. Lehman Brothers Holdings Inc., which recommended the currency in February, now predicts it will depreciate 21 percent by 2009.

Home Prices

Gains in the dollar may be limited by speculation that declines in home prices and employment will make it difficult for the Federal Reserve to raise interest rates.

Home prices in the S&P/Case-Shiller index fell by 16 percent in May from a year ago, the most on record and faster than a 15.3 percent decline in April, according to a Bloomberg News survey. The index is scheduled for release tomorrow.

U.S. nonfarm payrolls fell by 75,000 in July, following a decline of 62,000 in the previous month, according to a separate survey. The Labor Department will release the data on Aug. 1.

``Data on housing and payrolls pose downside risks to the dollar,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``Given the state of the housing market, you can't be overly optimistic on the U.S. economy. That makes it almost impossible for the Fed to raise rates.''

The dollar may fall to 106 yen this week, he said.

Futures on the Chicago Board of Trade show a 93.1 percent chance the Fed will keep borrowing costs on hold at 2 percent when it announces its next decision on Aug. 5, up from 64.1 percent a month ago.

German Confidence

The euro may weaken on speculation an industry report today will show German consumer confidence fell for a third month as soaring energy prices sapped people's purchasing power.

GfK AG's index for August, based on a survey of about 2,000 people, probably declined to 3.5 from 3.9 for June, the Nuremberg-based market-research company will say today, according to the median of 25 estimates in a Bloomberg News survey.

``The European economy is facing a major setback,'' Tomoko Fujii, head of Japan economics and strategy at Bank of America in Tokyo, wrote in a research note today. ``The markets cannot price in an ECB rate hike any more. We are recommending euro- selling against the dollar.''

Europe's single currency may fall to $1.54 against the dollar by the end of September, she said.

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



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Most Asian Stocks Advance; BHP Billiton Gains, ANZ Bank Drops

By Patrick Rial

July 28 (Bloomberg) -- Most Asian stocks advanced, as a gain in commodity producers countered a slump in financial shares after Australia & New Zealand Banking Group Ltd. forecast a drop in profit.

BHP Billiton Ltd., the world's largest mining company, led commodities producers higher after gold and copper rose. Yahoo Japan Corp., the operator of Japan's most visited Internet portal, rose to the highest in more than two weeks after profit rose and analysts raised their ratings on the stock. ANZ, Australia's fourth-largest bank, tumbled the most since 1987 after saying profit will fall as much as 25 percent this year on bad debts.

The MSCI Asia Pacific Index was little changed at 132.93 as of 10:57 a.m. in Tokyo. More than three stocks rose for every two that declined.

Japan's Nikkei 225 Stock Average added 0.8 percent to 13,436.88. Australia's S&P/ASX 200 Index lost 1.3 percent. Taiwan is closed today as Typhoon Fung-Wong struck the island.

In the U.S., the Standard & Poor's 500 Index rose 0.4 percent on July 25, paring a weekly retreat, on growing speculation the worst of the economic slowdown is over after better-than-forecast reports on durable goods orders, consumer confidence and new-home sales.

BHP gained 1.6 percent to A$37.52. Mitsubishi Corp., which jointly controls the world's biggest exporter of coking coal with BHP, gained 2.6 percent to 3,140 yen. Mitsui & Co., which generates more than half its profits from commodities dealing, surged 4.5 percent to 2,205 yen.

A measure of six metals traded on the London Metal Exchange, including copper and zinc, added 0.3 percent on July 25, the first gain in three days. Copper rose 0.8 percent, while gold climbed 0.5 percent.

Higher Orders

Resource prices were given a boost after U.S. durable goods orders unexpectedly rose 0.8 percent in June from the previous month.

Yahoo Japan shares gained 4.3 percent to 41,700 yen, the highest level since July 10. Net income for the three months ended June 30 rose to 19.2 billion yen ($177 million) from 16.2 billion yen a year earlier on increased advertising sales and profit from a new subsidiary, the company said. KBC Securities analyst Hiroshi Kamide raised his rating to ``buy'' from ``hold.''

ANZ Banking dropped 11 percent to A$15.73, set for its lowest close since March 2003. The bank said earnings per share may fall 20 percent to 25 percent in the 12 months to Sept. 30. Chief Executive Officer Mike Smith said the bank has tripled provisions for delinquent loans from a year earlier.

Banks Decline

Commonwealth Bank of Australia, the nation's largest lender, slumped 5.1 percent to A$41.06, while St. George Bank Ltd. lost 5.9 percent to A$26.85.

Honda Motor Co., Japan's second-largest automaker, slumped 2.9 percent to 3,650 yen after lowering its operating profit forecast on rising raw material costs and a weaker outlook for truck sales.

