Daily Report: Is Market Turning Around?

Market Overview | Written by ActionForex.com | Sep 12 08 07:43 GMT |

Dollar index is seen losing steam and fails to sustain above 80 level so far despite reaching as high as 80.38 yesterday. The greenback retreats further against most major currencies today. Is the market turning around? We'd like to point out a few facts, firstly, EUR/USD is now close to a key medium term support at 1.3851 with 50% retracement of 1.1639 to 1.6038 at 1.3839. GBP/USD is being supported by 50% retracement of 1.3680 to 2.1161 at 1.7421. USD/CAD just failed to sustain above a key medium term resistance level at around 1.08. Crude oil is near to 100 key psychological support while Gold is also near to key medium term support at 732. In other words, a break of near term levels in these pairs will probably trigger some chain effects in others which in turn trigger a broad based correction in the overbought greenback. The Japanese yen also reversed sharply after rebound in the equity markets. The development of Lehman is the dominant theme in the equity markets now. There are reports that Lehman is in intensive discussions with US officials which could eventual lead to a sale to a consortium of private firms. Such deal could be announced as soon as during the weekend. Since no money from the government is expected to be involved, a relief rally is triggered in global stock markets and the development could lead to more broad based improvement in investor's sentiment. Data released overnight saw New Zealand retail sales dropped more than expected by -0.8% in Jul but the Kiwi paid little attention to this piece of news. Japanese Q2 GDP annualized growth. was revised slightly higher from -4.0% to -3.0%. Industrial production was up from 2.0% to 2.4% yoy in Jul. Looking ahead, main focus in the European session will be Eurozone industrial production which is expected to contract -0.2% mom, -0.7% yoy in Jul. Eurozone Q2 employment will also be released. From US, main focus will be on Aug retail sales which is expected to grow 0.2% in Aug, but ex-auto sales is expected to drop by -0.2%. PPI is expected fall -0.5% mom, rise 10.2% yoy in Aug, with core PPI up 0.2% mom, 3.7% yoy. U of Michigan consumer sentiment is expected to improve from 63 to 64. EUR/USD Daily Outlook Daily Pivots: (S1) 1.3917; (P) 1.3959; (R1) 1.4037; More EUR/USD recovers after being supported at 1.3881, slightly above key medium term support at 1.3851 (50% retracement of 1.1639 to 1.6038 at 1.3839). Touching of 1.4093, with 4 hours MACD staying above signal line indicates that an intraday low is in place. Outlook is turned neutral for the moment. More recovery could be seen towards 4 hours 55 EMA (now at 1.4244). But consolidation should be relatively brief as long as 1.4428 resistance holds. Break of 1.3851 will target 1.3360 support. However, note bullish convergence condition in 4 hours MACD and RSI, further break of 1.4428 will indicate that a short term bottom is finally formed. In such case, much stronger rebound should be seen to correct the whole fall from 1.6038 and should send EUR/USD to 1.4908 resistance or above. In the bigger picture, as mentioned before, the double top reversal pattern (1.6019, 1.6038) serves as an important signal of completion of medium term rise from 1.1639 (05 low). Last week's break of key support level of 1.4309, (38.2% retracement of 1.1639 (05 low) to 1.6038 at 1.4358, 61.8% retracement of 1.3262 to 1.6038 at 1.4322) and medium term trend line support (1.1825, 1.2483, now at 1.4408) further support this view. Weekly MACD turned negative too. Much deeper medium term fall is now expected to support zone of 1.1639 and 1.3668. On the upside, while some rebound could be seen, sustained break of double top neckline resistance at 1.5284 is needed before considering that decline from 1.6038 has completely finished. Otherwise, another fall is still expected even in case of strong rebound.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
22:45	NZD	New Zealand Retail sales M/M Jul	-0.80%	-0.30%	0.90%
23:50	JPY	Japan GDP Q/Q Q2	-0.70%	-1.00%	-0.60%
23:50	JPY	Japan GDP annualised Q2	-3.00%	-4.00%	-2.40%
4:30	JPY	Japan Capacity utilisation Jul	1.40%	N/A	1.70%
4:30	JPY	Japan Industrial prod'n M/M Jul	1.30%	N/A	0.90%
4:30	JPY	Japan Industrial prod'n Y/Y Jul	2.40%	N/A	2.00%
9:00	EUR	Eurozone Employment Q/Q Q2		N/A	0.30%
9:00	EUR	Eurozone Employment Y/Y Q2		N/A	1.60%
9:00	EUR	Eurozone Industrial prod'n M/M Jul		-0.20%	0.00%
9:00	EUR	Eurozone Industrial prod'n Y/Y Jul		-0.70%	-0.50%
12:30	CAD	Canada Capacity utilisation Q2		79.30%	79.80%
12:30	USD	U.S. PPI M/M Aug		-0.50%	1.20%
12:30	USD	U.S. PPI Y/Y Aug		10.20%	9.80%
12:30	USD	U.S. PPI core M/M Aug		0.20%	0.70%
12:30	USD	U.S. PPI core Y/Y Aug		3.70%	3.50%
12:30	USD	U.S. Retail sales M/M Aug		0.20%	-0.10%
12:30	USD	U.S. Retail sales less auto M/M Aug		-0.20%	0.40%
13:55	USD	U.S. U. Michigan survey Prel. Sep		64	63
14:00	USD	U.S. Business inventories Jul		0.50%	0.70%

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Forex Exchange Morning Report

Daily Forex Fundamentals | Written by Westpac Institutional Bank | Sep 12 08 01:29 GMT |

News And Views USD Index saw some volatility as usual but by late NY was little flat versus late Asia- Pacific trade. Lehman Bros' shares sank another 45% as it dominated attention again. Moody's warned that to avoid a rating downgrade, LEH needed a 'stronger financial partner'... 'near term'. Wires reported that potential buyers are reviewing Lehmans' books. Other financial stocks were also weak, including MER -19%, Wachovia -9% and fresh 18 year lows for Washington Mutual in the final half hour of trade. However, after opening sharply lower (DJIA -170pts early), equity sentiment improved, with major indices up about 0.5% near the close. Rumours of an emergency Fed rate cut swirled. NY oil prices fell as low as $100.10/bbl. European investors responded to the RBNZ's aggressive easing by marking NZD/USD as low as 0.6441 but the pair quietly recovered to 0.6500 as the DJIA pressed higher. AUD/USD dipped to 0.7900 in the London morning but found buyers thereafter and rallied overall, to about 0.8000. EUR/USD was quiet by recent standards, with a low of 1.3882 but back to flat at 1.3940 into the NY close. Heightened risk aversion drove USD/JPY down a full yen in the London morning to a low of 106.07 but it ground back to 106.75 in NY as equity markets improved. The US trade deficit widened to -$62.2bn in July, capturing the peak in prices of crude oil imports. However, trade prices for August showed a hefty 3.7% drop in import prices, as oil reversed during the month, which should see the deficit drop below $60bn in coming months. Export prices were also fell by 1.7% in August, with agricultural prices down 9.6%. This will partly reflect the sharp rise in the US dollar over the month, but also suggests some easing in food prices. US initial jobless claims 445k in the first week of September, from an upwardly revised 451k the previous week. Though the figures have been distorted by the promotion of new claims arrangements, which attracted large numbers of people into claims offices, it is becoming clear that claims have taken a sizeable step upward in the last few months. Continuing claims also rose sharply to 3525k from 3403k the previous week. Japanese machinery orders were on expectations in July. The core measure fell 3.9% in the month, in line with forecasts. That follows a -2.6% outcome in June and a 10.4% jump in May. The ECB monthly report largely mirrored president Trichet's recent statements. The report said that inflation is at a 'worrying level' and unlikely to reach the 'just below 2%' target until 2010. Risks to growth are to the downside, but the risk of a wage-price spiral is still a major concern. The Bank of England spoke to the Treasury Select Committee, with five MPC members attending. Super-dove Blanchflower probably captured the most attention with his pessimistic forecasts, but the other members, including Governor King, were fairly balanced. King said that lower oil prices meant that inflation would not peak as high as first thought, but stressed that upside risks to wage and price inflation remain. Canada new home prices rose 0.1% in July, bringing the annual rate of growth down to 2.7%. Slower price gains are consistent with the cooling in sales and building activity seen this year. Canada trade surplus narrowed to $4.9bn in July. Exports were strong across all sectors except energy, as higher fuel prices weighed. Imports were also strong, with an 8% jump in imports from the US. Outlook The RBNZ's choice of -50bp provides markets with fresh ammunition to sell NZD, both against USD and our preferred trade, versus AUD. Events Today Country Release Last Forecast NZ Jul Retail Sales 0.90% –0.3% US Aug PPI 1.20% –0.8% Aug PPI Core 0.70% flat Aug Retail Sales –0.1% 1.00% Aug Retail Sales Ex Auto 0.40% –0.5% Sep UoM Consumer Sentiment (Prelim) 63 65 Jul Business Inventories 0.70% 0.50% Jpn Q2 GDP (F) %qtr –0.6% –0.9% Eur Jul Industrial Production flat –0.5% Can Q2 Capacity Utilisation Rate % 79.80% 79.50% 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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US Dollar - Forecast For Friday's US Retail Sales, Producer Price Index

