US Dollar Could Falter As Federal Reserve Leaves Rates At 2.00%, Signals Neutral Stance

Daily Forex Fundamentals | Written by DailyFX | Sep 17 08 02:01 GMT | 

US Dollar Could Falter As Federal Reserve Leaves Rates at 2.00%, Signals Neutral Stance
British Pound Unfazed By Surge in UK CPI, BOE Minutes To Determine Next Move
Euro Consolidates Above 1.41 As Euro-zone CPI Slows For First Time In 4 Months
Japanese Yen Tumbles As Investor Optimism Improves On Hopes Of AIG Intervention
US Dollar Could Falter As Federal Reserve Leaves Rates at 2.00%, Signals Neutral Stance

The Federal Reserve left rates unchanged at 2.00 percent, as we had anticipated, but subsequent market-wide reaction was mixed as fed fund futures had been fully pricing in a 25bp cut to 1.75 percent. Going forward, though, Credit Suisse overnight index swaps signal that the central bank will leave rates unchanged through the next 12 months - compared to expectations of a 25bp cut earlier today - as the Federal Open Market Committee's policy statement signaled a more neutral stance. Indeed, it appears that the drop in crude oil from nearly $150/bbl in July down to below $95/bbl has helped to alleviate some of their inflation fears, since even the most hawkish member of the group - Richmond Fed President Richard Fisher - voted for no change. Furthermore, the Committee dropped a line noting 'elevated” inflation expectations, suggesting they are a bit more confident that they've kept the public's outlook for inflation in check.

Overall, the Committee's balance of concerns regarding the 'downside risks to growth and the upside risks to inflation” should lead them to leave rates steady through the end of the year. Looking more specifically at the market's reaction, the US dollar jumped immediately on the news, but subsequently pulled back to pre-FOMC levels. Risky assets - like the JPY crosses - managed to stage a bit more of a recovery, though, amidst speculation that the Federal Reserve would bail out AIG, the world's largest insurer. Ultimately, my fundamental bias for the US dollar remains bearish this week, as the previous rally was fueled by expectations of future interest rate increases. However, with the FOMC now signaling no change in rates going forward, that impetus has been removed.

British Pound Unfazed By Surge in UK CPI, BOE Minutes To Determine Next Move

The British pound slipped throughout the day despite surprisingly strong UK inflation numbers, as the headline reading rocketed to the fastest annualized pace in at least 11 years. Indeed, CPI growth accelerated to a 4.7 percent pace in August, which is well above the Bank of England's 2 percent target and 3 percent limit. While oil prices may have fallen significantly during the survey period, gains in food, housing, and clothing costs picked up the slack. The news will be extremely disconcerting for the BOE, as they are already trying to grapple with tighter credit conditions and an economy teetering on the brink of recession. Indeed, this is much of the reason why Credit Suisse overnight index swaps are still pricing in over 100bps worth of rate cuts by the BOE during the next 12 months. However, the release of the minutes from the BOE's September meeting on Wednesday morning could have a significant impact on these interest rate forecasts. During the August meeting, the minutes revealed that there was a 7-1-1 vote for the second consecutive month to leave rates at 5.00 percent, with one dissent in favor of a 25bp hike and one in favor of a 25bp cut. The vote this time around could easily be split again, so traders should watch out for a 8-1 vote (dissent in favor of rate cut) or a 6-2-1 (two dissents in favor of rate hike, one in favor of rate cut) as these will have the most severe impact on interest rate expectations. Biased comments within the minutes could skew the British pound's reaction as well.

Euro Consolidates Above 1.41 As Euro-zone CPI Slows For First Time In 4 Months

The euro remained heavy on Tuesday as Euro-zone CPI slowed for the first time in four months in August, falling 0.1 percent during the month as the annual rate slipped to 3.8 percent from 4.0 percent. The drop in oil prices during the survey period certainly played a role in the decline, but with CPI still well above the European Central Bank's 2 percent target, today's readings may only have a marginal impact on their bias. Unlike the Bank of England and the Federal Reserve, the European Central Bank's primary mandate is to maintain price stability, whereas the other central banks must focus on supporting economic growth while containing inflation at the same time. While Credit Suisse overnight index swaps are pricing in over 50bps worth of rate cuts by the ECB over the next 12 months, I do not expect them to do so before the end of 2008 unless CPI falls significantly lower from current levels. Furthermore, with 1.3880 serving as a critical support level for the EUR/USD pair, my bias for the euro is bullish, unless we see a break below that point.

Japanese Yen Tumbles As Investor Optimism Improves On Hopes Of AIG Intervention

The Japanese yen experienced wild volatility on Tuesday as risky assets tumbled early in the day amidst growing fears in the financial markets. However, these assets - including the Japanese yen crosses - subsequently surged higher despite the fact the Federal Reserve didn't cut rates, on hopes that the central bank and US Treasury would step in and save the world's biggest insurer, AIG. Indeed, the DJIA - which holds a strong correlation with forex carry trades - started the day down over 150 points, but rebounded to end the day up 140 points. The impact on the Japanese yen? The low-yielder plunged nearly 1 percent against the US dollar and fell approximately 1.15 percent versus the Canadian dollar and New Zealand dollar. Looking ahead to Wednesday, any sort of news regarding a solution for the solvency issues plaguing AIG will be good for risky assets and bad for the Japanese yen, especially since Morgan Stanley - one of the two remaining large investment banks (the other being Goldman Sachs) - reported Q3 net income losses that were slightly better than forecasts after the market close. In the long-term, though, my fundamental bias for the Japanese yen is bullish, as risk aversion is unlikely to fade completely anytime soon


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FX Technical Commentary

Daily Forex Technicals | Written by Easy Forex | Sep 17 08 02:43 GMT | 


Euro 1.4190

Initial support at 1.4074 (Sept 16 low) followed by 1.3973 (Sept 12 low). Initial resistance is now located at 1.4481 (Sept 15 high) at followed by 1.4544 (Sept 4 high).

Yen 106.40

Initial support is located at 103.54 (Sept 16 low) followed by 102.74 (May 22 low). Initial resistance is now at 106.91 (Sep 15 high) followed by 107.99 (Sept 12 high).

Pound 1.7870

Initial support at 1.7707 (38.2 of 1.7446-1.8129) followed by 1.7542 (Sept 12 low). Initial resistance is now at 1.8012 (Sept 16 high) followed by 1.8128 (Sep 15 high).

Australian Dollar 0.8035

Initial support at 0.7675 (Aug 20, 2007 low) followed by the 0.7616 ( Nov 13, 2006 low). Initial resistance is now at 0.8164 (76.4% of 0.7850-0.8263) followed by 0.8263 (Sept 15 high).

Gold 780

Initial support at 764.69 (Sept 15 low) followed by 746.39 (Sept 12 low). Initial resistance is now at 805.15 (Sep 9 high) trendline resistance followed by 819.3 (Sep 5 high).

Currency Sup 2 Sup 1 Spot Res 1 Res 2
EUR/USD 1.3973 1.4074 1.4190 1.4481 1.4544
USD/JPY 102.74 103.54 106.40 106.91 107.99
GBP/USD 1.7542 1.7707 1.7870 1.8012 1.8128
AUD/USD 0.7616 0.7675 0.8035 0.8164 0.8263
XAU/USD 746.39 764.69 780.00 805.15 819.30
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US FED Holds Rates, AIG In Spotnight

Daily Forex Fundamentals | Written by Easy Forex | Sep 17 08 02:41 GMT |

U.S. Dollar Trading (USD) extremely volatile day of trading as the market recovered from the stock crash on Monday. Very skittish markets, news that American Insurance Group (AIG) was close to the brink sent stocks plummeting again before rumors swirled that the FED may intervene and provide loans to the financial giant. US August CPI was as expectation -0.1% M/M. The FOMC held rates at 2.00% citing concerns about downside risks to growth and Inflation. In the U.S. share markets, the NASDAQ was up 27.99 points (1.28%) and the Dow Jones was down 141 points (1.3%). Crude Oil closed down -$4.56 ending the New York session at $91.15 per barrel. Looking Ahead, August Building starts seen at .95M vs. .965M in July.