Advantest Corp., the world's biggest maker of memory-chip testers, fell 6.3 percent to 2,165 yen in Tokyo after the company forecast a loss in the first half on scaled-back investment in factories by chipmakers. Macquarie Group Ltd. reduced its 12- month price estimate 12 percent to 1,450 yen, citing slumping orders.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.



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Forex Exchange Morning Report

Daily Forex Fundamentals | Written by Westpac Institutional Bank | Jul 28 08 01:11 GMT |

News And Views USD gained some ground Friday night on better than expected US data (durable goods orders, new home sales and Uni of Michigan consumer sentiment all beat consensus) but the dollar's gains proved modest overall as equity sentiment was hurt by ratings agency S&P's threat to downgrade Fannie Mae and Freddie Mac. Oil lent some support to USD - NYMEX crude oil slumped about $3/bbl in short order and closed at $123.26/ bbl, its lowest close since 4 June. The New Zealand dollar had hit a high of 0.7469 in the London morning but the firmer US data set NZD/USD into a steady decline to the 0.7420 area, which proved sticky in New York. The Australian dollar traded a 0.9548 - 0.9609 range in London which got tighter after London finished the week, ultimately finishing around 0.9560. EUR/USD found ready buyers in London, pushing about 1.5750 but retreated on the reasonable US economic data and the resumption of oil price declines. This left the euro quite flat, near 1.5700. USD/JPY showed clearer direction than most, ramping up steadily from London morning lows under 106.60 to 107.70 after the US data, but with the Dow fading to an underwhelming 21pt gain, 108.00 proved too tough a nut to crack. US durable goods increased 0.8% in June - stronger than market expectations of a -0.3% fall and the first monthly gain since July 2007. May orders were also revised higher to 0.1%. Orders for non-defense capital goods excluding aircraft rose 1.4% following a 0.1% decline in May, while shipments for the same items increased 0.7%. The result has seen some forecasters lift their estimates for Q2 GDP. US new home sales were stronger than anticipated in June, declining just 0.6% to a 530,000 annualised pace. This followed a revised 1.7% decline in May (previously -2.5%). The market expected a fall of 1.8% in the month. The final read on the July US University of Michigan consumer confidence survey came in at 61.2, above expectations and stronger than the preliminary reading of 56.6 taken earlier in July. The index was at 56.4 in June. It seems the tax rebates may be giving consumers a bit of a lift, albeit still at low levels. Japanese consumer price inflation accelerated again. The headline nationwide CPI rose 2.0%yr in June, from 1.3% in May. Ex fresh food and energy, nationwide prices rose 0.1%yr, up from -0.1%. Ex fresh food came in at 1.9%. The Tokyo series for July came in at 1.6%, up from 1.5%. Ex fresh food and energy, Tokyo prices rose 0.3%yr in July, unchanged from May. Ex fresh food came in at 1.6%. Japanese June corporate services price inflation heading higher on international transport costs. The headline CSPI rose 0.5% in June, to be 1.2% above year ago levels. That compares to domestic corporate goods prices, which rose 0.8% in June to be up 5.6%yr. The main source of services price inflation is the freight industry. Ocean-going freight costs are up 23.3%yr; ship chartering services are up 24.4%yr and international air freight costs rose 5.0% in the month and 7.1%yr. Euroland money supply growth slowed by more than anticipated in June. M3 growth increased 9.5% compared to June last year - the weakest pace of growth since November 2006. Market expectations were for an increase of 10.3% yr. UK GDP rose 0.2% in the June quarter, in line with market expectations, and the slowest pace of growth since 2001. GDP grew 1.6% compared to a year ago. The main culprits for the weak growth were a 0.4% decline in manufacturing and a 0.7% decline in construction (the first contraction in more than two years). Outlook We continue to like NZD/USD lower multi week especially on a TWI basis. The RBNZ's rate cut and dovish statement last week only reinforced our confidence in this view. Events Today Date Country Release Last Forecast 28-Jul NZ Jun Merchandise Trade NZDmn -196 -170 Aus RBA Assistant Gov Debelle Speaks US Fedspeak: Mishkin Jpn Jul Nomura PMI (Tentative Date) 46.5 - Ger Aug GFK Consumer Confidence 3.9 3.5 29-Jul NZ Jun Building Consents s.a. -42% -9% Aus Q2 NAB Business Survey -4 - US May House Prices %yr -15.3% -17.0% Jul Consumer Confidence 50.4 51 Jpn Jun Unemployment Rate 4.00% 4.00% Jun Retail Sales %yr 0.30% -0.2% Westpac Institutional Bank http://www.wib.westpac.co.nz/ Disclaimer All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac's financial services guide by calling +612 9284 8372, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.

