Monday, November 30, 2009

Australia May Raise Key Rate for Record Third Month (Update1)

By Jacob Greber and Dan Petrie

Dec. 1 (Bloomberg) -- Australia’s central bank will raise its benchmark interest rate by a quarter percentage point today for a record third straight month as evidence mounts that the nation’s economy is strengthening, economists say.

Reserve Bank Governor Glenn Stevens will boost the overnight cash rate target to 3.75 percent at 2:30 p.m. in Sydney, according to 19 of 20 economists surveyed by Bloomberg. Futures traders say there is a 76 percent chance of an increase.

Central bank policy makers say the economy has entered a “new upswing” that will last several years, boosted by rising consumer confidence and China’s demand for resources such as iron ore. Still, some analysts say Stevens may delay an increase until the bank’s next meeting in February to gauge whether the recovery will slow as the government cuts stimulus spending.

“We are tipping a rate hike, but not with a high degree of certainty,” said Craig James, a senior economist at Commonwealth Bank of Australia. “Cash rates remain at historically low levels and our economy is continuing to improve. But on the other side of the equation, a slump in manufacturing investment would be weighing on board members’ minds.”

Investors have raised bets on a quarter-point rate increase today to 76 percent, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 9:38 a.m. Chances of such a move stood at 56 percent late yesterday.

‘Open Question’

The pace of interest-rate increases is an “open question” as policy makers balance the risk of keeping borrowing costs too low against an economy that may cool as government stimulus abates, central bank officials said in minutes of their November meeting, when they became the first central bankers in the world to raise borrowing costs twice since the height of the global crisis.

Business and consumer confidence, which helped Australia skirt the global recession, “could prove fragile,” and growth may slow as the effects of more than A$20 billion ($18.4 billion) in cash handouts from Prime Minister Kevin Rudd’s government and his A$22 billion of spending on roads, schools and hospitals fades next year, central bank policy makers said at their Nov. 3 meeting.

Rory Robertson, an economist at Macquarie Group Ltd. in Sydney, who yesterday forecast no change in the rate, today changed his view and said his official position is: “I don’t know.”

Retail Sales

Reports published since the bank’s last meeting showed Australia’s unemployment rate climbed in October to 5.8 percent from 5.7 percent, company profits fell in the three months through Sept. 30 for a fourth straight quarter, and retail sales unexpectedly dropped in September.

Business investment also unexpectedly fell 3.9 percent in the third quarter, led by a record 13.4 percent slump in spending by manufacturers.

Governor Stevens raised the overnight cash rate target by a quarter percentage point in October and this month. By contrast, officials in the U.S., U.K. and Europe have kept their benchmark lending rates at historic lows this year.

Speculation Stevens will continue to lead the world in raising rates has stoked this year’s 31 percent surge in the nation’s currency. The Australian dollar traded at 91.75 U.S. cents at 9:46 a.m. in Sydney yesterday.

Economic Growth

“It is now 18 years since Australia has experienced a negative in year-ended gross domestic product growth, a very prolonged expansion,” central bank Deputy Governor Ric Battellino said last week. “It is reasonable to assume that we will see this growth extended for a few more years yet.”

The economy expanded 1 percent in the first half of the year and is forecast by the Reserve Bank to grow 3.25 percent next year and in 2011. Third-quarter gross domestic product figures will be published on Dec. 16.

House prices rose 1.4 percent in October, taking this year’s increase to 10 percent, real-estate monitoring company RP Data-Rismark said yesterday.

“The strength in housing prices adds strongly to the case for tighter monetary policy,” said Alex Joiner, an economist at Australia & New Zealand Banking Group Ltd. in Melbourne.

Stevens is also under pressure to raise borrowing costs as a rebound in demand for commodities such as iron ore, coal and gas prompts energy companies to increase spending.

BHP Billiton Ltd. and Rio Tinto Group boosted iron-ore production to a record in the third quarter to satisfy Chinese demand for steel, which helped exports surge 5 percent in September.

The nation’s single biggest investment project, the A$43 billion Gorgon natural-gas venture involving Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell Plc, will create as many as 10,000 jobs when construction starts early next year, Chevron said on Sept. 14.