The Euro (EUR) traded in a fairly tight range until the US session where Oil losses and USD buying forced the pair lower. As US held rates at 2.0% the EUR was sold heavily. EUR/JPY was volatile tracking the rollercoaster ride in equities. Stronger Euro-zone Zew Economic sentiment at 40.9 vs. 55 expected. Overall the EUR/USD traded with a low of 1.4073 and a high of 1.4323 before closing the day at 1.4140 in the New York session.

The Japanese Yen (JPY) extended gains as risk aversion spiked on suggestions the AIG might go bankrupt, support at 104 gave way. When equities rebounded off lows and AIG loan rumors emerged, the USD/JPY traced higher. Overall the USDJPY traded with a low of 103.54 and a high of 106.69 before closing the day around 106.10 in the New York session. Looking ahead, BOJ rate decision today widely expected to remain at 0.50%.

TheSterling (GBP) tracked the Euro closely losing heavily against the JPY as risk aversion spiked, before staging a recovery on AIG news. UK data confirmed high inflation with a Y/Y figure at 4.7% in August. Overall the GDP/USD traded with a low of 1.7733 and a high of 1.8011 before closing the day at 1.7870 in the New York session. Looking ahead, Claimant Count expected at 22.3K in August. Also released the ILO Unemployment expected at 5.4% in July.

The Australian Dollar (AUD) fell below 0.8000 early in Asia as risk aversion soared and AUD/JPY plumbed new lows. Oil fell heavily and this left the commodity currency with a slightly offered tone. The rebound in US stocks saw a strong recovery into the days close. Overall the AUD/USD traded with a low of 0.7852 and a high of 0.8045 before closing the US session at 0.8000.

Gold (XAU fell in line with Oil and investors demand for cash and margin to cover losses in other markets. Overall trading with a low of USD$789 and high of USD$772 before ending the New York session at USD$780 an ounce.

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Australia Stocks: Aquarius, Babcock Wind, Macquarie, Woolworths

By Shani Raja

Sept. 17 (Bloomberg) -- The S&P/ASX 200 Index rose 66 points, or 1.4 percent, to 4,816.80 at 10:35 a.m. in Sydney. The broader All Ordinaries Index advanced 60.50 points, or 1.3 percent, to 4,860.30, while the futures index expiring in September advanced 1.3 percent to 4,812.

Financial stocks: Macquarie Group Ltd. (MQG AU), Australia's biggest securities company, rose A$1.03, or 2.8 percent, to A$37.83, partly reversing yesterday's 6.7 percent decline. National Australia Bank Ltd. (NAB AU) gained 38 cents, or 1.7 percent, to A$22.28, the most since Sept. 8.

American International Group Inc., the biggest U.S. insurer by assets, has been offered an $85 billion U.S. loan in return for an 80 percent stake in the company, according to a person familiar with the situation.

Separately, Macquarie said it's confident of refinancing debt amid the global credit squeeze, after raising A$6.4 billion ($5 billion) from March 31 to July 31.

Aquarius Platinum Ltd. (AQP AU), a producer of the metal in South Africa and Zimbabwe, plunged 70 cents, or 8.2 percent, to A$7.80, the index's fourth-biggest loser. Platinum futures for October delivery plummeted $107.70, or 9.2 percent, to $1,068.50 an ounce in New York.

Babcock & Brown Wind Partners (BBW AU), the wind energy producer managed by Babcock & Brown Ltd., soared 18 cents, or 20 percent, to A$1.06, the most since October 2005. The company said yesterday that it plans to buy back as much as 10 percent of its shares because it believes the share price doesn't reflect asset values. Separately, The Children's Investment Fund Management today said it acquired a 5.3 percent stake in Babcock Wind.

Ivanhoe Australia Ltd. (IVA AU) fell 1 cent, or 1 percent, to a record low A$1.02. The Australian unit of billionaire Robert Friedland's Ivanhoe Mines Ltd. said it's seeking to start its first copper mine in the country within two years.

Lynas Corp. Ltd. (LYC AU), an Australian miner of minerals used in iPod music players and liquid crystal displays, surged 5 cents, or 8.5 percent, to 70 cents, the fourth-best performer on the benchmark. The company today said it's committed to delivering its Mount Weld Rare Earths project on schedule and ``within financial resources available to Lynas.''

Rio Tinto Group (RIO AU) fell A$2.27, or 2.1 percent, to A$104.58. A measure of six metals traded on the London Metal Exchange dropped 1.4 percent. Zinc declined 0.8 percent, copper 0.9 percent and nickel 3.9 percent.

Tishman Speyer Office Fund (TSO AU), a trust that invests in and manages office properties in the U.S., fell 6 cents, or 5.7, to 98 cents, a record low, after Merrill Lynch & Co. downgraded the company's rating to ``underperform.''

Woolworths Ltd. (WOW AU) rose 24 cents, or 0.9 percent, to A$28.51, the highest since May 23. The retailer may buy all or some of Mitre 10 Australia Ltd., the nation's second-biggest hardware chain, the Australian Financial Review reported, without saying where it got the information.

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.



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Crude Oil Rebounds From a Two-Day Decline on AIG Rescue Plan

By Christian Schmollinger and Margot Habiby

Sept. 17 (Bloomberg) -- Crude oil rebounded from its biggest two-day decline in almost four years after the Federal Reserve agreed to rescue American International Group Inc., reducing the risk of further economic slowdown.

Oil climbed as U.S. stocks advanced after floor trading closed on the New York Mercantile Exchange yesterday. U.S. crude-oil and fuel inventories probably fell last week as production platforms and refineries on the Gulf of Mexico shut because of Hurricanes Gustav and Ike, a Bloomberg survey showed.

``We've seen a mild recovery in confidence in the U.S. after it was shattered in the past couple of days,'' said Mark Pervan, a commodity strategist at Australia and New Zealand Banking Corp. in Melbourne. ``The oil market is the most vulnerable to what's happening in the U.S. since that's the largest end-use market.''

Crude oil for October delivery rose as much as $3.34, or 3.7 percent, to $94.49 a barrel in electronic after-hours trading on the New York Mercantile Exchange. It was at $94.16 a barrel at 9:48 a.m. Singapore time. Crude futures declined more than $10 a barrel, or 9.9 percent, in the past two days on concern that financial market disruptions may weaken the global economy and cut fuel demand.

Prices have dropped 1.7 percent this year and declined 36 percent from the record $147.27 a barrel reached on July 11. Yesterday, oil fell $4.56, or 4.8 percent, to $91.15 a barrel, the lowest settlement price since Feb. 7.

Oil Inventories

The Federal Reserve Board, with support of the U.S. Treasury, invoked emergency powers to lend up to $85 billion to American International Group Inc. to save the firm from collapse.

``The rebound in the stock market probably encouraged some buying, and then we're also setting up for the DOE report, which should show lower U.S. inventories in the major categories,'' said Tim Evans, an analyst with Citi Futures Perspective in New York.

U.S. crude-oil inventories probably fell 3.5 million barrels last week because of Hurricane Ike, a Bloomberg News survey of analysts showed.

Supplies of gasoline and distillate fuel, a category that includes heating oil and diesel, probably also dropped. The Energy Department is scheduled to release its weekly petroleum supply report at 10:35 a.m. Washington time today.

Gasoline for October delivery rose 6.17 cents, or 2.6 percent, to $2.4625 a gallon in New York. Yesterday, it dropped 6.3 percent to $2.4008 a gallon, the lowest close since Feb. 13.

Raw Materials

The Reuters/Jefferies CRB Index of 19 raw materials dropped as much as 3.1 percent yesterday to 337.44, the lowest since Dec. 3. The index reached a record on July 3 as the dollar headed toward its lowest ever against the euro and oil approached an all-time high.

A total of 14 Texas and Louisiana refineries, with combined crude-oil processing capacity of 3.57 million barrels a day, are shut because of Ike, the U.S. Energy Department said.

U.S. energy producers have idled about 97 percent of oil production in the Gulf of Mexico after Ike and Hurricane Gustav moved through the region, the Minerals Management Service said yesterday in a statement on its Web site. Gulf fields produce 1.3 million barrels oil a day, about one-quarter of U.S. output.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net; Margot Habiby in Dallas at mhabiby@bloomberg.net.