Daily Forex Fundamentals | Written by DailyFX | Sep 12 08 01:20 GMT |

US Dollar - Forecast For Friday's US Retail Sales, Producer Price Index Euro Consolidates Above 1.39 As ECB Bulletin Leaves Markets Pricing in 50bps In Rate Cuts Japanese Yen Consolidates As Financial Markets Remain Jittery - Q2 GDP Anticipated To Contract Sharply US Dollar - Forecast For Friday's US Retail Sales, Producer Price Index Despite the release of bearish US data, the US dollar was strong across the majors for much of the day as risk aversion remained the predominant theme. In fact, the US trade deficit widened to the most in 16 months in July, while US import prices fell in August by the most since record-keeping began 19 years ago due to weaker commodities and a strong greenback during the survey period. As Quantitative Analyst David Rodriguez discussed this morning, the CFTC's latest Commitment of Traders report shows that speculative US dollar longs have gained to their highest levels since late 2005, which is a clear sign that forex trading sentiment has become extremely bullish the US dollar. Though short and medium term momentum remains in its favor, the exceedingly high level of speculative forex future long positions increases the likelihood of sharp pullbacks, like we saw at the end of Thursday's US trading session. Indeed, the move may indicate the beginnings of a turn, as the DJIA rocketed higher during the final 30 minutes of trading on news that Lehman Brothers was in talks with prospective buyers. Likewise, high-yielders and the JPY crosses picked up as well, and if this sentiment holds overnight and into tomorrow morning, the release of US Advance Retail Sales and the Producer Price Index could play well into the hands of dollar bears. According to Bloomberg News, retail sales are forecasted to edge slightly higher during the month of August, though excluding autos they are anticipated to fall. There is significant downside risk for this release, as wholesale sales slumped 0.3 percent during the month, while International Council of Shopping Centers (ICSC) sales slowed to a 1.7 percent annual pace in August from 2.5 percent thanks to a pullback in spending on discretionary items such as apparel and furniture. Meanwhile, as we saw in the release of the import price index, the plunge in commodities during the month of August resonated throughout the markets, and as a result the Producer Price Index for that month is likely to plummet as well. Euro Consolidates Above 1.39 As ECB Bulletin Leaves Markets Pricing in 50bps In Rate Cuts The EUR/USD pair made a clean break below 1.40 just before Wednesday's New York close, and since then euro has consolidated above 1.39 as the European Central Bank's monthly bulletin left the markets pondering the potential for a rate cut in the near-term. The ECB noted slowing growth as they said, 'the euro area economy is currently experiencing an episode of weak activity characterized by high commodity prices weighing on consumer confidence and demand, as well as by dampened investment growth.' However, the central bank was somewhat optimistic about the outlook, noting that a persistent drop in oil prices from their record highs in July should 'help strengthen real disposable income, with the level of employment remaining high and the unemployment rate low by historical standards.' Meanwhile, the ECB remained hawkish as they forecast that annual inflation rates would remain well above their 2 percent target for a 'protracted period of time' while 'upside risks to price stability over the medium term prevail.' This hawkish stance was not enough to quell rate cut speculation, as Credit Suisse overnight index swaps are now pricing in nearly 50bps in reductions by the ECB over the next 12 months, compared to 25bps in cuts just two weeks ago. Thus, from a fundamental perspective there's still downside risk for the euro, but from a technical perspective, looming support may prevent significant declines from current levels. Indeed, the 50% fib of 1.1638 - 1.6041 at 1.3840 aligns with the July 2007 highs near 1.3850, providing a good profit-taking level for EUR/USD bears. Japanese Yen Consolidates As Financial Markets Remain Jittery - Q2 GDP Anticipated To Contract Sharply Like the US dollar, the Japanese yen was strong for most of the day on signs of market-wide risk aversion, but news Lehman was in talks with prospective buyers helped lead risky assets higher. This move was to the detriment of the yen primarily, though the US dollar suffered as well. Furthermore, we continue to see that Japanese fundamentals have little bearing on the currency, as the latest forex correlations report shows that carry trades and the DJIA have increasingly been moving in lockstep (though the correlation is not as high as it was in 2007). Nevertheless, traders should not ignore the release of the final reading of Japanese GDP, as the economy is expected to have contracted sharply during Q2. In fact, GDP is forecasted to fall an annualized 3.1 percent, the worst result since Q3 2001. Going forward, the Japanese yen will continue to depend on the status of risk appetite in the market, and while the currency could pull-back in the near-term, I still think there is long-term bullish potential for the low-yielder. As a result, I will look for JPY buying opportunities on sharp declines. New Zealand Dollar, Australian Dollar Struggle to Recover as Risk Trends To Decide Fate of High-Yielders The New Zealand dollar and Australian dollar have been particularly vulnerable to risk trends, as the high-yielding currencies slumped with commodities and equities for much of the day, only to rebound with the DJIA at the end of the US trading session. While the Reserve Bank of New Zealand slashed rates by 50bps to 7.5 percent yesterday, the Kiwi remains a prime carry trade currency. In economic news, New Zealand retail sales fell more than expected in July, as a plunge in auto sales led the headline figure down 0.8 percent. Excluding autos, sales were still disappointing at -0.2 percent. The data underpins the RBNZ's rate cut, especially as RBNZ Governor Alan Bollard said the economy was experiencing a major slowdown that would be "led primarily by the household sector." The New Zealand dollar fell versus the US dollar on the news for a test of support at 0.6500, but given the pickup in risk appetite over the past few hours, NZD/USD may be able to recover overnight. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

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Daily Forex Market Commentary

Daily Forex Technicals | Written by Global Forex Trading | Sep 12 08 01:44 GMT |

The dollar encountered choppy trading on Thursday amid volatile equity and oil prices, while everyone is looking for the resolve of the newest problem: Lehman Brothers. This may be solved by the end of the weekend, but what about other big names? The dollar made little progress, except for a choppy recovery of some of the losses in dollar/yen. Friday should see mostly opportunistic trading conditions in the same mold, as the above factors will be supplemented by a rich US economic calendar. This features the retail sales, PPI and University of Michigan reports.
Euro/dollar

Euro/dollar recovered from a new low on Thursday and the downside is less obvious, but my model remains short positions. The medium-term outlook remains negative.

Immediate support is at 1.3935. The next level is now 1.3883. Below 1.3835, distant support remains at 1.3695.

Initial resistance remains at 1.4045. Above 1.4070, the next levels are 1.4130, 1.4180 and 1.4225. If this strong area gives way, the pair would make an aggressive, if very unlikely, recovery toward 1.4295

Oscillators are declining.

NEAR-TERM: Slightly bearish
MEDIUM-TERM: Bearish
LONG-TERM: Mixed
Dollar/yen

Dollar/yen recovered most of its aggressive losses and choppy trading defined the day amid volatile conditions in the yen crosses. Again, following a brief recovery, the sell-off should resume. My model remains short.