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Five Tankers Leave Closed Section of Mississippi River for Gulf

By Robert Tuttle

July 27 (Bloomberg) -- Five tankers entered the Gulf of Mexico yesterday after exiting a section of the Mississippi River that is closed because of an oil spill, a U.S. Coast Guard spokesman said.

The ``foreign tankers'' were carrying petroleum products from refineries along the Mississippi and were allowed to leave, Petty Officer Chris McLaughlin said in a telephone interview. A 100-mile (160-kilometer) section of the river from the New Orleans area to the gulf was shut to vessel traffic after a ship struck a barge July 23, releasing about 419,000 gallons (1.59 million liters) of fuel oil into the river.

It is too early to say when the section will be reopened, McLaughlin said.

A ship called the Elver is being sent up the river to test whether vessels are able to move through the area without their hulls becoming contaminated with oil, McLaughlin said. Another test ship will be sent after the Elver finishes its voyage.

``From there, they will decide what to do,'' he said.

About 48,000 gallons of a mixture of oil and water have been cleaned from the river, McLaughlin said.

To contact the reporter on this story: Robert Tuttle in New York at rtuttle@bloomberg.net.



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Corn, Soybeans May Rise; Hot, Dry Weather Threatens U.S. Crops

By Jeff Wilson

July 28 (Bloomberg) -- Corn may rise after four weekly drops and soybeans may gain on speculation yields for the biggest U.S. crops will suffer after June floods stunted root development, leaving plants vulnerable to heat stress.

Twenty of 36 traders, advisers and grain merchants surveyed on July 25 from Beijing to Chicago said they expect corn to rise, and 21 of 37 said to buy soybeans. Corn fell 5.1 percent to $5.965 a bushel last week in Chicago and has plunged 25 percent since reaching a record $7.9925 on June 27. Soybeans dropped 4.2 percent to $13.865 a bushel, down 15 percent since touching an all-time high of $16.3675 on July 3.

Most respondents surveyed July 18 expected the drop in corn and soybeans last week. Since 2004, the surveys have been correct 60 percent of the time on corn, 63 percent on soybeans.

Weekly results: Bullish on corn: 20 Bullish on soybeans: 21 Bearish on corn: 16 Bearish on soybeans: 16

To contact the reporter on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net.



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Oil Trades Near 7-Week Low as OPEC Output Climbs, Demand Drops

By Angela Macdonald-Smith

July 28 (Bloomberg) -- Crude oil traded near a seven-week low in New York after falling July 25 on signs the Organization of Petroleum Exporting Countries is bolstering output while fuel use in the U.S. and Asia is dropping.

OPEC increased output by 200,000 barrels a day in July, PetroLogistics Ltd. said last week. Oil prices have dropped from a record on speculation that the risk of a conflict between Iran and the U.S. has diminished and because the dollar has appreciated, the group's President Chakib Khelil said July 26.

``The news events have lately all been for weaker prices,'' said Mark Pervan, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne. ``There's certainly some heat coming out of the market. You wouldn't discount another event coming out of Nigeria or Iran this week, so I don't think the price is going to fall that far.''

Crude oil for September delivery traded at $123.23 a barrel, down 3 cents, in after-hours electronic trading on the New York Mercantile Exchange at 7:13 a.m. Singapore time. On July 25 the contract fell $2.23, or 1.8 percent, to $123.26, the lowest settlement price since June 4. Prices fell 4.8 percent last week.

Oil has slipped about $24 a barrel from the $147.27 record on July 11. Tensions over Iran's nuclear work had helped to push prices to an all-time high amid concerns that Israel or the U.S. might resort to military action to halt the nation's atomic drive, should diplomacy fail.

OPEC Output

Gunmen in Nigeria, Africa's biggest oil producer, have freed eight foreigners during a raid on a ship in the oil-rich Niger Delta, a military spokesman said yesterday. Seven other oil workers that were abducted in separate incidents on July 25 are still being held, he said.

Attacks by Nigerian militant groups have halted more than 20 percent of the west African country's production since 2006.

OPEC will provide 32.9 million barrels a day of oil this month, up 200,000 barrels from June, PetroLogistics founder Conrad Gerber said July 25. The 13-member group produces more than 40 percent of the world's oil.

Saudi Arabia, in response to calls from consuming nations, said it would produce an extra 300,000 barrels a day in June and a further 200,000 barrels a day in July to curb prices.

Crude oil may fall this week as Saudi Arabia increases output and slowing economic growth curbs consumption, a Bloomberg News survey found. Thirteen of 28 analysts surveyed, or 46 percent, said prices will fall through Aug. 1. Five of the respondents, or 18 percent, said oil will rise and 10 forecast little change.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net



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Japan's Yen, Malaysian Ringgit, Rupee: Asia Currency Preview

By Aaron Pan

July 28 (Bloomberg) -- The following events and economic reports may influence trading in Asian currencies today.