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Yen Falls for Second Day Against Dollar After Fed Rescue of AIG

By Ron Harui and Ye Xie

Sept. 17 (Bloomberg) -- The yen fell for a second day versus the dollar after the Federal Reserve said it will lend as much as $85 billion to cash-strapped American International Group Inc. to prevent credit markets seizing up.

Japan's currency also dropped against the Australian and New Zealand dollars on speculation an AIG rescue will encourage investors to resume taking out loans in Japan to buy higher- yielding assets elsewhere. The yen jumped the most in a decade against the greenback on Sept. 15 as mounting credit-market losses forced Lehman Brothers Holdings Inc. to file the biggest bankruptcy in history, causing global stocks to tumble and prompting investors to shun riskier investments.

The Fed's loan is ``likely to support the U.S. financial system and avert a catastrophe,'' said Kenichiro Ikezawa, who helps oversee the equivalent of about $3 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo. ``Risk-taking appetite will probably recover a bit. Sentiment toward the dollar isn't bad, and the yen may be sold.''

Japan's currency fell 0.6 percent to 106.30 per dollar at 10:49 a.m. in Tokyo, after sliding 0.9 percent yesterday and surging 3.1 percent on Sept. 15. Against the euro, the yen slid 1.1 percent to 150.90. It touched 147.04 yesterday, the strongest since August 2006. The dollar fell 0.5 percent to $1.4193 per euro.

Australia's dollar rose 3.8 percent to 85.48 yen from late in Asia yesterday, and New Zealand's dollar climbed 3.8 percent to 70.46 yen.

``A disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,'' the Fed said, explaining its decision to lend money to AIG in return for 79.9 percent stake.

`Impressive' Turnaround

The yen gained earlier yesterday versus all 16 of the most- active currencies as AIG debt-rating downgrades by Standard & Poor's and Moody's Investors Service fueled concern credit- market losses will mount. Money-market rates surged, with the London interbank offered rate, or Libor, for overnight dollars more than doubling to the highest level in seven years.

``The whole turnaround is very impressive,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online trading firm Gain Capital in Bedminster, New Jersey. ``It's like watching a yoyo. This will continue for a while until the fear totally dissipates.''

Implied volatility on one-month dollar-yen options touched 19.50 percent yesterday, the highest since March 17, the day before the Fed made a cut in the target lending rate, indicating traders see more price fluctuation in the next month.

`Too Big to Fail'

The Fed's loan to AIG marks a reversal from a position policy makers held as recently as late Sept. 15, said a person with knowledge of the talks, who declined to be identified because negotiations are confidential. New York Fed spokesman Andrew Williams declined to comment.

``It does suggest some entities are perceived as too big to fail,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``In the short term, if you're long on the yen, you have to cover it quickly. But this crisis has got legs.'' A long position is a bet a currency will rise.

The yen decreased 1.2 percent to 9.857 against the Mexican peso yesterday on speculation a Fed bailout of AIG would encourage investors to put on so-called carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's target lending rate of 0.5 percent compares with 8.25 percent in Mexico and 7.5 percent in New Zealand.

Chairman Ben S. Bernanke and his colleagues yesterday rebuffed calls by some investors for an interest-rate cut after Lehman filed for bankruptcy, signaling they will continue to address market turmoil with emergency lending and aim monetary policy at a longer-term economic forecast that may still show the economy is skirting a recession. The benchmark rate was kept at 2 percent.

Fed Speculation

Before the Fed's rate decision was announced, futures on the Chicago Board of Trade indicated an 84 percent chance policy makers would reduce the target rate for overnight lending between banks by a quarter-percentage point. Traders saw a 2 percent chance of a rate cut a week ago.

``Clearly, the risk is the Fed is done cutting rates,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``The market shows there's no reason to sell the dollar at this stage.''

The Standard & Poor's 500 Index yesterday closed up 1.8 percent, after earlier plunging 2 percent on concern AIG would be the next major financial institution to fail. Lehman filed for bankruptcy this week after Bank of America Corp. and Barclays Plc pulled out of talks to buy it.

The dollar has gained about 12 percent since touching an all-time low of $1.6038 per euro on July 15, strengthening as reports showed the European economy shrank in the second quarter and crude oil dropped more than a third from its peak of $147.27 a barrel.

To contact the reporter on this story: Ron Harui in Tokyo atrharui@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

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Korea Won Rises After Biggest Loss in a Decade as Stocks Gain

By Kim Kyoungwha and Judy Chen

Sept. 17 (Bloomberg) -- South Korea's won rose following yesterday's biggest decline in a decade as Asian and U.S. stocks advanced after the Federal Reserve offered to provide a loan to American International Group Inc.

The Korean currency, Asia's worst performer this year, gained as the nation's Kospi share index jumped 2.8 percent after a loss of 6.1 percent yesterday, the most in 13 months. Policy makers in Korea said the government may provide cash to help stabilize markets that slumped in the wake of Lehman Brothers Holdings Inc.'s bankruptcy filing and as AIG sort capital.

``With the talk of an AIG rescue, risk appetite is reviving somewhat, lending support to the won,'' said Kim Yule, a currency dealer with BNP Paribas in Seoul.

Korea's currency climbed 1.1 percent to 1,146.55 against the dollar as of 9:22 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. The advance reduced this year's loss to 18 percent. The won fell the most since August 1998 yesterday as global investors accelerated sales of Asian equities.

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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Asian Stocks Advance on Federal Reserve Loan to AIG; Banks Rise

By Chua Kong Ho and Kotaro Tsunetomi

Sept. 17 (Bloomberg) -- Asian stocksrose, helping the regional benchmark index rebound from the steepest plunge in eight months, after the Federal Reserve invoked emergency powers to save American International Group Inc. from collapse.

Mitsubishi UFJ Financial Group Inc. added 2.8 percent andCommonwealth Bank of Australia Ltd. gained 1.2 percent as concern eased the failure of AIG, the No. 1 U.S. insurer, would cause more financial losses globally. The Federal Reserve agreed to lend as much as $85 billion to AIG, the largest U.S. insurer. Woodside Petroleum Ltd. rose 1.8 percent as oil rebounded.

``Expectations of an AIG rescue will likely spur people to buy back into the market,'' said Masayoshi Yano, a senior market analyst at Tokyo-based Meiwa Securities Co. ``Investors are keeping a sharp eye on all AIG developments.''

The MSCI Asia Pacific Index rose 0.98, or 0.9 percent, to 111.41 at 10:06 a.m. in Tokyo. The measure plunged the most in eight months yesterday as credit turmoil pushed Lehman Brothers Holdings Inc. to bankruptcy, and caused a debt-rating downgrade of AIG. The regional gauge is down 29 percent this year.

Japan's Nikkei 225 Stock Average climbed 1.3 percent to 11,757.64, while South Korea's Kospi Index added 3.1 percent. All Asia-Pacific markets open for trading advanced.

U.S. stocks climbed, driving the Standard & Poor's 500 Index 1.8 percent higher, as speculation AIG would weather a funding shortage boosted financial shares in the last hour of trading. S&P futures gained 0.5 percent today.

Crude oil jumped 3 percent to $93.90 a barrel, rebounding from a decline of more than $10 a barrel in the past two days.

To contact the reporter for this story: Chua Kong Ho in Shanghai atkchua6@bloomberg.net; Kotaro Tsunetomi in Tokyo atktsunetomi@bloomberg.net.

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Taiwan Had NT$489 Million in Stock Defaults Yesterday

By Tim Culpan

Sept. 17 (Bloomberg) -- Taiwan brokerages' customers defaulted on NT$489 million ($15 million) of securities transactions yesterday, the Taiwan Stock Exchange said.

The statement on the exchange's Web site last night gave no further details. The defaults equal 0.6 percent of yesterday's NT$82.8 billion in trading value, excluding block trades, according to Bloomberg's calculations based on exchange data.

The benchmark Taiex Index fell 8.8 percent in the past two days to 5,756.59 points at yesterday's close, the lowest since Oct. 28, 2005.