Good resistance remains at 107.95 from a 50-point pivot, which targets 107.45 and 108.45. Above 108.70, resistance remains at 109.15 from another 50-point pivot, which targets 109.65 and 108.65. Distant resistance is at 110.35 from a 50-point pivot, which targets 109.85 and 110.85.

Initial support is at 106.75 from a 50-point pivot, which targets 106.25 and 107.25. A pivot low is at 105.53.

Oscillators are declining.

NEAR-TERM: Mixed
MEDIUM-TERM: Bearish
LONG-TERM: Mixed
Sterling/dollar

Sterling/dollar recovered from a new low for the downtrend on Thursday, but should see some weakness today. My model remains short and the medium term is bearish.

Below the new pivot low at 1.7447, there is support at 1.7420. Distant support remains at 1.7315.

Initial resistance is at 1.7575. This is followed by 1.7605. A Fibonacci retracement level is pegged at 1.7737. Distant resistance is seen at 1.7975.

Oscillators are falling.

NEAR-TERM: Slightly bearish
MEDIUM-TERM: Bearish
LONG-TERM: Bearish
Dollar/Swiss franc

Dollar/Swiss reached a new high for the uptrend on Thursday and my model remains long. Again, following some corrective decline, the uptrend should resume.

Initial resistance remains at 1.1420. Above 1.1466, a pivot high remains at 1.1605.

Immediate support is at 1.13337. The next levels remain at 1.1270 and 1.1214. Distant support is at 1.1100.

Oscillators are rising.

NEAR-TERM: Slightly bullish
MEDIUM-TERM: Bullish
LONG-TERM: Bullish

Cornelius Luca
Global Forex Trading
http://www.gftforex.com

DISCLAIMER: This forum and the information provided here should not be relied on as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. The views of the author are not necessarily those of Global Forex Trading, its owners, officers, agents or employees. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Cornelius Luca will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Cornelius Luca do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.



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Why The Dollar Could Hit New Highs As Problems Intensify

Daily Forex Fundamentals | Written by Global Forex Trading | Sep 12 08 01:15 GMT |

The Stories in the Currency Market USD: WHY THE DOLLAR COULD HIT NEW HIGHS AS PROBLEMS INTENSIFY EUR: WHEN WILL TRICHET FINALLY GIVE IN? GBP: UK ON RECESSION WATCH CAD: TRADE SURPLUS CONTRACTS AUD: HOTTER EMPLOYMENT NUMBERS NZD: SURPRISE IN RETAIL SALES? JPY: SHARP END OF DAY RALLY IN STOCKS LIFTS USD/JPY Why The Dollar Could Hit New Highs As Problems Intensify With crude oil prices trading at $100 a barrel and the EUR/USD fluctuating around 1.40, being long dollars has been one of the best trades this quarter. In past editions of the Daily Currency Focus we have outlined countless reasons for why the dollar is rallying including the correlation with oil prices, the slowdown in growth outside of the US and interest rate compression. However as the problems in the US financial sector intensify, the US dollar could go on to hit new highs. One of the biggest concerns for banks and any financial institution for that matter is sufficient capital and one of the ways to raise capital is by reducing exposure. Up until June, the long commodity play has been one of the most profitable bets for hedge funds and investment banks. The unwinding of these positions and the repatriation of other foreign investments is a big reason why the dollar has managed to rally despite systemic risks in the US financial sector. Will the Government Take Over Lehman and WAMU as Well? With that in mind, there will be more problems in the banking sector before the worst is over. Although Lehman Brothers has been the headline grabber, Washington Mutual also faces serious problems. Shares of WAMU have fallen 90 percent year to date. After taking over Fannie Mae and Freddie Mac, the US government may have more trouble brokering some sort of deal for Lehman and Washington Mutual. With Bear Stearns, they only convinced JPMorgan to do the deal by providing $29B in public finances. Not only could they have a hard time convincing another bank to be the white knight for Lehman or WAMU, but the potential buyer would probably ask for a sweeter deal than JPMorgan. With 117 banks on the FDIC’s watch list, be careful of more problems. Expect the banking sector to remain in focus next week with Goldman Sachs reporting earnings. Watch Out for Weak PPI and Retail Sales Today's economic releases were very weak, but the impact on the US dollar was limited. The trade balance widened from $58.5B to $62.2B in the month of July as exports rose for the fourth month in a row. This is the worst trade deficit since March 2007. Jobless claims also remained above the 400k mark for the eighth consecutive month. The labor market is at recessionary levels and despite the rally in the US dollar, traders should not lose sight of the growing problems in the US economy. Retail sales and producer prices are due for release on Friday. Even though everyone is talking about the drop in oil prices driving a recovery in consumer spending, that will come until the holiday shopping season. In the meantime, traders may have to contend with some weak data first. Not only could consumer spending be weak, but the sharp drop in import prices suggests that PPI will miss as well. The only piece of potentially dollar bullishness news is the University of Michigan consumer confidence report. The drop in prices at the pump could help to bolster confidence. The 2 Things that Will Halt the Dollar's Rise There are 2 things that can carve a serious top in the US dollar - a surprise interest rate cut by the Federal Reserve and a reversal in oil prices. Weak economic data and the trouble in the financial sector has triggered Fed fund traders to price in a growing chance of a rate cut and with 2 more months until the end of Hurricane Season, a big storm could still trigger a sharp rally in oil. WHEN WILL TRICHET FINALLY GIVE IN? The Euro sliced through 1.40 to hit an intraday low of 1.3895 but the currency has since recovered materially. One man however has refused to give in despite the growing threat of a recession and softer inflation. Traders are sitting at the edge of their seats waiting for any hint from ECB President Trichet that the central bank could cut interest rates for the first time in 5 years. The EU Commission announced this morning that they expect a technical recession in Germany and Spain. At the same time, wholesale prices plunged last month in Germany, providing us with evidence that inflation is easing. Trichet however is a very smart man so we have to understand why he refuses to loosen monetary policy. Unlike the US, unions are a much more powerful force in Germany. Wage negotiations have been underway for months and one of the ECB's biggest fears is that the unions will successfully negotiate a sharp increase in wages, which could turn into a big inflation problem. According to a story on Bloomberg today, more than 30 percent of European high risk high yield bonds are trading at distressed levels, which is the highest since September 2001 - this signals that defaults are expected in the Europe as well. UK ON RECESSION WATCH The UK economy is on recession watch. Although we have been warning about this possibility for some time, the European Commission has now jumped on board by warning of the same risk in a report released yesterday. This would be the first time since 1990s that the UK economy has fallen into recession, but like Germany, this could be nothing more than a technical recession. Since July, the British pound has fallen more than 10 percent against the US dollar while oil prices are down more than 30 percent. Although it won't help to recapitalize struggling banks, $100 oil is the answer to many of the world's problems. There is no economic data expected over the next 24 hours, which means that the market’ appetite for dollars will determine whether or not the GBP/USD holds above 1.75. CANADIAN, AUSTRALIAN AND NEW ZEALAND DOLLARS STRUGGLE After breaking below 65 cents on the Reserve Bank of New Zealand's surprise 50bp rate cut last night, the New Zealand dollar remains weak. This is due to the triple blow of the rate cut, recessionary calls by the RBNZ and US dollar strength. Even though business PMI fell deeper into contractionary territory, we actually think that the New Zealand retail sales report could beat expectations. The most recent reports for business sentiment, credit card spending and visitor arrivals improved, which suggests stronger consumer spending in the month of July. Australian employment numbers were hotter than the market expected, but given the rise in the employment components of the PMI reports, it was not much of a surprise for us. The same is true for the Canadian international merchandise trade balance. In yesterday's Daily Currency Focus, we said that the sharp drop in the IVEY PMI signals a potential contraction in the trade surplus and that was exactly what we saw in this morning's report. SHARP END OF DAY RALLY IN STOCKS LIFTS USD/JPY The volatility in the US stock market has translated into sharp volatility in the Japanese Yen crosses. At one point today, the Dow Jones Industrial Average was deep in negative territory, but in the last few minutes of trading, stocks surged, helping the Dow end the day up 164 points. USD/JPY trailed equities higher but it has failed to close near the day's high. The volatility across the financial markets and everyone’s focus on risk reduction is keeping a lid on the carry trade recovery. To no one's surprise, machine tool orders were weaker than expected in July. The Japanese economy is in trouble and its problems will be confirmed by the final second quarter GDP and industrial production numbers due for release this evening. Although the Yen is up against all of the G-10 currencies year to date, many of the other Asian currencies like the Korean Won have suffered. This has kept inflation elevated and could lead to slower growth in the region going forward. Kathy Lien Global Forex Trading http://www.gftforex.com DISCLAIMER: This forum and the information provided here should not be relied on as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. The views of the author are not necessarily those of Global Forex Trading, its owners, officers, agents or employees. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Cornelius Luca will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Cornelius Luca do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

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Australia Stocks Update: S&P/ASX 200 Rises 28.60 to 4,842.90

By Darren Boey

Sep. 12 (Bloomberg) -- Australia's benchmark stock index, the S&P/ASX 200 Index, rose 0.59 percent at 10:05 a.m.