Exchange rates are from the previous session.

Japanese yen: Chief Cabinet Secretary Nobutaka Machimura will hold briefings at 11 a.m. and 4 p.m. in Tokyo. Vice Finance Minister Kazuyuki Sugimoto will address reporters at 5 p.m.

The yen was at 107.87 per dollar at 7:02 a.m. in Tokyo.

Taiwan dollar: The June leading index, a gauge of economic conditions three months ahead, is due today. It climbed 0.1 percent in May from the previous month.

The Taiwan dollar was at NT$30.407.

Malaysian ringgit: The central bank unexpectedly left the benchmark interest rate unchanged at 3.5 percent at a meeting on July 25, saying ``the immediate concern is to avoid a fundamental economic slowdown.'' The decision came after local trading hours.

The ringgit was at 3.25.

Indian rupee: Central bank officials meet tomorrow to review monetary policy. Policy makers last month raised the benchmark interest rate twice to a six-year high of 8.5 percent.

The rupee was at 42.265.

To contact the reporter on this story: Aaron Pan in Hong Kong at apan8@bloomberg.net.



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New Zealand Dollar May Decline as Yield Advantage Diminishes

By Tracy Withers

July 28 (Bloomberg) -- The New Zealand dollar may decline as the nation's high yield advantage diminishes on the outlook for slowing economic growth and more interest-rate cuts.

New Zealand's three-year swap rate is 3.29 percentage points more than the equivalent U.S. rate, from 3.48 points a week ago and as much as 5.55 points in March, according to Bloomberg data. The currency fell 5.2 percent against the U.S. dollar the past three months, the worst performing major currency against the U.S. dollar.

``Concerns about the slowing economy and looming interest rates cuts should continue to take a toll on the New Zealand dollar,' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. ``Further narrowing of interest rate differentials will likely undermine the local currency going forward.''

New Zealand's currency bought 74.27 U.S. cents at 9:10 a.m. in Wellington from 74.18 cents in late New York trading July 25. It bought 80.05 yen from 80.01 yen.

The currency fell 2 percent last week after Reserve Bank Governor Alan Bollard unexpectedly cut the official cash rate a quarter point to 8 percent, the first reduction in five years. Bollard, in a July 24 statement, said further rate cuts are likely unless there is ``excessive depreciation'' in the currency or a larger-than-expected surge in inflation.

The chance of a quarter-point cut at a review in September is 104 percent, suggesting it's a certainty, according to an index calculated by Credit Suisse based on swaps trading. All 15 economists surveyed by Bloomberg News expect a cut to 7.75 percent.

Bollard is cutting interest rates because the economy was probably in a recession in the first half of the year, and will recover only slowly in the remainder of the year, economists say.

``There is a risk that the domestic economy will slow further,'' he said in his statement. Weak growth will curb inflation over the next two years, he said.

A report today may show the trade deficit narrowed in the year ended June 30 as consumer demand for imports slowed, according to the median forecast of nine economists surveyed by Bloomberg News.

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



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Australia Dollar Peak Pushes Traders to Yen on Slowing Economy

By Wes Goodman and Stanley White

July 28 (Bloomberg) -- Six months after correctly identifying the Australian dollar as one of the best bets in the foreign exchange market, the biggest investor in the nation's debt says the rally is coming to an end.

Daiwa Asset Management Co., which holds 4 percent of the government's bonds, expects the currency to close the year at $1, compared with 95.62 U.S. cents on July 25, after earlier forecasting a surge to $1.10. Daiwa cut its estimate as the country's benchmark S&P/ASX 200 Index of stocks dropped to a 2 1/2-year low this month and the Reuters/Jefferies CRB Index of commodities fell 13 percent from its record high on July 2.

``The rally is finished as the best days for the economy may be over,'' said Tsutomu Komiya, a money manager in Tokyo at Daiwa, a unit of Japan's second-largest brokerage. Daiwa, which manages the equivalent of $93 billion, isn't buying the currency because cash flowing into Australia funds ``has stopped in recent days,'' he said.

Mizuho Asset Management Co., State Street Global Advisors and Putnam Investments are also turning into bears as the U.S. economic slowdown spreads, curtailing the rally in coal, oil and metals that fueled Australia's expansion. Lehman Brothers Holdings Inc., which recommended the currency in February, now predicts it will depreciate 21 percent by 2009.

The Aussie gained 9.3 percent against the greenback this year, lagging behind only the Brazilian real and the Swiss franc among the 16 most-traded currencies, according to data compiled by Bloomberg. It touched 98.5 cents on July 16, the highest since 1983. The Australian dollar soared 44 percent over the past five years, on demand from China for the country's coal, iron ore and nickel.