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net



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Japan Stocks Advance on Fed Rescue of AIG; Tokio Marine Gains

By Masaki Kondo and Kotaro Tsunetomi

Sept. 17 (Bloomberg) -- Japanese stocks advanced, rebounding from a three-year low, on expectations a rescue of the biggest U.S. insurance company will calm turmoil in financial markets.

Tokio Marine Holdings Inc., Japan's biggest insurance group, climbed 5.6 percent after the Federal Reserve said it will extend a loan to American International Group Inc. Resona Holdings Inc., Japan's fourth-largest listed bank, leapt 6.5 percent. Kawasaki Kisen Kaisha Ltd. led shipping companies higher after transport fees for commodities ended a 19-session drop.

``Expectations of an AIG rescue will likely spur people to buy back into the market,'' said Masayoshi Yano, a senior market analyst at Tokyo-based Meiwa Securities Co. ``Investors are keeping a sharp eye on all AIG developments.''

The Nikkei 225 Stock Average climbed 184.41, or 1.6 percent, to 11,794.13 as of 10:14 a.m. in Tokyo. The broader Topix index rose 11.87, or 1.1 percent, to 1,129.44. All but three of 33 industry groups on the Topix advanced.

The Federal Reserve Board, with support of the U.S. Treasury, invoked emergency powers to lend up to $85 billion to AIG to save the firm from collapse. Yesterday, the Nikkei sank 5 percent to the lowest since July 2005 in Tokyo after U.S. brokerage Lehman Brothers Holdings Inc. filed for bankruptcy and on concern AIG will suffer a similar fate.

Tokio Marine surged 5.6 percent to 3,410 yen, helping insurers rebound from their biggest decline since October 1987 yesterday. Resona surged 6.5 percent to 111,100 yen, while market leader Mitsubishi UFJ Financial Group Inc. jumped 4.4 percent to 827 yen.

Shipping Fees

Kawasaki Kisen, the nation's third-largest shipping line, soared 6 percent to 695 yen, set for the biggest gain since April 18. Mitsui O.S.K. Lines Ltd., the second largest, jumped 2.4 percent to 1,011 yen, while bigger rival Nippon Yusen K.K. added 2.3 percent to 771 yen.

The Baltic Dry Index, a measure of shipping costs for commodities, rose 0.3 percent yesterday, the first gain since Aug. 18, as demand increased for shipments of iron ore used in steel.

Toshiba Corp., Japan's biggest semiconductor manufacturer, gained 3.5 percent to 498 yen. Samsung Electronics Co., the world's second-largest chipmaker, made a $5.85 billion hostile bid for SanDisk Corp. to widen its lead in the market for semiconductors that store pictures and music. SanDisk rejected Samsung's bid. The move will probably prompt Toshiba to wage a bidding war, said Vijay Rakesh, a San Francisco-based analyst at ThinkPanmure LLC.

Yesterday, Toshiba denied a Reuters report it was interested in making a bid for SanDisk.

Share Buyback

Canon Inc. leapt 5.5 percent to 4,050 yen, headed for the steepest advance since April 21. The company will spend as much as 50 billion yen ($470 million) to buy back up to 14.5 million shares, the company said yesterday after markets shut. Canon, whose shares have fallen by a quarter this year, will probably report its first drop in annual net income this year, the Nikkei newspaper reported on Sept. 13.

Nikkei futures expiring in December added 1.9 percent to 11,800 in Osaka and gained 1.6 percent to 11,790 in Singapore.

To contact the reporters for this story: Masaki Kondo in Tokyo atmkondo3@bloomberg.net; Kotaro Tsunetomi in Tokyo atktsunetomi@bloomberg.net.

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BOJ May Keep Key Rate at 0.5% After $24 Billion Cash Injection

By Mayumi Otsuma

Sept. 17 (Bloomberg) -- The Bank of Japan, fresh from injecting 2.5 trillion yen ($24 billion) into the banking system, may keep interest rates unchanged today following the collapse of Lehman Brothers Holdings Inc.

Global financial markets reeled after Lehman filed for bankruptcy this week, sending Japanese stocks to a three-year low and causing the yen to surge to the highest since May against the dollar.

Governor Masaaki Shirakawa and his policy board may want more evidence that weakening global growth will derail the world's second-largest economy before deciding whether to cut its 0.5 percent interest rate, the lowest in the industrialized world. The bank will probably reiterate today that prolonging a low-rate policy could hamper the nation's prospects for sustainable growth in the long term, economists said.

``The Bank of Japan needs time to judge how much the latest shock will hurt global economic growth and affect Japan's exports,'' said Yoshimasa Maruyama, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. ``The bank's next action will still be a rate hike, but the ongoing turmoil will make the BOJ more cautious about the timing.''

Yesterday's money-market operation was the biggest since March. The Nikkei 225 Stock Average and Topix index fell to three-year lows.

Shirakawa and his policy board will keep the rate unchanged at 0.5 percent today, according to all 33 economists surveyed by Bloomberg News. Of 29 who gave predictions through June, 24 said there will be no move by then. Four estimated higher rates and one forecast a cut.

Recession

Japan is on the verge of a recession. The economy shrank an annualized 3 percent after companies cut spending in the second quarter. Exports, the main driver of the nation's longest postwar expansion, fell for the first time in three years in the period.

``A pickup of exports is a prerequisite for a shift in the central bank's policy,'' said Teizo Taya, a former central bank board member and now an adviser to Daiwa Research Institute in Tokyo. ``Given that, the timing of a rate hike will be considerably postponed.''

The bank will probably announce the decision, along with a statement explaining the reasons for its judgment, early this afternoon. Shirakawa will speak at a press conference in Tokyo at 3:30 p.m.

``Shirakawa will probably suggest flexibility but he's not going to hint at the possibility of a rate cut,'' said Tomoko Fujii, head of economics and strategy at Bank of America Corp. in Tokyo. ``This isn't a Japan-made panic. The BOJ is likely to just wait for the passing of these side effects.''

Prolonging Low Rates

Shirakawa said in speeches in August and this month that prolonging a low interest rate policy may overstimulate the economy and hamper prospects for sustainable growth in the longer term. He said last month Japan's short-term rates are ``low'' and monetary conditions are ``accommodative.''

Since the seven-member board met last month, reports showed bankruptcies soared and the ratio of jobs available to jobseekers fell to the lowest level in four years. Consumer prices excluding fresh food rose 2.4 percent, the most in a decade, outpacing wage growth.

Crude oil prices have tumbled 37 percent since exceeding $147 a barrel for the first time on July 11. Cheaper oil won't provide immediate respite, economists say.

`Slowdown Will Linger'

``It takes a while before changes in oil costs start to affecting the terms of trade and prices, and a slowdown of Japan's exports will linger,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo.

Core inflation will probably stay around 2 percent because businesses will continue to pass on costs to compensate for losses caused by fuel and material expenditures, said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo.

``The Bank of Japan, while alert against the economy's downside risks, is expected to repeat its commitment to protecting price stability,'' Kanno said. ``Financial markets may try to factor in a rate cut, but the central bank will probably try to contain such speculation if becomes excessive.''

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



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Black Swans Become Norm, Instead of Exception: William Pesek

Commentary by William Pesek

Sept. 17 (Bloomberg) -- The cottage industry that Nassim Taleb created with his book ``The Black Swan: The Impact of the Highly Improbable'' has gone beyond global.

The options-trader-turned-author is concerned with rare, major events that humans argue were predictable in hindsight. It's a kind of philosophical Murphy's Law for investors, and one increasingly hears folks from New York to Ulaanbaatar buzzing about black-swan events.

Taleb's 2007 book, named after a bird once thought not to exist, was itself a black swan -- an unexpected hit with great impact. It ranks much higher on Amazon.com's sales charts than Alan Greenspan's 2007 memoirs, ``The Age of Turbulence.''

That, too, gets into black-swan territory. Who would have expected a year ago that Taleb would be outselling the man dubbed ``Maestro'' in a gushing 2000 book by Bob Woodward?