The index of 200 companies traded on the Australian Stock Exchange rose 28.60 to 4,842.90. Among the stocks in the index, 82 rose, 33 fell and 85 were unchanged.

Gains in the S&P/ASX 200 Index were led by Bhp Billiton Ltd, Commonwealth Bank Of Australia and Macquarie Group Ltd. About 56.17 million shares changed hands on the Australian Stock Exchange.

Bhp Billiton Ltd, which rose 82 cents to A$35.29, was the most active stock by value in Australia.

The next most-active issues were Australia & New Zealand Banking Group Ltd, which rose 20 cents to A$17.05, and Foster's Group Ltd, which rose 14 cents to A$5.75.



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Japan Stocks Rise as Drop in Oil Eases Cost Concern; Sony Gains

By Masaki Kondo
Enlarge Image/Details

Sept. 12 (Bloomberg) -- Japan's stocks rose, headed for a weekly gain, after a drop in crude prices to a six-month low allayed concern fuel costs will hurt company earnings.

Mitsubishi Motors Corp., Japan's fifth-largest carmaker, added 2 percent, while Sony Corp. advanced 1.4 percent. Mitsubishi UFJ Financial Group Inc., Japan's largest listed bank, rose 1.6 percent on speculation a purchase of Lehman Brothers Holdings Inc. will relieve uncertainty in financial markets.

``A decline in crude prices is positive for the outlook for the global economy,'' Soichiro Monji, chief strategist at Tokyo- based Daiwa SB Investments Ltd., said in an interview with Bloomberg Television. ``Financials have been oversold and some investors are likely to snap them up.''

The Nikkei 225 Stock Average climbed 130.01, or 1.1 percent, to 12,232.51 as of 9:03 a.m. in Tokyo. The broader Topix index rose 9.78, or 0.8 percent, to 1,172.50, set for a weekly advance of 0.1 percent.

Yesterday, the Topix fell to the lowest since March 17, when the gauge reached a level not seen since June 2005.

Crude oil for October delivery fell 1.7 percent to $100.87 a barrel in New York yesterday, the lowest settlement since March 24. Oil has dropped by a third from a record on July 11 as high prices and slowing global economic growth reduce demand.

Japan's gross domestic product contracted an annualized 3 percent last quarter, the Cabinet Office reported before markets opened. That's wider than the 2.4 percent drop reported last month. The median estimate of 27 economists surveyed by Bloomberg News was for a 3.1 percent contraction.

Lehman, the fourth-biggest U.S. brokerage, entered into talks with potential buyers, people with knowledge of the situation said. Bank of America Corp. is among potential acquirers, the Wall Street Journal reported.

Warren Lichtenstein's Steel Partners proposed to buy Noritz Corp., which makes gas-fired baths and water heaters, for about 42.3 billion yen ($395 million). Steel Partners yesterday said it will acquire all the outstanding shares it doesn't already own in the Kobe, western Japan-based company for 1,025 yen apiece. Shares in Noritz were poised to jump.

Nikkei futures expiring in December added 1.2 percent to 12,210 in Osaka and gained 1 percent to 12,205 in Singapore.

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



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South Korea Delays Proposed $1 Billion Bond Sale

By Seyoon Kim and Kim Kyoungwha

Sept. 12 (Bloomberg) -- South Korea's government postponed a $1 billion sale of global bonds after the credit crunch and concerns about the health of North Korean leader Kim Jong Il forced up borrowing costs, the finance ministry said.

``We decided to postpone the sale of the sovereign bonds as the deterioration of the global credit crunch on Lehman Brothers and concerns about North Korea raised the spread,'' the ministry said in a statement released in Gwacheon today. ``We plan to pursue the sale swiftly next time without separately holding investor presentations, when global financial markets conditions improve.''

South Korea's government said last week it would hold presentations for investors on the foreign-currency debt offer in Singapore, Hong Kong, London, Boston and New York from Sept. 8 to 11.

The won has slumped more than 18 percent this year as accelerating inflation and the currency's decline sparked speculation South Korea may be headed for a repeat of 1997, when the won lost half its value and the government turned to the International Monetary Fund for a $57 billion bailout to help companies repay overseas debt.

The ministry said an investor presentation it held for the bond sale this week ``helped eliminate investor concerns'' about a rumored financial crisis in the country and about the soundness of the nation's foreign exchange reserves.

Better Shape

South Korea's debt levels are in better shape now than they were in 1997, according to Credit Suisse, with corporate net debt-to-equity standing at an estimated 18 percent compared with 218 percent in 1997.

Total foreign exchange reserves now exceed short-term external debt by about $72 billion, compared with in 1997 when the short-term external debt exceed reserves by more than $40 billion, Credit Suisse said last week.

South Korea won't face a repeat of the 1997 currency collapse because local banks and companies have more robust finances, Moody's Investors Service said on Sept. 2.

Deputy Finance Minister Shin Je Yoon said last week speculation that the country is facing a September financial crisis is ``groundless.''

South Korea's Unification Ministry said it is on ``high alert'' after a U.S. intelligence official said earlier this week that North Korean leader Kim Jong Il is sick and may have suffered a stroke in the past month.

South and North Korea are still technically at war after their 1950-53 conflict ended without a peace agreement.

South Korea last sold dollar debt in November 2006, raising $500 million from a 10-year 5.125 percent bond sale priced at 69.6 basis points above U.S. Treasuries, data compiled by Bloomberg shows.

To contact the reporter on this story: Seyoon Kim in Seoul at Skim7@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net;



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New Zealand's Retail Sales Fall More Than Forecast

By Tracy Withers

Sept. 12 (Bloomberg) -- New Zealand's retail sales fell more than twice as much as economists' forecast in July, adding to signs the central bank will cut interest rates to revitalize an economy that is in a recession.

Retail sales fell 0.8 percent from June when they rose 1 percent, seasonally adjusted, Statistics New Zealand said in Wellington today. The median estimate of 13 economists surveyed by Bloomberg News was for a 0.3 percent decline.

Falling consumer spending means the economy may not recover from a first-half recession until late this year. Reserve Bank Governor Alan Bollard cut interest rates yesterday and forecast the economy will also contract in the third quarter as the housing market slumps, unemployment rises and a drought cuts farm exports.

``Spending is under an awful lot of pressure and will continue to contribute to weak economic data through the middle part of this year,'' said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington. ``This provides justification for a further reduction of interest rates.''

The yield on a three-month bank-bill futures contract maturing in December fell 3 basis points to 7.27 percent at 11:20 a.m. in Wellington as investors increased bets Bollard will cut the official cash rate in October. A basis point is 0.01 percentage points.

The New Zealand dollar bought 65.29 U.S. cents from 65.28 cents immediately before the report.

Profit Slump

Bollard said yesterday the economy is experiencing a ``marked slowdown, led primarily by the household sector.'' He cut the official cash rate by a half point to 7.5 percent and urged banks to pass on lower borrowing costs to customers. HE also cut the benchmark by a quarter point in July.