Record Exports

Commodities exports were poised to set a record for the fourth-straight year in the 12 months to June 30, 2008, reaching A$145.6 billion, the government's Australian Bureau of Agricultural and Resource Economics said in March.

The $1 trillion economy is slowing after the central bank increased its target interest rate to a 12-year high of 7.25 percent in March to stem inflation. Home loan approvals fell by the most in eight years in May and consumer confidence slumped to a 16-year low this month. Growth may decelerate to 2.95 percent this year from 4.23 percent in 2007, according to the median estimate of 14 economists surveyed by Bloomberg News.

Australia's dollar slumped 1.4 percent last week, even after a government report showed consumer prices climbed 4.5 percent from a year earlier, the most since 2001.

Cooling Economy

The Reserve Bank of Australia increased its target rate 12 times from 4.25 percent in April 2002 to curb inflation. Governor Glenn Stevens will cut rates by 0.25 percentage point at least once in the coming 12 months, a Credit Suisse Group index shows.

The Aussie will slide 4.8 percent this year to 91 U.S. cents, according to the median of 30 currency strategist forecasts in a Bloomberg survey. Lehman predicts 85 U.S. cents as commodity prices fall and losses linked to subprime mortgage defaults slow global growth.

``Parity is out of the question,'' said Akira Takei, the general manager for international bonds at Mizuho in Tokyo, part of Japan's second-largest publicly traded bank. ``For the past several years, people were eager to take risks. Now things have changed as the U.S. subprime issue spills over into other regions. The Australian dollar will be sacrificed.''

Mizuho, which oversees the equivalent of $37 billion, sold last week. The currency may fall to 85 cents this year and 75 the next, Takei said.

Yen to `Soar'

The biggest beneficiary of a weaker Aussie may be the yen. Australian dollar securities rose to 12 percent of Japanese overseas investments between November and April, compared with an average of 6 percent since 2005, according to Japan's Ministry of Finance. Investors took advantage of the difference between Australia's interest rates and Japan's, where the benchmark borrowing cost is 0.5 percent.

As Japanese bring home proceeds of their sales, the yen will gain 1 percent this year after closing last week at 107.84 to the U.S. dollar, a separate Bloomberg survey showed.

``The yen should broadly soar if commodity prices were to fall,'' Taisuke Tanaka, Lehman's chief Japan currency strategist wrote in a July 17 report.

Japanese individuals already started to reduce bets, according to figures from the Tokyo Financial Exchange Inc. Net long positions that the Australian dollar will gain against the yen fell to 39,449 contracts on July 22, less than half the record of 79,920 contracts on July 1.

Trade Balance

Investors should be wary of betting too soon on the yen, according to UBS AG, the world's second-biggest foreign exchange trading firm. Japan's exports fell in June for the first time in more than four years as demand for cars and electronics dropped, the Finance Ministry reported last week. The yen and the trade balance have consistently moved together over the last couple of decades, UBS said.

``The downside risks to Japan's currency are growing sharply,'' said Mansoor Mohi-uddin, a Zurich-based strategist at UBS, in a research note on July 25.

The Aussie remains the favorite of Kokusai Asset Management Co. because of growth in China's economy, which is expanding at an annual rate of more than 10 percent, said Masataka Horii, one of four investors for the firm's $53 billion Global Sovereign Open fund in Tokyo.

``Australia will profit from China,'' said Horii. ``Its economy is relatively better than that of Japan or the U.S.''

Australia & New Zealand Banking Group Ltd., the country's third-biggest bank, predicts the currency will rise to $1.04, after reaching parity for the first time since 1982.

Commodity Impact

Australia relies on raw material exports for 9 percent of its economy, ranking behind Gulf Arab states, Chile and Russia, according to research by Morgan Stanley.

Investors started to question the outlook for Australia after oil prices tumbled 15 percent since reaching a record on July 3 on concern demand from the U.S., Japan and China will wane. Gold fell 5 percent from this month's high as the drop in fuel prices gave investors less need for the metal as a hedge against inflation.

Gold, Australia's biggest raw-material export after coal and iron ore, may drop to $825 in 2010 from $924 now, according to a Bloomberg survey of 11 analysts. Crude oil, the No. 4 raw- material export, may slump to $112 a barrel in 2010 from $124, a separate survey shows. China's economy grew 10.1 percent in the second quarter from a year earlier, compared with the 11.9 percent pace in 2007.

`Too Expensive'

``Oil and commodities are too expensive,'' said Kensuke Niihara, head of foreign-exchange management in Japan at State Street, which manages $100 billion in assets worldwide. ``Within this year, there is good potential the Australian dollar will come down.''