Taleb's insight that we are all blind to rare events and fool ourselves into thinking we can predict risks and rewards proved more prescient. Former Federal Reserve Chairman Greenspan helped fuel the bubbles and set the weak regulatory stage for the U.S. financial crisis. Taleb shed light on why few saw it coming.

It gets you wondering what other unexpected, high-impact events are ahead.

Japan's Lead

Who would have predicted the great Bear Stearns Cos. would collapse? Or that Lehman Brothers Holdings Inc., founded in 1850, would be next? Or that the Fed would follow Japan's lead and shore up a cracking system with ultra-low interest rates? Or that the U.S. financial crisis -- featuring zombies such as Fannie Mae and Freddie Mac -- might be worse than Japan's?

Who would have thought five years ago that Russia would be calling the shots in 2008? Or that the wealth of Singapore, population 4.7 million, would be integral to keeping the $14 trillion U.S. economy afloat?

Would you have believed North Korea experts would be wondering if the son who got caught trying to visit Tokyo Disneyland with a forged Dominican Republic passport might replace Kim Jong Il? Or that South Korea would turn the tables on Wall Street with Lehman going hat-in-hand to Korea Development Bank for capital?

Perhaps the most disorienting change in the global order is the shift in power from West to East.

Black Swans

Black-swan enthusiasts will point out that some of the above examples don't exactly fit Taleb's definition. Yet the power shift to Asia and the Middle East is occurring faster than seemed possible. It has markets considering how countries could use the phenomenon to their advantage.

So what do newly rich, often autocratic countries want and how can they get it?

Just think how surprised we'll all be when the United Arab Emirates, awash in petrodollars, undertakes an emergency takeover of Citigroup Inc., Morgan Stanley and Washington Mutual Inc. Think of how New Yorkers will react when U.A.E. officials announce plans to move Wall Street to a man-made island in the Persian Gulf.

Julian Barnes laid out the plan in his 1998 novel ``England, England.'' It chronicled the creation of a U.K.-themed amusement park that Britons and tourists like better than the country itself. Given the U.S.'s crumbling airports, bridges and dodgy broadband speeds, financiers may like the new Wall Street more than the old one.

Using Power

What else haven't we thought of? Perhaps China will agree to increase purchases of U.S. Treasury bonds and not dump U.S. agency debt in exchange for Taiwan. Maybe China wants to buy Australia, where the stock market is about 30 percent cheaper this year.

Russian tourists love visiting London. Oil-rich Russia may want to buy the city, and with the housing slump, it may get it on the cheap. Perhaps the Middle East will seek to buy every football team in the English Premier League.

Or after Singapore's sovereign wealth fund owns a piece of all major banks, it might be able to get them to shut their Hong Kong operations and relocate to new office buildings in the island-nation's own central business district.

Yes, this all sounds nuts, kind of like a woman running for prime minister in male-dominated Japan, as Yuriko Koike is. It sounds crazy, like China controlling the weather at the Olympics, or some scientists fearing an experiment at a laboratory near Geneva would destroy our planet.

White Is Black

Pure lunacy -- like a politician twice accused of sodomy being on the verge of leading Muslim-majority Malaysia. Or Japanese and American voters thinking old-school politicians Taro Aso, 67, and John McCain, 72, are the agents of change that their sputtering economies need.

I'm getting fanciful here for a reason. The rhythm of this column moves from the serious to the seemingly absurd because that's what has become of global markets.

Lots of bright people tried to call the bottom in markets. The normal goalposts of analysis and financial models have proven useless. The more certainty with which so-called experts tell you what will happen, the faster you should run in the other direction.

These days, up really does seem to be down and white really does seem to be black, at least where swans and prognosticators' eyes are concerned.

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

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



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Crude Oil Rises in New York on Speculation of AIG Rescue Plan

By Margot Habiby

Sept. 17 (Bloomberg) -- Crude oil rose from a seven-month low amid speculation the Federal Reserve may rescue American International Group Inc. from collapse.

Oil climbed as U.S. stocks advanced after floor trading closed on the New York Mercantile Exchange yesterday. U.S. crude-oil and fuel inventories probably fell last week as production platforms and refineries on the Gulf of Mexico shut because of hurricanes Gustav and Ike, a Bloomberg survey showed.

``The rebound in the stock market probably encouraged some buying, and then I think we're also setting up for the DOE report, which should show lower U.S. inventories in the major categories,'' said Tim Evans, an analyst with Citi Futures Perspective in New York.

Crude oil for October delivery rose $1.60, or 1.8 percent, to $92.75 a barrel at 9:15 a.m. Sydney time on the Nymex after touching $92.98. Crude futures declined more than $10 a barrel in the past two days on concern that financial market disruptions may weaken the global economy and cut fuel demand.

Prices have dropped 3.4 percent this year and declined 37 percent from the record $147.27 a barrel reached on July 11. Yesterday, oil fell $4.56, or 4.8 percent, to $91.15 a barrel, the lowest settlement price since Feb. 7.

Regulators are considering putting AIG into conservatorship while the Fed is in talks about a ``loan package'' as time runs out for the insurer to raise cash, according to three people briefed on negotiations involving U.S. and state officials.

Lehman Brothers

Yesterday, AIG had its credit rating cut, threatening efforts to raise funds, and the Fed left its main interest rate at 2 percent. Lehman Brothers Holdings Inc. Sept. 15 sought bankruptcy protection. The two-day drop in oil has erased this year's gain.

U.S. crude-oil inventories probably fell 3.5 million barrels last week because of Ike, a Bloomberg News survey of analysts showed. Supplies of gasoline and distillate fuel, a category that includes heating oil and diesel, probably also dropped. The Energy Department is scheduled to release its weekly petroleum supply report at 10:35 a.m. Washington time today.

``Ike disrupted imports of crude oil, it disrupted refinery operations and it disrupted some crude oil production from the Gulf of Mexico,'' Evans said.

Gasoline for October delivery rose 3.77 cents, or 1.6 percent, to $2.4385 a gallon in New York. Yesterday, it dropped 16.06 cents, or 6.3 percent, to settle at $2.4008 a gallon, the lowest since Feb. 13.

Demand Forecast

Venezuela may call a special meeting of the Organization of Petroleum Exporting Countries if crude oil prices continue to fall, Energy and Oil Minister Rafael Ramirez said yesterday.

OPEC, supplier of more than 40 percent of the world's oil, lowered its forecast for 2009 oil demand to 87.66 million barrels a day because of the global economic slowdown.

OPEC needs to study the effects of its production cuts before considering an emergency meeting, Iran's OPEC governor said yesterday.

``Ministers need at least September and October data to see the impact of OPEC's decision on the market,'' Mohammad Ali Khatibi said in a phone interview from Tehran yesterday. ``We cannot be in a hurry; an emergency meeting would be a judgment in a rush.''

OPEC agreed at its meeting in Vienna last week to a limit for 11 members of 28.8 million barrels a day, about 500,000 barrels a day lower than the group's July output. The group is scheduled to meet on Dec. 17 in Oran, Algeria.

Raw Materials

The Reuters/Jefferies CRB Index of 19 raw materials dropped as much as 3.1 percent yesterday to 337.44, the lowest since Dec. 3. The index reached a record on July 3 as the dollar headed toward the lowest ever against the euro and oil approached an all-time high.

Brent crude oil for November settlement declined $5.02, or 5.3 percent, to settle at $89.22 a barrel on London's ICE Futures Europe exchange yesterday. It was the lowest settlement price since Feb 7. Prices have dropped 14 straight days, the longest stretch since the contract was introduced in 1988.

A total of 14 Texas and Louisiana refineries, with combined crude-oil processing capacity of 3.57 million barrels a day, are shut because of Ike, the U.S. Energy Department said.

U.S. energy producers have idled about 97 percent of oil production in the Gulf of Mexico after Ike and Hurricane Gustav moved through the region, the Minerals Management Service said yesterday in a statement on its Web site. Gulf fields produce 1.3 million barrels oil a day, about one-quarter of U.S. output.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net.



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Yen, Singapore Dollar, Philippine Peso: Asia Currency Preview

By Bob Chen

Sept. 17 (Bloomberg) -- The following events and economic reports may influence trading in Asian currencies today.