``We've got room to move,'' Bollard said in an interview from Wellington yesterday. ``We're in a loosening mode.''

The economy contracted in the first quarter and Bollard said yesterday New Zealand is now in recession.

The central bank said the economy probably shrank 0.2 percent in the second quarter and will contract 0.3 percent in the third quarter.

House sales have fallen to a 16-year low, the jobless rate has risen to a two-year high and exports have dropped for two quarters as a drought curbed dairy production. Dairy products are the nation's largest export.

Profit Slump

The high cost of basic items has curbed spending at companies such as Warehouse Group Ltd., the nation's largest discount retailer. The company said today profit fell 21 percent in the year to July as margins were squeezed. Fourth-quarter sales fell 2 percent.

``A clear shift in consumer sentiment occurred during this period, which placed significant pressure on retail sales,'' Chief Executive Officer Ian Morrice said.

Gasoline prices reached an all-time high in July. Food costs rose 7.6 percent from a year earlier and the benchmark interest rate was at a record until Bollard unexpectedly cut borrowing costs on July 24 for the first time in five years.

Core retail sales, which exclude cars, fuel and workshops, fell 0.2 percent from June when they gained the same amount, today's report showed. Economists expected a 0.3 percent increase.

Retail sales fell in 13 of the 24 store categories measured in the report.

Car sales dropped 5.3 percent. Supermarket and grocery sales, which make up one-fifth of all retailing, fell 2 percent. Furniture, hardware and footwear sales also declined.

Department store sales rose 5.9 percent and clothing stores gained 9 percent. Fuel and appliance sales also increased.

Car sales have fallen in five of the past seven months and are 19 percent less than a year earlier.

The trend series for vehicle sales, which adjusts for irregular events, is close to a seven-year low, the statistics agency said.

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

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Brown May Have to Ignore King's `Warning Shots' on U.K. Housing

By John Fraher and Brian Swint

Sept. 12 (Bloomberg) -- Prime Minister Gordon Brown may have to ignore the advice of his own central bank if he wants to kickstart an economy that's headed for a recession.

Bank of England Governor Mervyn King, 60, told lawmakers in London yesterday it's an ``illusion'' that the government could rescue the housing market without jeopardizing taxpayers' money and warned that increases in government spending risk fuelling inflation expectations.

His comments come as Brown, 57, considers proposals to revive a mortgage market that's almost ground to a halt and exacerbated the worst property downturn since the early 1990s. A Treasury- commissioned report in July said the government could guarantee all securities backed by home loans or encourage the Bank of England to extend emergency lending.

``The governor seemed to be firing some warning shots,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. ``It was interesting the amount of emphasis he put on the implications of the taxpayer underwriting the mortgage-lending process.''

Brown faces pressure from his own ruling Labour Party to revive the economy and its popularity, which has slumped to the lowest in more than a decade. While he announced plans to help first-time buyers and cut taxes on property purchases last week, the yearlong credit-market rout is making banks reluctant to hand out mortgages to potential homebuyers.

Chancellor of the Exchequer Alistair Darling will receive final proposals in coming weeks on how to fix the logjam and still has an ``open mind'' on the issue, said King. Neither Darling nor Brown have yet expressed their preferences on the matter.

Liquidity Measures

``If the government wants to do something, it will,'' said Peter Dixon, an economist at Commerzbank AG in London. ``The Bank of England is providing liquidity. A guarantee is a whole different ball game.''

King, who claimed that he doesn't want to ``take a position'' on what the government should do, still spent much of his testimony outlining the risks of guaranteeing mortgages.

``It may seem at the first round that it's attractive,'' said King. `The difficulty is, you throw out the baby with the bathwater, and this is what's happened over years in North America where the private-sector mortgage market has been squeezed out.''

U.S. Treasury Secretary Henry Paulson was forced on Sept. 7 to seize control of Fannie Mae and Freddie Mac after the U.S. housing slump threatened to topple the companies making up almost half of its home-loan market.

Lending Plan

King also indicated the central bank won't extend its ``exceptionally generous'' emergency lending program. He instead plans to introduce a regime that only provides an emergency credit line to banks facing temporary liquidity problems.

``The bank is saying it can help with short-term liquidity issues but it is not its job to fund long-term lending and a recovery of the mortgage market,'' said Leigh Goodwin, a London- based analyst at Fox-Pitt Kelton Ltd.

King also expressed skepticism about the government's own revenue forecasts and said its fiscal framework risks losing credibility, which could fuel inflation expectations and ``make our lives more difficult.'' Inflation is already more than double the Bank of England's 2 percent target.

Questioning the government's projections is ``new territory'' for King, said Nick Kounis, an economist at Fortis Bank NV in Amsterdam and a former U.K. Treasury official. ``Usually what he says is: `What the government presents to us is what we'll use in our forecasts.' They take it as a given.''

King's performance was so striking that Labour Party lawmaker George Mudie asked whether the governor had overstepped his remit.

``Attached to the guarantee proposals is a view implicit in it that, in some ill-defined sense, the Bank of England can fund and finance these things,'' said King. ``I am not giving the chancellor a public lecture. It is perfectly reasonable to explain what central banks can and can't do and that is what I am doing.''

Some of the governor's exchanges with lawmakers ``seemed more animated than usual,'' RBS's Walker said.

``I thoroughly enjoyed it,'' said Philip Shaw, chief economist at Investec Securities in London. ``King was on great form. It's the best performance I've seen in a long time.''

To contact the reporters on this story: John Fraher in London at jfraher@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.



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Fed May Expand Funding in a `Mother of Year-Ends'

By Craig Torres and Liz Capo McCormick

Sept. 11 (Bloomberg) -- The Federal Reserve may have to increase the cash it provides to banks and brokers, already a record, to help them balance their books at the end of the year.

Six bank failures in the past two months and rising concern about Lehman Brothers Holdings Inc.'s capital levels pushed lenders' borrowing costs to near a four-month high yesterday. They may climb further as companies rush for cash to settle trades and buttress their balance sheets at year-end.

``This could be the mother of year-ends,'' said Brian Sack, vice president of Macroeconomic Advisers LLC in Washington, who used to serve as head of monetary and financial market analysis at the Fed. ``The markets will need extraordinary actions to get through it.''

One option is for banks and brokers to increase the loans they take out directly with the Fed; the central bank reports on the figures today. Officials could also offer options on its biweekly loan auctions or introduce special repurchase agreements to straddle the end of the year, economists said.

Futures traders have also priced in a higher probability of a cut in the benchmark interest rate by at least a quarter-point by year end. Investors now see a 32 percent chance of a cut in December, up from 14 percent a week ago.

Year 2000

When policy makers sought to head off a potential funding crunch with the year 2000 changeover, they auctioned liquidity options to the primary dealers of U.S. Treasuries.

The central bank's latest weekly report on direct loans is scheduled for release at 4:30 p.m. New York time. Lending to commercial banks from the so-called discount window averaged $19 billion in the week through Sept. 3, the fifth record in seven weeks.

Traders in the forward markets, where financial instruments are sold for future delivery, are pricing three-month cash from December to March at 94 basis points over expectations for the federal funds rate. That's up from 85 basis points at the start of the week and an average of 7 basis points in 2006.

``If banks are unwilling to lend to other banks, then they are unwilling to lend to you and me,'' says Stan Jonas, chief executive officer at Axiom Management Partners LLC, a New York investment firm. ``The market anticipates that we will be in a heightened state of credit risk.''

New Tools

As the credit crunch erupted a year ago, Fed officials introduced new tools to stem a jump in borrowing costs. In December, they created the Term Auction Facility to inject cash to commercial banks.

The Term Securities Lending Facility was unveiled in March as a resource for primary dealers of Treasuries, and offers a loan of U.S. government bonds in exchange for collateral including asset-backed debt. After Bear Stearns Cos.'s collapse, the Fed the same month gave dealers access to direct loans.

Acknowledging persistent funding strains, policy makers in July extended the programs through January. They also introduced sales of options on the TSLF to help brokers get through quarter-ends.

``We will continue to review all of our liquidity facilities to determine if they are having their intended effects or require modification,'' Fed Chairman Ben S. Bernanke said Aug. 22.