Thursday, November 26, 2009

Fujii Watching Yen Rise to 14-Year High Very Closely (Update3)

By Kyoko Shimodoi and Keiko Ujikane

Nov. 26 (Bloomberg) -- Japanese Finance Minister Hirohisa Fujii said the government is watching currencies “very closely” after the yen advanced to a 14-year high against the dollar, threatening the country’s export-led recovery.

Fujii spoke to reporters in Tokyo today after investors shrugged off remarks he made less than an hour earlier that Japan needs to “take appropriate action against abnormal movements” in foreign-exchange markets.

The comments suggest Japan is closer to stepping into currency markets for the first time in more than five years as the rising yen erodes exporters’ profits in the wake of the country’s worst postwar recession. The currency’s more than 8 percent advance over the past three months has also added to Japan’s deflationary pressure by driving import costs lower.

“The possibility of intervention has apparently increased,” said Masafumi Yamamoto, Tokyo-based chief foreign- exchange strategist at Barclays Bank Plc. “Stocks have been falling and the government declared Japan is in a deflationary state. In this environment, there’s no reason for it to tolerate a higher yen.”

The yen rose to 86.66 per dollar at 1:33 p.m. in Tokyo, after climbing to 86.53, the highest since July 1995. The Nikkei 225 Stock Average slid 0.5 percent to a four-month low.

Support for Dollar

Fujii, 77, said yesterday that the dollar’s weakness is spurring the yen’s advance. Today he said “a strong U.S. dollar is in their national interest. There is no change in our support for that.”

Manufacturers are contemplating shifting operations abroad because the yen’s gains make it costlier to run factories at home. A stronger yen would be a “huge risk” to producing autos in Japan, Nissan Motor Co. Chief Operating Officer Toshiyuki Shiga said this month.

Japanese authorities haven’t stepped into the currency market since the first three months of 2004, when it sold a record 14.8 trillion yen ($171 billion). Fujii, who assumed his post in September, spurred some of the yen’s gains by saying he opposed “easy intervention,” only later to tone down his remarks by saying Japan will act if currency moves are “abnormal or disorderly.”

Vice Finance Minister Yoshihiko Noda said the government isn’t considering stepping into the currency market now, Reuters reported earlier today.

Below 85

“The chances of intervention would increase if the dollar-yen breaks below 85,” Tomoko Fujii, a foreign-exchange strategist at Bank of America-Merrill Lynch in Tokyo, wrote in a report published today. “Intervention backed by a monetary policy change is more effective than intervention without supportive monetary policy action.”

Fujii at Bank of America-Merrill Lynch said it’s unlikely that the U.S. would join Japan in stepping into foreign- exchange markets, barring a “meltdown caused by a dollar crisis.” Expectations for the Bank of Japan to add liquidity to the economy will grow should the yen’s gains “sharply” lower stock prices, hurt business sentiment and exacerbate deflation, she wrote.

The government last week said Japan was in a “mild deflationary phase.” Price declines blighted Japan during its so-called lost decade of stagnation after an asset bubble burst in the early 1990s.

Meanwhile Finance Minister Fujii said yesterday that China’s currency is probably too weak, backing calls from the U.S. and Europe to let the yuan appreciate.

“It can’t be helped that people see the yuan as undervalued given the strength of the Chinese economy,” Fujii said in an interview in Tokyo. “The yuan is pegged to the dollar. I don’t think such a situation is necessarily good.”

The remarks are Fujii’s strongest on the Chinese currency since he took office in September, adding to concerns voiced by officials including European Central Bank President Jean-Claude Trichet this month about the yuan’s flexibility. The yuan’s peg to the dollar has sheltered China from the slide in the U.S. currency that’s making Japanese and European exports more expensive.

Wednesday, November 25, 2009

BOJ Can Resume Collateralized Lending, Minutes Show (Update1)

By Mayumi Otsuma

Nov. 26 (Bloomberg) -- Bank of Japan board members said last month they could reinstate an emergency-lending program for banks after it expires in March, minutes show.

All members agreed “the bank should employ appropriate measures -- including reutilization of the special funds- supplying operations -- to facilitate corporate financing in a flexible and timely manner,” if necessary, according to minutes of the bank’s Oct. 30 meeting published in Tokyo today.

Governor Masaaki Shirakawa and his colleagues decided at the meeting to stop buying corporate debt at the end of the year and terminate its special program of providing unlimited collateral-backed loans to banks on March 31. It also indicated it would keep its benchmark overnight rate at 0.1 percent to cement the nation’s recovery from its deepest postwar recession.