Exchange rates are from the previous session.

Japanese yen: The Bank of Japan will leave the overnight lending rate unchanged at 0.5 percent, economists said in a Bloomberg News survey before today's decision.

The yen was at 103.97 a dollar at 8:28 a.m. in New York.

Singapore dollar: Non-oil domestic exports fell 9.2 percent in August from a year earlier, compared with a 5.7 percent decline the previous month, economists forecast in a Bloomberg News survey before the government reports the data at 1 p.m.

The local dollar was at S$1.4308.

Philippine peso: The government will report tomorrow its fiscal performance for August. It reported a deficit of 15.4 billion pesos ($327 million) in July, the first shortfall in four months.

The peso was at 47.20.

Taiwan dollar: The central bank will report its benchmark interest rate for the fourth quarter as early as tomorrow. It raised the rate to 3.625 percent in June, the highest in more than seven years.

The island's dollar was at NT$32.07.

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



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Dollar May Extend Gain Versus Yen on AIG Bailout Speculation

By Ye Xie

Sept. 17 (Bloomberg) -- The dollar may gain for a second day versus the yen on speculation the Federal Reserve will bail out cash-strapped American International Group Inc.

The U.S. currency rose against the euro for the first time in four days yesterday after the Fed left the target lending rate at 2 percent. The yen fell against the Mexican peso and the New Zealand dollar, reversing earlier gains, on bets an AIG rescue will encourage investors to resume taking out low-cost loans in Japan and buying higher-yielding assets elsewhere.

``Clearly some kind of solution will be very positive,'' said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York. ``A bit of risk aversion is going away. But the situation is still very fluid.''

The U.S. currency traded at 105.65 yen at 6:20 a.m. in Tokyo, after increasing 1 percent yesterday. The dollar traded at $1.4133 per euro, following a 0.8 percent advance. The yen was at 149.44 per euro, after rising 0.1 percent and earlier touching 147.04, the strongest since August 2006.

The yen gained earlier yesterday versus every other major currency as a debt-rating downgrade of AIG by Standard & Poor's and Moody's Investors Service after the collapse of Lehman Brothers Holdings Inc. fueled concern credit markets are seizing up. Money-market rates surged, with the London interbank offered rate, or Libor, for overnight dollars more than doubling to the highest level in seven years.

`Impressive' Turnaround

``The whole turnaround is very impressive,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online trading firm Gain Capital in Bedminster, New Jersey. ``It's like watching a yoyo. This will continue for a while until the fear totally dissipates.''

Implied volatility on one-month dollar-yen options touched 19.26 percent, the highest since March 17, the day before the Fed made a cut in the target lending rate. Volatility of euro- dollar options reached 14.80 percent, the highest since the aftermath of the Sept. 11 terrorist attacks, indicating traders see more price fluctuation in the next month.

The Fed is considering extending a ``loan package'' to AIG, according to a person familiar with the negotiations. The stance by federal regulators is a reversal from a position they held as recently as late Sept. 15, said the person, who declined to be identified because negotiations are confidential. New York Fed spokesman Andrew Williams declined to comment.

The Treasury is considering taking over AIG under a conservatorship as one option to address the insurer's crisis, according to two people briefed on the discussions.

`Too Big to Fail'

``It does suggest some entities are perceived as too big to fail,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``In the short term, if you're long on the yen, you have to cover it quickly. But this crisis has got legs.'' A long position is a bet a currency will rise.

The yen decreased 2 percent to 9.94 against the Mexican peso and 2 percent to 70.37 versus the New Zealand dollar yesterday on speculation a Fed bailout of AIG will encourage investors to put on carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's target lending rate of 0.5 percent compares with 8.25 percent in Mexico and 7.5 percent in New Zealand.

Chairman Ben S. Bernanke and his colleagues rebuffed calls by some investors for an interest-rate cut after Lehman filed for bankruptcy, signaling they will continue to address market turmoil with emergency lending and aim monetary policy at a longer-term economic forecast that may still show the economy is skirting a recession.

Fed Speculation

Before the Fed's rate decision was announced, futures on the Chicago Board of Trade indicated an 84 percent chance policy makers would reduce the target rate for overnight lending between banks by a quarter-percentage point. Traders saw a 2 percent chance of a rate cut a week ago.

``Clearly, the risk is the Fed is done cutting rates,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``The market shows there's no reason to sell the dollar at this stage.''

The Standard & Poor's 500 Index increased 1.8 percent after earlier plunging 2 percent on concern AIG would be the next major financial institution to fail. Lehman filed for the biggest bankruptcy in history Sept. 15 after Bank of America Corp. and Barclays Plc pulled out of talks to buy it.

The dollar has gained about 12 percent since touching an all-time low of $1.6038 per euro on July 15, increasing as the European economy slowed and crude oil dropped 35 percent from its peak of $147.27 a barrel.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net



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New Zealand Dollar Rises as AIG Prospects Bolster U.S. Stocks

By Tracy Withers

Sept. 17 (Bloomberg) -- The New Zealand dollar surged, reversing earlier losses, as speculation U.S. authorities may bail out American International Group Inc. buoyed stock markets and renewed demand for higher-yielding currencies.

The Federal Reserve is considering taking over American International Group Inc. under a conservatorship as one option to address the insurer's crisis, according to two people briefed on the discussions. The world's biggest insurer is seeking capital to stave off a collapse. The news helped the Standard & Poor's 500 index rise 1.8 percent.

``The New Zealand dollar rebounded off its lows in line with the recovery in U.S. equity markets amid hopes that government authorities will take action to prevent a systemic failure of the banking system,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington.

New Zealand's dollar rose 1.3 percent to 66.06 U.S. cents at 9 a.m. in Wellington from 65.21 cents in late Asian trading yesterday. Earlier, it fell as low as 65.08 cents. The currency surged 2.7 percent to 69.76 yen.

The currency yesterday fell to the lowest in more than four years against the yen as investors exited so-called carry trades amid nervousness about financial markets.

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.

New Zealand's benchmark interest rate is 7.5 percent compared with 0.5 percent in Japan.

The New Zealand dollar, which has dropped 13 percent against the U.S. currency the past three months, may gain further if Asian stocks rise, Hampton said. It could reach 66.5 cents today, she said.

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



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FOMC Holds Rates Steady at 2%, Yen Overnight Gains Reversed

Daily Forex Fundamentals |  Written by CMS Forex |  Sep 16 08 23:01 GMT | 

RBA Meeting Minutes Pave Way for More Rate Cuts

The Reserve Bank of Australia released its meeting minutes last night, confirming its dovish stance. The 25-basis-point rate cut was a conservative one and the bank will likely keep slashing in light of slowing demand in the economy and the increase pressure the global financial system is facing in light of the recent headlines involving Lehman Bros and AIG.

AUD/JPY - Aussie Slides vs Yen on Risk Aversion, Minutes

The market is pricing in another rate cut by the RBA. The minutes provided another confirmation that the bank is more concerned about the slowdown in growth. The AUD/JPY dropped almost 300 pips overnight until hitting 81.40, where it started to reverse the losses. Much of this fall was a continuation of risk aversion in the Forex markets. By 3:30PM the pair was back to trading near 84.50.

GER CPI Matches Forecast, Down -0.3%

In the European session, the final version of German CPI for August stuck to the estimate of -0.3%. On the year, inflation eased to 3.1%. The major culprit was a strong fall in energy prices as oil tumbled during the month.

EUR CPI Down -0.1%

In the Euro-zone as a whole, CPI on the month was revised slightly up to -0.1% from -0.2% in the preliminary release. These numbers suggest that inflation may have peaked and alleviates some of the pressure on the ECB to hike rates in order to combat inflation.

EUR ZEW Economic Sentiment Surprises on Upside

For September the German and Euro-zone ZEW Economic Sentiment Indexes, which measure attitudes of financial professionals in those areas, improved to -41.1 and -40.9 respectively. That was close to a 15 point improvement in both indexes and surprised forecasts on the upside. Still, the levels remain weak, though the Euro-zone can use any good news at this point.