Solvency Questions

Even if the Fed succeeds in easing the liquidity squeeze, it can do little to alleviate the underlying problem about the solvency of companies that invested in securities whose values are sliding. Worldwide, financial firms have posted $510 billion of writedowns and losses in the crisis, and raised just $359 billion of capital.

``Liquidity tools by definition can only have so much impact,'' said Dino Kos, former head of financial markets at the New York Fed and now a managing director at Portales Partners LLC, a New York research firm.

The Fed ``can alleviate the problem by helping institutions finance these bad assets,'' Kos said. ``But by itself, that doesn't lift the price of these assets. You still have an underlying solvency problem.''

The need for cash is exacerbated by rising credit losses and difficulty in obtaining capital to offset them.

The government seizure of Fannie Mae and Freddie Mac this week may have heightened perceptions of risk in investing in U.S. financial firms. The two companies failed to raise capital even after the Treasury won unlimited powers to inject funds as a backstop in July. After the Sept. 7 takeover, shareholders were nearly wiped out.

``Why would anyone inject equity capital into a financial institution if a few weeks later the government comes in and renders it worthless?'' said Axel Merk, president of Merk Investments, a Palo Alto, California-based fund manager. ``The slope of bailouts is slippery and expensive.''

Falling Stocks

Prices of fixed-rate preferred stock, a security typically used by banks to raise new capital, fell an average of 11 cents to 69.8 cents on the dollar this week, with the biggest drop in a decade Sept. 8, according to Merrill Lynch & Co. index data.

Lehman has lost 72 percent this week, trading at $4.45 at 2:42 p.m. in New York Stock Exchange composite trading. The New York-based investment bank yesterday reported a $3.9 billion third-quarter loss, the biggest in its 158-year history.

Lehman hasn't tapped the Fed for cash since April, a person briefed on the matter said yesterday. Any such loans would appear on the Fed's Primary Dealer Credit Facility figures to be released today; there was no outstanding balance last week.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.; Liz Capo McCormick in New York at +1- Emccormick7@bloomberg.net

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Japan Economy Shrank Annual 3%, Revised Figures Show

By Jason Clenfield

Sept. 12 (Bloomberg) -- Japan's economy contracted more than the government initially estimated last quarter after figures showed businesses cut spending.

Gross domestic product shrank an annualized 3 percent in the three months ended June 30, the Cabinet Office said today, more than the 2.4 percent drop reported last month. The median estimate of 27 economists surveyed by Bloomberg News was for a 3.1 percent contraction.

Bank of Japan Governor Masaaki Shirakawa said last week growth in the world's second-largest economy is likely to ``remain sluggish for the time being.'' With little room for interest-rate cuts or government stimulus, Economic and Fiscal Policy Minister Kaoru Yosano said there's ``nothing to be done but wait'' for the country's export markets to recover.

``Japan's economy will keep slowing at least until the end of this year,'' said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group in Tokyo. ``Compared with previous recessions, this one will be very shallow. We're at the deepest point of the downturn now.''

The yen traded at 107.25 per dollar at 9:17 a.m. in Tokyo from 107.14 before the report was published.

Stalled growth and the fastest inflation in a decade have created a dilemma for the Bank of Japan, which will probably have to keep interest rates unchanged for the rest of the year, according to economists surveyed this week. At 0.5 percent, Japan's key rate is the lowest among major economies.

Leadership Battle

Yosano and four other lawmakers are battling for the leadership of the ruling Liberal Democratic Party after Yasuo Fukuda announced his resignation as prime minister this month. Whoever wins will have little scope to spend on the economy because of public debt that the Organization for Economic Cooperation and Development estimates is 180 percent of GDP, the biggest in the industrialized world.

From the first quarter, the economy shrank 0.7 percent, the biggest drop since the third quarter of 2001 and more than the 0.6 percent initially reported. Economists expected a 0.8 percent contraction.

Business spending slid 0.5 percent from the first quarter, more than twice the pace of the 0.2 percent drop reported last month. The revision reflected Finance Ministry figures last week that showed capital spending fell for a fifth quarter.

Slumping U.S. demand has forced exporters including Toyota Motor Corp. to cut production and jobs. A Kyushu-based Toyota subsidiary reduced output of sport-utility vehicles by at least 10 percent and fired 800 workers since June.

Deteriorating

Markets outside the U.S. are also deteriorating. The European economy shrank for the first time in almost a decade last quarter, and EU Commissioner Joaquin Almunia said this week that the outlook is ``unusually uncertain.''

Sales of construction equipment by companies including Komatsu Ltd. will fail to meet industry forecasts because of lower demand from India and China, the Japan Construction Equipment Manufacturers Association said last month.

``The market is heading into a turning point,'' said Michijiro Kikawa, chairman of the association and president of Hitachi Construction Machinery Co. ``Although we expect the strength of emerging markets to continue, the speed of growth will decelerate.''

Exports dropped 2.5 percent and imports fell 2.6 percent. Net exports subtracted 0.1 percentage point from gross domestic product compared with the first quarter.

Even as exports weaken, economists say companies are better able to withstand the slowdown because they have shed the excess workers, factory lines and debt that contributed to a decade of economic stagnation in the 1990s.

Oil Prices

Further declines in oil prices, which have eased 30 percent since reaching a record in July, will benefit Japan even more than other economies, according to Julian Jessop, chief international economist at Capital Economics Ltd. in London. Jessop says Japan is unique in having escaped the credit crunch and the housing collapse that's hit the U.S. and Europe.

Without adjusting for inflation, Japan's economy shrank 0.8 percent in the second quarter from the previous three months, more than the 0.7 percent in the preliminary report.

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

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In the Land of Genghis Khan, Prices Only Go Up: William Pesek

Commentary by William Pesek

Sept. 12 (Bloomberg) -- I'm barreling down a Mongolian highway at 70 miles (113 kilometers) an hour and am about to die.

That's what I thought as my sport-utility vehicle veered into a ditch to avoid two massive cows the other day. It wasn't my driver's fault. The ditch -- which locals call a pothole even though it could swallow a Volkswagen -- was actually on the road.

Welcome to rural driving, Mongolian-style. My near-death experience didn't happen hundreds of miles from Ulaanbaatar, but 20 minutes outside the Mongolian capital. It was my own all-too- graphic reminder of the desperate infrastructure needs of what's heralded to become Asia's fastest-growing economy.

They don't call this a ``frontier market'' for nothing. At less than $5 billion, Mongolia's economy is a rounding error for neighboring China and Russia. Yet those looking for risky investments that might pay off handsomely in the years ahead are increasingly looking to Mongolia.

Of course, Dow Jones Industrial Average stocks could be considered a risky bet these days, never mind Vietnamese shares. Given the volatility out there, who would want to take chances on a nation that on July 1 declared a state of emergency to quash anti-government protests? An hour with Ganzorig Ulziibayar could change your mind.

``People tend to think Mongolia is a backward economy, that it's all minerals and nothing else,'' says the chief executive officer of Prime Insurance. ``There is great potential in infrastructure, real estate, construction, retail industries and many other areas.''

More Than Mining

There's still plenty of Genghis Khan in this nation of about 2.9 million. Statues of one of the world's most famous conquerors litter the capital. There can be little doubt that this landlocked, isolated and sparsely populated nation the size of France is still Khan's.

It's also the land of never-falling prices, partly because of global interest in Mongolia's rich deposits of copper, gold and other minerals. Accelerating capital inflows into Mongolia's immature, yet relatively open, economy are raising concerns about overheating.

``One of the risks is that Mongolia has never seen a down market,'' says Peter Morrow, chief executive officer at Khan Bank. ``The bankers, the lenders, the people -- they're just not used to that.''

Khan to Friedman

If the land of Khan is the land of the perpetual bull market, it won't be forever. For this is becoming the land of Milton Friedman, too. A change is coming, as it does to all developing nations experiencing a sudden boom. The question is how economic-policy makers react.