Putnam, which forecast the Aussie would reach 95 U.S. cents when it was trading at 88 cents on Jan. 10, is also turning negative.

``We've been bullish the Australian dollar all year long but we have reduced some in the last few weeks,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president in Boston. ``If you believe we're in a period of weaker global growth then it would seem the Australian dollar has some risk of falling.''

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net.



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Bank of Israel to Raise Rates to Curb Inflation: Week Ahead

By Susan Lerner

July 27 (Bloomberg) -- The Bank of Israel will probably raise its benchmark interest rate by a quarter of a percentage point after inflation exceeded the target range for a seventh month and the economy grew faster than the bank forecast.

The bank will increase the rate to 4 percent, according to 10 of 17 economists surveyed by Bloomberg. The rest predicted no change. The Jerusalem-based bank will announce its decision at 6:30 p.m. on Monday.

``There are some indications that show the economy is slowing and some that show growth is still high, but the Bank of Israel still has a little room to raise rates,'' said Ori Greenfeld, chief economist at Clal Finance Investment Management Ltd. He is predicting a quarter-point increase.

Bank Governor Stanley Fischer increased borrowing costs by a quarter-point in each of the past two months after inflation accelerated to 5.4 percent in May, the fastest pace in more than five years. While inflation unexpectedly slowed to 4.8 percent in June, it remained above the 1 percent to 3 percent target range.

The bank said on June 18 the economy will probably grow 4.2 percent this year, higher than its April 1 forecast of 3.2 percent, though still the slowest pace since 2003. The bank estimated growth will ease further to 3.1 percent in 2009.

Last Week

Last week, the yield on the benchmark 6.5 percent Shahar bond due in January 2016 rose to 5.76 percent. The shekel fell 4 percent to 3.498 per dollar.

The Tel Aviv Stock Exchange's benchmark TA-25 Index rose 2 percent to 1,028.13. Verifone Holdings Inc., a maker of electronic-payment equipment, climbed 18 percent. Teva Pharmaceutical Industries Ltd., the world's biggest maker of generic drugs, rose 12 percent.

Israel's unemployment rate fell to 6.1 percent in May, the lowest in about two decades, reflecting economic growth that has topped 5 percent since 2004.

Check Point Software Technologies Inc. reported that revenue rose 13 percent to $199.6 million, topping the average analyst estimate of $195.2 million. The world's second-largest network-security company also raised its sales outlook for the year.

Lawyers for Prime Minister Ehud Olmert on Tuesday completed a five-day cross-examination of Morris Talansky, the U.S. businessman who has testified that he gave Olmert more than $150,000 in over a 15-year period. Israel's Justice Ministry asked Olmert and others involved in the corruption probe to undergo polygraph tests on leaks in the case.

The following is a list of important events in Israel next week:

Event Date
Bank of Israel rate decision July 28
Teva Pharmaceutical 2Q earnings July 29
AudioCodes reports 2Q earnings July 29
Alvarion reports 2Q earnings July 30
Partner Communications 2Q earnings July 31

To contact the reporter on this story: Susan Lerner in Jerusalem at Slerner2@bloomberg.net;



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Payrolls Probably Fell for Seventh Month: U.S. Economy Preview

By Shobhana Chandra

July 27 (Bloomberg) -- The U.S. lost jobs in July for the seventh straight month, a sign the economy may weaken after tax rebates boosted growth in the second quarter, economists said before reports this week.

Payrolls probably shrank by 75,000, according to the median estimate in a Bloomberg News survey ahead of a Labor Department report on Aug. 1. The economy expanded at a 2.3 percent annual rate from April to June, more than twice the pace of the prior quarter, other figures may show.

Sustained job losses will take a toll on Americans already burdened by record gasoline costs, plunging home values, and shrinking access to credit. The weakening labor market reinforces concern consumer spending will falter once the cash from the tax rebates is used up.

``With the tax rebates, we essentially put our troubles off for another day,'' said Maxwell Clarke, chief U.S. economist at IDEAGlobal Inc. in New York. ``The weakening employment market will definitely hurt the consumer's ability to spend.''

The employment report may also show the jobless rate rose to 5.6 percent in July, the highest level in four years, according to the Bloomberg survey median. Factory payrolls probably fell by 40,000, the report may show.

Last month's job cuts would follow a 62,000 reduction in June, bringing the total drop in payrolls so far this year to more than half a million. The three-year housing slump and prolonged credit crisis signal builders and financial firms will probably fire even more workers in coming months.