UK CPI Inflation Heats Up to 4.7% in August

Consumer inflation in the UK, unlike in other developed nations, did not ease during the month of August. Instead, the monthly CPI rose 0.6%, slightly above the forecast and on the year inflation jumped to 4.7%. That's the highest annual rate in 11 years.

EUR/GBP - Euro Gives Up Earlier Gains vs Pound

The EUR/GBP traded within its recent range as the Euro rallied overnight against the pound, bringing the pair from support to resistance. The price move came despite signs that inflation has peaked in the Euro-zone, but is persistent in the UK. After hitting the resistance at the NY open, the pair started declining and reversed all 60 pips of the overnight rally.

US Consumer Inflation Down 0.1% in August

The US also came out with consumer inflation data. CPI declined 0.1% on the month in August, and is now running at an annual pace of 5.4%. Both came in below expectations which eases the pressure on Fed officials to guard against higher prices. Excluding food and energy, inflation was up 0.2% on the month.

US FOMC Holds Rates Steady at 2%

The Federal Reserve held rates steady at 2%, trying to inject some calm amid the financial storm that is raging this week. The statement cautioned about risks to both growth and inflation, and ignored calls to lower the rates as a result of the most recent bout financial turmoil.

USD/JPY - Dollar Recovers After Testing 103.50

US stocks on Tuesday posted modest gains in afternoon trading even as worries spread about the financial stability of insurance giant AIG. Hopes were lifted by reports that the Federal Reserve would intervene to prevent a possible collapse, which overshadowed the FOMC meeting later in the day. The Dollar-Yen pair hit a low near 103.50, following the NY open but managed to recover as stocks turned positive. Oil fell again today, declining $3.50 to trade near $92 a barrel.

USD/CAD - Greenback Hits Resistance at 1.0750

The US Dollar-Canadian Dollar pair has been pivot trading this session. After trading between the 1.0670 - 1.0710 range for most of last evening and the night, the pair rallied to the next range between 1.0710 - 1.0750. After the FOMC announcement, it dropped back into the lower range.

Releases Tonight and Overnight

Tonight Australia will release its WMI leading index while the Bank of Japan decides on rates. Overnight, the UK releases its Claimant Count, and BOE Meeting Minutes, along with its CBI industrial trends orders. Switzerland meanwhile posts its ZEW measure of expectations.

Tomorrow's Releases

Continuing overnight the Euro-zone releases its trade balance. Tomorrow, the US reveals housing data along with its current account, while Canada releases a measure of foreign flows.

Capital Market Services, L.L.C.
www.cmsfx.com

©C2004-2005 Globicus International, Inc. and Capital Market Services, L.L.C. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Capital Market Services, L.L.C. with regard to the accuracy of the data. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. Capital Market Services, L.L.C. accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this report. No part of this report may be reproduced or distributed in any manner without the permission of Capital Market Services, L.L.C.

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Australia Stocks Preview: BHP, Macquarie, Woodside, Woolworths

By Shani Raja

Sept. 17 (Bloomberg) -- The following is a list of companies whose shares may rise or fall in Australia. This preview includes news announced after markets closed yesterday. Prices are from yesterday's close unless otherwise stated.

The S&P/ASX 200 Index futures contract due in September gained 0.3 percent to 4,765 at 6:59 a.m. in Sydney. The Bank of New York Australia ADR Index rose 3.6 percent in New York.

The S&P/ASX 200 Index dropped 66.90 points, or 1.4 percent, to 4,750.80.

Mining shares: A measure of six metals traded on the London Metal Exchange dropped 1.4 percent. Zinc declined 0.8 percent, copper 0.9 percent and nickel 3.9 percent. Minara Resources Ltd. (MRE AU), Australia's second-largest nickel producer, lost 0.5 cents, or 0.5 percent, to A$1.065.

American depositary receipts of BHP Billiton Ltd. (BHP AU), the world's largest mining company, advanced 3.1 percent to the equivalent of A$36.32 a share in New York, 8 cents lower than the A$36.40 close in Sydney.

Rio Tinto Group (RIO AU) added 42 cents, or 0.4 percent, to A$106.85.

Oil companies: Crude oil tumbled 4.8 percent to $91.15 a barrel in New York, the lowest settlement price since Feb. 7, on concern turmoil on Wall Street may weaken the global economy.

Woodside Petroleum Ltd. (WPL AU), Australia's second-largest oil and gas producer, dropped A$1.64, or 3.2 percent, to A$50.36.

Financial stocks: Merrill Lynch & Co. led a 6.2 percent rally in the S&P 500 Financial Index, as expectations grew the Federal Reserve may rescue American International Group Inc. from collapse. The S&P 500 increased 20.9 points, or 1.8 percent, to 1,213.6.

Macquarie Group Ltd. (MQG AU), Australia's biggest securities company, dived A$2.66, or 6.7 percent, to A$36.80.

CFS Retail Property Trust (CFX AU): The shopping-center owner's rating was raised to ``buy'' from ``neutral'' at Merrill Lynch & Co. CFS was unchanged at A$2.14.

Ivanhoe Australia Ltd. (IVA AU): The Australian unit of billionaire Robert Friedland's Ivanhoe Mines Ltd. said it's seeking to start its first copper mine in the country within two years. Ivanhoe lost 1 cent, or 1 percent, to A$1.02.

Woolworths Ltd. (WOW AU): The retailer may buy all or some of Mitre 10 Australia Ltd., the nation's second-biggest hardware chain, the Australian Financial Review reported, without saying where it got the information. Woolworths advanced 14 cents, or 0.5 percent, to A$28.27.

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.



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New York Session Recap

Daily Forex Fundamentals | Written by Forex.com | Sep 16 08 22:13 GMT |

The buck caught a bid in the NY session as the Federal Reserve decided to keep rates unchanged at 2% despite heavy futures market pricing for a cut of at least -25 basis points. The statement balanced the risks of inflation and growth evenly and the Fed made no hint as to the future direction of rates, indicating they are likely on hold for the foreseeable future. The initial stock market negative reaction was reversed on subsequent news that the Fed will help in the rescue of the recently troubled insurance giant.

The JPY crosses were extremely volatile following the rate decision -- with an initial -80 pip plunge in USD/JPY towards 104.50 and sharper decline in EUR/JPY into the 147.20 area. The news on the insurance company’s potential rescue swung the pairs around into the intraday highs of USD/JPY 106.40 and EUR/JPY 150.50. The news since that the insurance company could face the same fate as the GSEs by being placed into a government conservatorship has the pairs trading lower in the early Asia session.

Moves in other pairs were less inspiring. EUR/USD fell about -40 pips in the session towards a close near 1.4130. GBP/USD rose 30 pips towards the 1.7840 zone. USD/CAD meanwhile was a touch lower, shedding about -55 pips into 1.0680/85 as oil prices traded higher into the $93/bbl mark. With the Fed decision now out of the way, the focus falls squarely once again on the goings on in the financials space. Expect the volatility in JPY crosses to continue until the equity market shakes things out.

Upcoming Economic Data Releases (Asia Session) Prior Estimate

* 9/17/2008 0:30 GMT AU Westpac Leading Index (MoM) JUL - - 0.10%
* 9/17/2008 1:30 GMT AU Preliminary BoP Imports MoM sa AUG - - 5.00%
* 9/17/2008 2:30 GMT AU Deputy Premier Julia Gillard Speaks in Canberra
* 9/17/2008 JN BOJ Target Rate 17-Sep 0.50% 0.50%
* 9/17/2008 3:20 GMT AU Reserve Bank Governor Stevens Speaks in Sydney

Forex.com
http://www.forex.com

DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.