“Members agreed that the bank should maintain the extremely accommodative financial environment by holding interest rates at their current low levels,” the minutes said, adding the bank would provide “ample funds sufficient to meet demand in financial markets.”

A Cabinet Office official who attended the meeting urged the central bank to monitor the risk of falling prices taking hold of a recovery that has yet to show signs of sustainability, the minutes showed. Concerns about prices grew after the meeting, prompting the government to declare that the economy is in deflation on Nov. 20.

Deflation Risk

Keisuke Tsumura, a parliamentary secretary at the Cabinet Office, told the central bank it needs to be aware of the risk of deflation given that the economic recovery isn’t “autonomous,” the minutes showed.

“With the government’s declaration of deflation, political pressure on the central bank may intensify,” said Mari Iwashita, chief market economist at Nikko Cordial Securities in Tokyo. “The government is finding it difficult to secure funds for spending, so they’ll probably turn to monetary policy to stimulate the economy.”

For its part, the government has limited room to spur demand, with tax revenue declining and the public debt approaching twice the size of the economy.

Finance Minister Hirohisa Fujii, who has called on the central bank to work with the government to fight falling prices, has pledged to ensure bond sales next fiscal year don’t exceed the record 44 trillion yen ($504 billion) budgeted for the current period.

The bank’s board last week kept interest rates unchanged by a unanimous vote. All except two of 17 economists surveyed by Bloomberg News this month said they expect borrowing costs to stay on hold at least through 2010.

Monday, November 23, 2009

Dollar Weakens on Speculation Fed to Maintain Stimulus Measures

By Matthew Brown and Ron Harui

Nov. 23 (Bloomberg) -- The dollar fell for the first time in three days against the euro on speculation the Federal Reserve will keep its stimulus measures in place and ensure interest rates remain low.

The U.S. currency slid against 15 of its 16 major counterparts after Fed Bank of St. Louis President James Bullard said in New York yesterday that he supported extending the central bank’s purchases of mortgage-backed securities beyond the first quarter of next year. The yen weakened as commodities and stocks advanced, boosting demand for higher-yielding assets such as the South African rand.

“The central bank language at the moment is still pretty dovish and that’s making riskier assets more attractive than the dollar into the end of the year,” said Mark O’Sullivan, director of dealing in London at Currencies Direct Ltd.

The dollar weakened to $1.4965 per euro as of 8:05 a.m. in London, from $1.4862 in New York last week. The yen depreciated to 132.84 versus the euro, from 132.09, and was at 88.77 per dollar, from 88.88. The South African rand was the biggest gainer versus the dollar, strengthening 1.3 percent to 7.5124.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, declined 0.7 percent to 75.101. It slid to 74.679 on Nov. 16, the lowest level since August 2008.

Fed’s Bullard

U.S. policy makers repeated on Nov. 4 that they will complete the Fed’s planned $1.25 trillion in purchases of mortgage securities by March and said they will buy $175 billion of agency debt, down from a previous maximum of $200 billion. They kept their benchmark rate in a range of zero to 0.25 percent and repeated borrowing costs will stay low for an “extended period.”

In his speech, Bullard said “unemployment is high, and labor markets are lagging,” while repeating his view that economic recovery in the U.S. has started.

Futures contracts on the Chicago Board of Trade on Nov. 20 showed a 32 percent chance the Fed raise rates by June, down from 68 percent odds a month ago.

The yen and dollar also declined as gold climbed to a record and shares advanced for the first time in three days. Bullion for immediate delivery rose as much as 1.5 percent to $1,167.88 an ounce, and the MSCI World Index gained 0.9 percent.

Benchmark interest rates are as low as zero in the U.S. and 0.1 percent in Japan, compared with 3.5 percent in Australia, attracting investors to the South Pacific nation’s higher- yielding assets.

Futures traders decreased bets the euro will strengthen against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed on Nov. 20.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 11,956 on Nov. 17, compared with 25,173 a week earlier.

Monday, November 16, 2009

Bernanke Says ‘Not Obvious’ Asset Prices Misaligned (Update2)

By Scott Lanman

Nov. 16 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” he said today in response to audience questions after a speech in New York. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”

The U.S. central bank chief didn’t address asset prices outside of the country. Financial officials in Japan and China, Asia’s two largest economies, said this week that the Fed’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.