Automakers, Airlines

Surging energy costs also are prompting cuts at automakers and airlines. Chrysler LLC, the third-largest U.S.-based automaker, plans to shed an additional 1,000 salaried jobs after U.S. sales tumbled 22 percent in the first half of 2008. UAL Corp.'s United Airlines, the world's second-largest carrier, will cut 7,000 jobs after a second-quarter loss.

``Our industry is challenged as never before by the unrelenting price of oil,'' UAL's Chief Executive Officer Glenn Tilton said in a statement on July 22.

Rising unemployment is one reason last quarter's stimulus- driven rebound in growth will give way to weaker numbers by the end of the year. By June 27, the government had already distributed almost 80 percent of the more than $100 billion in tax rebates to be doled out under the plan, Treasury figures show.

As a result, consumer spending climbed at a 1.5 percent pace in the April to June period, picking up from 1.1 percent in the prior quarter, the survey median shows. The figures will be released as part of the Commerce Department's gross domestic product report on July 31.

Bernanke's View

The stimulus package ``does seem to be helping,'' Federal Reserve Chairman Ben S. Bernanke said this month in semiannual testimony to the Senate in Washington. Still, there are ``significant downside risks to the outlook for growth.''

A private report on Aug. 1 may show manufacturing cooled in July. The Institute for Supply Management's factory index slipped to 49.2 from 50.2 the prior month, according to the Bloomberg survey median. A reading of 50 is the dividing line between growth and contraction.

Other reports this week will probably provide more evidence housing remains in a slump. Home prices in 20 U.S. metropolitan areas probably fell in the 12 months ended May by the most on record, economists project a July 29 report from S&P/Case- Shiller will show.

Figures from the Commerce Department due Aug. 1 may show spending on construction projects dropped in June for the third consecutive month.

                         Bloomberg Survey

================================================================
                       Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
================================================================
Case Shiller Monthly YO   7/29      May      -15.3%    -16.0%
Case Shiller Monthly In   7/29      May      169.9     168.2
Consumer Conf Index       7/29      July      50.4      50.0
GDP Annual QOQ%           7/31      2Q A      1.0%      2.3%
Personal Consump. QOQ%    7/31      2Q A      1.1%      1.5%
GDP Prices QOQ%           7/31      2Q A      2.7%      2.3%
Core PCE Prices QOQ%      7/31      2Q A      2.3%      2.0%
Employ Costs QOQ%         7/31       2Q       0.7%      0.7%
Initial Claims ,000's     7/31     27-Jul     406       395
Cont. Claims ,000's       7/31     20-Jul     3107      3150
Chicago PM Index          7/31      July      49.6      49.0
Nonfarm Payrolls ,000's   8/1       July      -62       -75
Unemploy Rate %           8/1       July      5.5%      5.6%
Manu Payrolls ,000's      8/1       July      -33       -40
Hourly Earnings MOM%      8/1       July      0.3%      0.3%
Hourly Earnings YOY%      8/1       July      3.4%      3.4%
Avg Weekly Hours          8/1       July      33.7      33.7
ISM Manu Index            8/1       July      50.2      49.2
ISM Prices Index          8/1       July      91.5      88.0
Construct Spending MOM%   8/1       June     -0.4%     -0.3%
================================================================

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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India May Increase Rates for Third Time Since June on Inflation

By Cherian Thomas

July 28 (Bloomberg) -- India's central bank may raise interest rates for the third time in less than two months to combat inflation running at a 13-year high.

The Reserve Bank of India will increase the benchmark repurchase rate to 8.75 percent from 8.5 percent, according to 16 of 22 economists in a Bloomberg News survey. The bank, which will release its quarterly monetary policy tomorrow at noon in Mumbai, will also raise the cash reserve ratio to 9 percent from 8.75 percent, 10 of 21 economists said.

Governor Yaga Venugopal Reddy, whose term at the Reserve Bank ends in September, is intensifying efforts to cool inflation that has accelerated to more than double his goal. Prime Minister Manmohan Singh, fresh from winning last week's confidence vote, is looking to Reddy to spearhead the fight against rising prices as he prepares for elections before May.

``We expect another rate hike,'' said Krishnamoorthy Ramanathan, who manages $1.9 billion in Indian debt at ING Investment Management Pvt. in Mumbai. ``The government has exhausted fiscal measures and hence is relying on monetary policy to bring inflation under control.''

India's key wholesale price inflation has accelerated to 11.89 percent even as the government cut import duties on edible oils, steel products and gasoline, foregoing revenue. The government also banned the export of corn, pulses, rice, wheat and edible oil to spur local supplies.

Standard & Poor's said this month that India's BBB- credit rating, the lowest level in the investment grade, may be cut to junk if faster inflation and higher government spending ahead of the election widens the budget deficit.