``Mongolia's resource endowment should make it Asia's fastest-growing economy,'' says Tim Condon, head of Asia research at ING Groep NV in Singapore. ``The challenge is to avoid boom- bust cycles that have bedeviled previous holders of the top spot.''

Mongolia's to-do list is a daunting one. Price trends, for example, are ``alarming,'' Condon says, noting that inflation was almost 35 percent year-over-year in July. Some economists say the central bank's monetary policies are fueling a credit boom.

The government needs to reduce poverty in a nation in which the average income is less than $200 a month. It must reduce corruption and improve government and corporate transparency. Its young democracy should manage its precarious position between authoritarian China and Russia.

Educating its population to compete in the Internet age is another challenge.

Many Headaches

``It's hard to find skilled managers and technology knowledge among Mongolians,'' says Luvsan Khurelbaatar, president of pharmaceutical company Monos Group.

Perhaps the biggest headache for President Nambaryn Enkhbayar and lawmakers is to iron out laws dictating how foreign companies and the government will divide up mineral profits. Rio Tinto Group and Ivanhoe Mines Ltd. have spent more than four years seeking approval for a $3 billion project to develop Mongolia's Oyu Tolgoi deposits of gold and copper.

The issue is politically explosive. Recent elections featured pledges that foreign companies won't be allowed to plunder Mongolia's natural resources. Mongolia's democracy also has taken its lumps. Riots in July over a disputed parliamentary election left five dead in Ulaanbaatar.

Challenges aside, it's worthwhile to consider how far Mongolia has come. Just ask Laurenz Melchers, who has lived in Ulaanbaatar for 10 years.

Opportunities Abound

``I've seen this place go from being a very dark place to a very vibrant place,'' says Melchers, director of trade and service company Mongolian Star Melchers.

For all the potential bumps in the road, Mongolia is moving in the right direction.

A nation known more for its nomads, horses and yurts than for business, Mongolia is opening up to a world far more enamored with China in East Asia and Kazakhstan in Central Asia. There's an unmistakable buzz to the streets of Ulaanbaatar -- and a sense of national pride.

Some of that reflects the success of Mongolian athletes at the Beijing Olympics. Photographs of the nation's first two gold medalists are omnipresent. Yet the excitement is more about a tiny, historically important nation entering the globalization age with great potential and alacrity.

``This is a new era for us,'' says Orgodol Sanjaasuren, chairman of Mongol Post Bank.

One should expect some craters, errrr, potholes along the way. Mongolia is likely to be worth the trip.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Ulaanbaatar, Mongolia at wpesek@bloomberg.net



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CLP Drops Plan for HK$10 Billion LNG Plant, Morning Post Says

By Kyunghee Park

Sept. 12 (Bloomberg) -- CLP Holdings Ltd. abandoned a HK$10 billion ($1.3 billion) plan to build a liquefied natural gas plant in Hong Kong, the South China Morning Post said, citing CLP Commercial Director Richard Lancaster.

CLP may instead invest in an LNG processing plant in China, either a regasification facility planned by PetroChina Co. in Dachen Bay, or one proposed by China National Office Oil Corp. in Zhuhai, the newspaper said.

CLP will also negotiate to source gas from a China National Offshore field in the South China Sea and from PetroChina's planned 4,800-kilometer (2,983 mile) pipeline from Turkmenistan, the newspaper said.

The power producer scrapped the LNG project after China agreed last month to extend supplies of natural gas and electricity to Hong Kong for an additional 20 years, according to the report.

To contact the reporter on this story: Kyunghee Park in Hong Kong at kpark3@bloomberg.net



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Yen, Yuan, Thailand's Baht, Indian Rupee: Asia Currency Preview

By Bob Chen

Sept. 12 (Bloomberg) -- The following events and economic reports may influence trading in Asian currencies today.

Exchange rates are from the previous session.

Japanese yen: Gross domestic product shrank a revised 3.1 percent in the second quarter from a year earlier, economists said in a Bloomberg News survey before the Cabinet Office reports the data at 8:50 a.m. in Tokyo.

Finance Minister Bunmei Ibuki, Economic and Fiscal Policy Minister Kaoru Yosano and Chief Cabinet Secretary Nobutaka Machimura will hold briefings after a cabinet meeting this morning in Tokyo. Machimura will hold a second briefing at 4 p.m.

The yen was at 106.67 a dollar at 8:39 a.m. in New York.

Chinese yuan: Industrial production in August expanded 14.5 percent from a year earlier, the slowest pace since February 2007, economists said in a Bloomberg survey before the National Bureau of Statistics reports the data at 10 a.m. local time.

The yuan was at 6.8465.

Thai baht: The central bank will report foreign-exchange reserves and holdings of forward contracts for last week at 2:30 p.m. local time. Reserves fell 0.4 percent to $101.2 billion the previous week while holdings of dollar forwards fell 1.8 percent to $15.8 billion.

The ruling People Power Party will support a bid by Samak Sundaravej for re-election as prime minister today, a spokesman said. The five other coalition members haven't decided on the candidate.

The baht was at 34.78.

Indian rupee: Factory output rose 6 percent in July from a year earlier, after increasing 5.4 percent the previous month, economists said in a Bloomberg survey before the Central Statistical Organisation reports the data at about noon.

Inflation slowed for a third week, a government report showed yesterday after trading hours. Wholesale prices rose 12.10 percent in the week ended Aug. 30 from a year earlier, the smallest advance in more than a month.

The rupee was at 45.555.

To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net.



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Yen Near 2-Year High Versus Euro on Concern About Lehman Sale

By Stanley White and Ye Xie

Sept. 12 (Bloomberg) -- The yen traded near a two-year high against the euro, after gaining every day this week amid concern Lehman Brothers Holdings Inc. may collapse, prompting sales of higher-yielding assets funded with cheap loans in Japan.

The yen appreciated against all major currencies yesterday on concern about Lehman's capacity to raise capital after posting a record loss. U.S. officials are helping Lehman find a buyer, a person familiar with the matter said. The dollar rose to the strongest in a year against the euro yesterday on evidence the economic slump that started in the U.S. has spread to the rest of the world.

``The market would welcome a resolution that ends the uncertainty,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``These things tend to happen over the weekend, so the market may be waiting for a deal to go through before it takes carry trades higher.''

The yen was little changed at 149.96 per euro at 8:13 a.m. in Tokyo from 149.98 yesterday, when it touched 147.54, the strongest in more than two years. The U.S. currency traded at $1.3994 per euro, after reaching $1.3882 yesterday, the strongest level since Sept. 18, 2007. The yen was at 107.16 per dollar, from 107.17.

The U.S. Treasury and the Federal Reserve have been working with Lehman on a sale, and a deal may be announced before Asian markets open Sept. 15., a person with knowledge of the matter said. The government isn't likely to contribute money, the person said. Bankers from other firms were reviewing Lehman's books today, according to people with knowledge of the situation, who declined to identify potential acquirers.

The Standard & Poor's 500 Index rose 1.7 percent yesterday after earlier falling to its lowest level since 2005.

Dollar's Gains

The ICE's Dollar Index touched 80.375 yesterday, the highest level since September 2007, when the Fed began cutting the target lending rate from 5.25 percent to 2 percent to stave off a recession. The index, a gauge measuring the dollar against the currencies of six U.S. trading partners, reached a low of 70.698 on March 17.

The dollar strengthened beyond 1.80 versus the Brazilian real yesterday for the first time since January and reached $1.7447 against the pound, the strongest level since April 2006.

``The global slowdown has dimmed the allure of higher yields abroad,'' wrote Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut, in a research note to clients yesterday.

The dollar has gained 13 percent since touching the all- time low of $1.6038 per euro on July 15 as the European economy slumped and crude oil dropped more than 30 percent to $100.31 a barrel from its peak of $147.27.

`Perception of Risk'

Industrial output in the 15 nations that use the euro probably fell 0.2 percent in July after a drop of the same amount in the previous month, according to the median forecast of 31 economists surveyed by Bloomberg News. The report from the European Union's statistics office is due today.

``We're looking at a much weaker level for the euro over the next year,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co., in an interview on Bloomberg Television. ``Europe, Japan and Asia can't have strong growth with the U.S. so weak. The decoupling story is a mirage.''