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Fed Leaves Rates at 2%, But Stocks Soar on AIG Hope

Daily Forex Fundamentals |  Written by Global Forex Trading |  Sep 16 08 22:17 GMT | 

TODAY'S BIGGEST PERCENTAGE MOVERS

• NZD/JPY ( +102 pips or +1.48%)
• CAD/JPY ( +124 pips or +1.27%)
• USD/JPY ( +130 pips or +1.26%)

THE STORIES IN THE CURRENCY MARKET

• USD: FED LEAVES RATES AT 2%, BUT STOCKS SOAR ON HOPE FOR AIG
• EUR: HOW DOES THE VOLATILITY STACK UP HISTORICALLY?
• JPY: YEN CROSSES RECOVER AS DOW SOARS 140 POINTS
• GBP: KEEP AN EYE ON THE BOE MINUTES AND EMPLOYMENT DATA
• CAD: OIL PRICES NEARING A BOTTOM
• AUD: HAWKISH RBA MINUTES FAIL TO HELP THE AUD
• NZD: RALLY IN STOCKS LIFT HIGH YIELDERS

EXPECTATIONS FOR UPCOMING FED MEETINGS

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

FED LEAVES RATES AT 2%, BUT STOCKS SOAR ON HOPE FOR AIG

The Federal Reserve left interest rates unchanged at 2 percent, which given the market's grossly skewed expectations for a rate cut, should haven bearish for the US stock market and it was, for about 15 minutes. The Fed's decision to hold rates steady sent the Dow Jones Industrial Average to a 2 year low intraday before equities reversed violently higher to end the US trading session up 140 points. Although today's Fed meeting was probably one of the most important in months, speculation about what could happen to AIG has dominated trading. The waiting game is underway and the stakes have increased after the Federal Reserve failed to cut interest rates. This morning, a government bailout seemed out of the question, but as the day unfolded, there was news that the Federal Reserve could be reconsidering its stance on AIG. If this true, it may be the Fed's compromise. In order for today's move to be a bottom for US stocks, AIG needs a bridge loan from the Fed, the private sector or Sovereign Wealth Funds. Hank Greenberg, the former CEO of AIG is already talking about stepping in to help and some people are floating around the idea of conservatorship.

Fed is Holding on to its Ammunition

Going into the meeting, everyone thought that the Fed was backed into a corner and would have no choice but to cut interest rates by 25 and possibly even 50bp. Although the tone of the FOMC statement was relatively cautious, the action or more specifically, the lack of action by the Federal Reserve indicates that they are not willing to bend to the market's pressure. The statement expressed concern about growth, but the outlook for inflation was still uncertain. Therefore one of 2 things probably compelled the Federal Reserve to hold back today - with liquidity injections and 325bp of easing since August 2007, they probably believe that they have done enough. Or they have injected so much liquidity into the financial system today that they want to give the markets an opportunity to respond. If things get worse they can always cut interest rates in October or between monetary policy meetings.

Fed Fund Futures See 60-40 Chance of Rate Cut by Christmas

Fed Fund futures completely miscalculated the central bank's move today, but even so, it does reflect the market's expectations. Yesterday, Fed fund futures was pricing in a 92 percent chance that interest rates would be at 1.75 percent or lower by the end of the year with a 50 percent of rates falling even further to 1.50 percent. These expectations have changed dramatically since today's announcement. The futures contracts are now pricing in approximately a 60 percent chance that we will see a 25bp rate cut by the end of the year.

What Does this Mean for the US Dollar?

For the US dollar, this should be good news because the recent correction was primarily triggered by the readjustment of interest rate expectations. Now that the Fed has failed to deliver, dollar bulls have a reason to jump back into the markets, especially with oil prices at $91 a barrel. We expect the downtrend in the EUR/USD and GBP/USD to resume but USD/JPY should also trickle lower as US equities sell off, but of course that is all contingent upon AIG at this point.

US Economic Data: An Afterthought

The surprises and disappointments of US economic data are nothing more of than an afterthought these days. Consumer prices were weaker than expected while foreign purchases of US securities grew at the slowest pace in 11 months. Looking ahead, housing market data and the second quarter current account balance are due for release on Wednesday.

EURO: HOW DOES THE VOLATLITY STACK UP HISTORICALLY?

Since the beginning of the year, the EUR/USD has had a trading range of 21 big figures or 2100 pips. The high of 1.6038 was set back in July and while the low (so far) of 1.3882 was hit last Friday. With an average annual range of 1900 pips since the Euro's inception, the move may seem unprecedented to many traders. However that is not true, in 2003, the EUR/USD had a 2300 pip range and in 2002, the range was approximately 2200 pips. On a percentage basis, the range that we have seen thus far pales in comparison to the move that we saw in 2003. Nonetheless, EUR/USD 1 month volatilities continue to be at the highest level since 2001. For currency traders, the latest move in the EUR/USD compared to its move historically suggests that 1.3882 is not far from the bottom in the EUR/USD and it should just be a matter of time that the dust settles and the volatility and trading range of the EUR/USD starts to contract. However keep in mind, that this “time” could still be a month away. Meanwhile surprisingly enough, the German ZEW survey of analyst sentiment improved last month while consumer prices dropped by less than expected. The Eurozone trade balance is due for release on Wednesday and the deficit is expected to grow considering the slowdown in German exports.

BRITISH POUND: WATCH OUT FOR BANK OF ENGLAND MINUTES AND EMPLOYMENT DATA

The only country with any consequential economic data on Wednesday is the UK, who is expected to release their employment report and the minutes from the latest Bank of England meeting. Judging from the tone of the letter submitted by BoE Governor King to explain the uptick in inflation to Chancellor Darling, he expects inflation to remain high into the New Year as liquidity injections and interest rate cuts keep monetary policy easy. Going forward, we fully expect the Bank of England to move closer to a rate cut, especially since they cannot afford to let a UK bank fail like the US has after Northern Rock. Their best option at this point is to be proactive rather than reactive which is why they are expected to propose a new emergency financing facility for troubled banks later this week. Consumer prices were slightly softer than expected on an annualized basis, suggesting that inflation may have peaked. Looking ahead, we expect the employment report to be weak as the job cuts in the financial sector hit the UK labor market.

JAPANESE YEN CROSSES RECOVER AS DOW SOARS 140 POINTS

Thanks to the recovery in US stocks, the Japanese Yen crosses were the day's largest percentage movers and the day's best performers. As we mentioned in the US dollar portion of our report, news about AIG holds the fate of the Yen crosses. The Federal Reserve's decision to keep interest rates unchanged should be positive for USD/JPY from the perspective of interest rate differentials, but the equity markets has a bigger pull on the currency market these days than rate differentials. Therefore if AIG is rescued, a rally in the Dow could trigger a recovery in USD/JPY, even though we are bearish the currency pair from a longer term perspective. We will only turn bullish USD/JPY when the markets have stabilized, banks are willing to extend credit, and default risk is no longer an issue. Unfortunately if legendary bond fund manager Bill Gross of PIMCO is right in expecting a financial tsunami, then we have yet to see a bottom in USD/JPY.

CANADIAN, AUSTRALIAN, NEW ZEALAND DOLLARS CONSOLIDATE

The Canadian and New Zealand dollars recovered against the greenback as commodity prices consolidate. Oil prices hit an intraday low of $91 a barrel before settling at $93. With crude prices having fallen close to 40 percent since July, it may time for a recovery since supply and demand for oil has not changed. Part of the reason why the Canadian dollar has fared better than its US counterpart is the encouraging comments from Canadian officials. They believe that the Canadian markets are in much better shape than the US and for that reason Canada will not suffer the same fate. Interestingly enough, the Australian dollar did not track the other currencies higher despite more hawkish RBA minutes. Central bank Governor Stevens will be speaking in Sydney this evening.

GBP/USD: CURRENCY PAIR IN PLAY OVER THE NEXT 24 HOURS

The country with the most market moving economic data on the calendar Wednesday is the UK. The Bank of England minutes and the UK employment numbers are due for release at 4:30am ET or 8:30 GMT. The dollar will also be a big focus with the market looking for a possible announcement from AIG.

The makes the GBP/USD the currency pair in play. Yesterday's levels still hold. We want to point out the continued failure at the Fib level. The GBP/USD has broken out of our sell zone and is currently in range trading mode. The levels to watch are 1.8131 on the upside and 1.7645 on the downside. If the currency pair closes at or above that level, it would have broken the 20-day SMA and the 23.6% Fibonacci retracement of the July to September sell-off, which would open the door for a move towards 1.85. If it breaks below 1.7645 on the other hand, the GBP/USD would fall back into our sell zone, triggering a possible move below 1.75.

Kathy Lien
http://www.gftforex.com

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