`Fiscal Headroom'

``The fiscal headroom available to relieve the inflation stress is fast reducing,'' said Shuchita Mehta, senior economist at Standard Chartered Bank in Mumbai. ``A higher budget deficit not only will crowd out private investment, but also is likely to be inflationary.''

Reddy, who has been tightening monetary policy since 2004, was caught wrong-footed as inflation in India surged in the past two months after the government was forced to increase energy prices by as much as 17 percent to cut losses at refiners.

Since June, Reddy has raised rates by 75 basis points and the cash reserve ratio by half a percentage point. The governor is trying to discourage lending from banks that could stoke consumer demand and add to inflation fanned mainly by higher prices of oil. Money supply is growing at about 21 percent, more than the central bank's 17 percent target.

Faster inflation is prompting other Asian central banks to also increase interest rates. The Philippine central bank has raised rates at its last two meetings, while Bank Indonesia has boosted borrowing costs for three straight months.

Weaker Rupee

Reddy has also had to contend with a weakening rupee this year, which has pushed up the cost of imported goods.

India's $912 billion economy may grow as little as 8 percent this year, Reddy estimates. The rupee has weakened 8.3 percent and the benchmark stock index fell by a third since January. The yield on India's benchmark 10-year bonds has gained 91 basis points this year on inflation expectations.

Prime Minister Singh extended his four-year tenure last week by proving his majority in parliament after his main ally, the communist parties, withdrew support on opposition to a nuclear energy accord pursued by the government with the U.S.

By averting early elections, Singh, who has suffered electoral reverses in nine of the past 11 state polls, has won more time to gain control over inflation.

Oil Prices

Singh may succeed in reining in inflation before the national elections if oil prices, which have dropped 13 percent in the past two weeks, sustain their downward trend. India imports 70 percent of its oil requirement.

Lehman Brothers Holdings Inc. expects India's inflation rate to start falling ``decisively'' from January, based on their assumption that growth will slow to 7.3 percent this year and the price of oil drops to $90 a barrel in the first quarter of 2009.

``Our inflation pulse measure is starting to turn, but pressure on producers to pass on input costs remain heavy,'' said Sonal Varma, a Mumbai-based economist at Lehman. ``A rate hike will help anchor inflation expectations.''

India's Rate Forecasts

--------------------------------------------------------------
Cash
Reverse Reserve
Company Repo Rate Repo Ratio
--------------------------------------------------------------
Median 8.75% 6.00% 9.00%
% estimates at Median 72.73% 100.00% 47.62%
High 9.00% 6.00% 9.25%
Low 8.50% 6.00% 8.75%
Number of Estimates 22 22 21

--------------------------------------------------------------
ABN Amro Bank 8.75% 6.00% 8.75%
Anand Rathi Securities 8.50% 6.00% 9.25%
Axis Bank Ltd. 8.50% 6.00% 8.75%
CARE Ratings 8.50% 6.00% 8.75%
CRISIL Ltd. 8.75% 6.00% 9.00%
Dun & Bradstreet Info. 8.75% 6.00% 9.00%
Edelweiss Securities 8.75% 6.00% 9.00%
Forecast Singapore 8.75% 6.00% 8.75%
HSBC Singapore 8.75% 6.00% 9.00%
ICICI Securities 8.75% 6.00% 8.75%
IDBI Gilts Ltd. 8.75% 6.00% 9.00%
ING Groep NV 8.75% 6.00% 9.00%
ING Investment Mgmt. 8.75% 6.00% 8.75%
JPMorgan Chase Bank 9.00% 6.00% 9.00%
Kotak Mahindra Bank 8.75% 6.00% 8.75%
Kotak Securities Ltd. 8.75% 6.00% 8.75%
Lehman Brothers* 8.75% 6.00% --
Moody's Economy.com Inc. 8.75% 6.00% 9.00%
Securities Trading Corp. Of India 8.50% 6.00% 9.00%
Sundaram BNP Paribas Asset Mang. 8.75% 6.00% 8.75%
Westpac Banking 8.75% 6.00% 9.00%
Yes Bank 8.50% 6.00% 8.75%
--------------------------------------------------------------

Note: * Lehman Brothers expect CRR to be at 9.25% by

September 2008.

-- With reporting by Manish Modi in New Delhi. Editors: Michael Dwyer, David Tweed

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net



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Economic Calendar Eco Data 7/28/08

GMT Ccy Events Actual Consensus Previous Revised 22:45 NZD New Zealand Trade balance (nzd) Jun -350.0M -195.8M 22:45 NZD New Zealand Imports Jun 3.70B 3.92B 22:45 NZD New Zealand Exports Jun 3.35B 3.73B 06:00 EUR Germany Gfk Consumer Confidence Aug 3.5 3.9 16:00 USD FED Mishkin Speaks

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