Canada, Brazil

Canada's dollar fell yesterday to the weakest since August 2007 after a government report showed the nation's trade surplus shrank in July as crude oil prices declined. The currency touched a one-year low of C$1.0821 per U.S. dollar.

Japan's currency rose 2.1 percent to 59 versus the Brazilian real yesterday and 0.2 percent to 13.09 against the South African rand on speculation investors will reduce carry trades, which involve getting funds in a country with low borrowing costs and buying assets where returns are higher. Japan's target lending rate of 0.5 percent compares with 13.75 percent in Brazil and 12 percent in South Africa.

``We're in a situation where we're likely to see the current environment of slower global growth, lower interest rates, more risk reduction and deleveraging,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``All suggest to me this process of unwinding the carry trades is going to continue.''

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.netYe Xie in New York at yxie6@bloomberg.net



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Australian, N.Z Dollars Gain as Investors Boost Carry Trade

By Candice Zachariahs

Sept. 12 (Bloomberg) -- The Australian and New Zealand dollars rose as speculation that Lehman Brothers Holdings Inc. will be bought increased investors' appetite for the nations' higher-yielding assets.

The currencies climbed from two-year lows against the yen after oil closed at its lowest in five months and U.S. equities rose, giving investors confidence to return to so-called carry trades. The Aussie, as Australia's currency is known, also strengthened as investors pared bets that the central bank will reduce interest rates at its next meeting in October.

``We've got quite a strong rebound underway,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``Any resolution of the Lehman issue will see risk appetite increased and you're seeing that now on the yen crosses like the Aussie-yen.''

The Australian dollar rose 0.8 percent to 80.17 U.S. cents at 8:42 a.m. in Sydney, from 79.52 in late Asia yesterday. It earlier touched 79.12, close to its lowest since August 2007. It bought 85.71 yen from 84.94 yen yesterday.

The New Zealand dollar advanced 0.6 percent to 65.21 U.S. cents and 0.7 percent to 69.72 yen. The currency pared its advance after a government report showed retail sales fell more than economists forecast in July.

The local dollars were the second- and third-top performing currencies among the 16 most-traded currencies behind the South African rand as the Standard & Poor's 500 Index rebounded from a retreat. It ended 1.4 percent higher after the Wall Street Journal reported that Bank of America Corp. is among potential suitors for Lehman.

Carry Trades

Benchmark interest rates are 7 percent in Australia and 7.5 percent in New Zealand, compared with 2 percent in the U.S. and 0.5 percent in Japan, making the South Pacific nations popular targets for carry trades.

In carry trades, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is that currency market moves can erase those profits.

The Australian dollar also rose as a stronger-than-expected employment report yesterday spurred traders to reduce bets on the Reserve Bank of Australia reducing the benchmark to 6.75 percent next month. The implied yield on the 30-day interbank futures contract maturing in October rose 4.5 basis points to 6.89 percent, according to the Sydney Futures Exchange.

New Zealand retail sales fell 0.8 percent from June when they rose 1 percent, seasonally adjusted, Statistics New Zealand said in Wellington today. The median estimate of 13 economists surveyed by Bloomberg News was for a 0.3 percent decline.

To contact the reporter on this story: Candice Zachariahs in Sydney at Czachariahs2@bloomberg.net



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Oil Rises From 5-Month Low as Hurricane Ike Heads for Houston

By Mark Shenk and Margot Habiby

Sept. 12 (Bloomberg) -- Crude oil rose from a five-month low as Hurricane Ike headed toward a near-direct hit at Houston, the busiest U.S. refining center.

About 12 percent of U.S. refining capacity is being shut before Ike makes landfall tomorrow. The Gulf Coast region is home to 26 percent of U.S. oil production. Ike's forecast path veered closer to Houston yesterday. Galveston, parts of southern Houston and areas south of the city and near the coast are under a mandatory evacuation order.

``We have about 3 million barrels a day of refining in the forecast path of Hurricane Ike,'' said Brad Samples, a commodity analyst for Summit Energy Inc. in Louisville, Kentucky.

Crude oil for October delivery rose 53 cents, or 0.5 percent, to $101.40 a barrel at 8:32 a.m. Sydney time on the New York Mercantile Exchange. Prices are up 27 percent from a year ago. Yesterday, futures fell $1.71, or 1.7 percent, to $100.87 a barrel, the lowest settlement price since March 24.

Gasoline for October delivery rose 2.12 cents, or 0.8 cent, or 0.7 percent, to $2.77 a gallon in New York after rising 8.72 cents, or 3.3 percent, to $2.7488 a gallon yesterday in the biggest one-day gain since Aug. 27. Heating oil gained 2.2 cent, or 0.8 percent, to $2.9375 a gallon. Yesterday, it increased 1.31 cents, or 0.5 percent, to $2.9155 a gallon.

Ike's eye was 400 miles (645 kilometers) east-southeast of Galveston, Texas, and moving west-northwest at 10 miles per hour, the National Hurricane Center said in an advisory at 4 p.m. Houston time. It strengthened to a Category 2 hurricane with sustained winds of 100 miles per hour, up from 80 mph Sept. 10. The mandatory evacuation orders started at noon yesterday and the area may see a storm surge of as much as 15 feet, the center said.

Refinery Closures

Exxon Mobil Corp.'s Baytown refinery, the country's biggest, with a capacity of 590,500 barrels of crude oil a day, is in a mandatory evacuation area and the company has begun shutting the facility, according to an advisory on its Web site.

Valero Energy Corp. is shutting its Houston and Texas City, Texas, refineries. The company also reduced rates at its Port Arthur refinery and may decide yesterday if it will shut the plant, said Bill Day, a company spokesman, in an e-mail. The Houston and Texas City refineries can process a combined 375,000 barrels of oil a day, according to the company Web site.

BP Plc is closing its Texas City refinery because of Ike, Scott Dean, a company spokesman, said in a telephone interview. Texas City has a 475,000-barrel-a-day capacity.

Platform Evacuations

Gulf operators have evacuated workers from 78 percent of production platforms, the Minerals Management Service said on its Web site yesterday. The agency estimates that 97 percent of Gulf oil production, and 93 percent of natural gas output, is shut. That is about 1.3 million barrels a day of oil and 7.4 billion cubic feet a day of gas.

CME Group Inc., the world's biggest futures exchange, said it's extending New York Mercantile Exchange electronic trading hours this weekend because of Ike.

The decision applies to energy trades on its ClearPort and Globex trading platforms, CME said in a release yesterday. Trading will begin at 10 a.m. New York time on Sept. 14 with the session closing on Sept. 15. Trading would normally open at 7 p.m.

Brent crude oil for October settlement declined $1.33, or 1.3 percent, to settle at $97.64 a barrel on London's ICE Futures Europe exchange, the lowest since March 4. The futures have dropped 11 straight days, the longest stretch since the contract was introduced in 1988.

Oil's Drop

Oil in New York has fallen 32 percent from a record $147.27 a barrel on July 11 as high prices and slowing global economic growth reduce demand for fuels. Oil's decline led the Organization of Petroleum Exporting Countries to say at a meeting this week it will try to limit production.

OPEC members, who supply about 40 percent of the world's oil, agreed in Vienna to a total production limit for 11 members of 28.8 million barrels a day, unchanged from previous targets. OPEC Secretary-General Abdalla El-Badri said this means it will trim ``oversupply'' by about 500,000 barrels a day.

Crude oil also fell because the dollar gained against the euro, reducing the appeal of commodities as a hedge. The dollar rose to a one-year high against the euro on speculation that growth in Europe will slow more than in the U.S. Investors looking to hedge against the dollar's decline helped lead crude oil and other commodities to records earlier this year.

The U.S. currency climbed 0.4 percent to $1.3946 per euro, from $1.3998 Sept. 10, after touching $1.3882, the strongest level since Sept. 18, 2007.

To contact the reporters on this story: Mark Shenk in New York at mshenk1@bloomberg.net; or Margot Habiby in Dallas at mhabiby@bloomberg.net.



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