“The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset-price bubble bursts in the future,” Bernanke said.

Bernanke said in his speech that the “headwinds” of reduced bank lending and a weak labor market will probably restrain the pace of the U.S. economic recovery, warranting continued low borrowing costs. Bernanke also said the Fed is “attentive” to changes in the dollar’s value and “will help ensure that the dollar is strong.”

Stocks in the U.S. extended gains after his comments, while the dollar slumped against the euro for a second day as traders doubted Bernanke can do much to bolster the currency.

Stocks Rose

The S&P 500 Index rose today 1.5 percent to 1,109.30. The price of gold has climbed 55 percent in the past year to $1,142.65 an ounce, reaching a record today for the fourth time in six sessions. Crude oil is up 77 percent in 2009.

The dollar weakened to $1.4974 per euro from $1.4903 on Nov. 13.

The U.S. economy has suffered two booms and busts in asset prices -- one in technology stocks and the other in housing -- in 10 years. Economists have blamed former Fed Chairman Alan Greenspan for standing aside in the first, and aiding the second by keeping interest rates too low earlier this decade.

On the possibility of using interest rates to pop bubbles, “we can never say never,” Bernanke said today. “We have to keep an open mind.”

In some markets, including U.S. stocks, gold and oil, “there may not necessarily be a bubble, but you certainly have valuations that are above where near-term conditions would suggest they’re going to be at,” said Keith Hembre, chief economist at U.S. Bancorp’s FAF Advisors Inc. in Minneapolis, which oversees $103 billion.

‘Robust Improvement’

“They’re certainly priced for robust improvement,” said Hembre, who previously worked at the Fed.

Bank of Japan Governor Masaaki Shirakawa said earlier today that emerging economies “might overheat and experience financial turmoil,” while Liu Mingkang, China’s top banking regulator, yesterday called risks from low rates and the dollar’s weakness “new, real and insurmountable.”

“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu, chairman of the China Banking Regulatory Commission, said in Beijing.

Donald Tsang, the chief executive of Hong Kong, said Nov. 13 that record-low U.S. interest rates are encouraging investors to borrow dollars cheaply to invest in Asian stock markets, driving up asset prices in Korea, Taiwan, Singapore and Hong Kong “to levels that are incompatible or inconsistent with the economic fundamentals.”

Wednesday, November 11, 2009

U.K. Unemployment Rises Least in 18 Months as Recession Eases

By Jennifer Ryan and Svenja O’Donnell

Nov. 11 (Bloomberg) -- U.K. unemployment rose at the slowest pace in 18 months in October, bolstering government claims that efforts to lift the economy out of recession are working.

Claims for jobless benefits increased by 12,900, the least since April 2008, the Office for National Statistics said in London today. The median forecast in a Bloomberg News survey of 20 economists was an increase of 20,000. The number of people seeking work in the three months through September rose 30,000, the smallest increase since the period through May 2008.

Prime Minister Gordon Brown is counting on an economic revival to narrow the Conservative lead over his Labour Party before a general election due by June 2010. Economists expect unemployment to keep rising long after the economy returns to growth, casting doubt over the strength of the recovery.

“I think we probably are out of the woods but I’m not convinced how sustainable it is,” said George Buckley, chief U.K. economist at Deutsche Bank AG. “We see a recovery that peters out next year.”

Tuesday, November 3, 2009

English Says N.Z. Jobless Rate Will Peak at About 7% (Update1)

By Tracy Withers

Nov. 4 (Bloomberg) -- New Zealand’s jobless rate will probably peak at about 7 percent some time in 2010, less than the 8 percent the government previously expected, Finance Minister Bill English said.

The unemployment rate is lagging the economic recovery and it will take some time to level off, English said in an e-mailed statement. A report tomorrow will probably show the rate was 6.4 percent in the third quarter, according to the median forecast in a Bloomberg survey.

New Zealand’s economy grew for the first time in six quarters in the three months ended June 30, and the Treasury Department this week said the recovery is likely to accelerate in the second half of 2009. The New Zealand currency’s 25 percent surge against the U.S. dollar the past six months is a “head wind” for exports, English said.

New Zealand’s dollar bought 71.98 U.S. cents at 9.03 a.m. in Wellington trading from 71.82 cents in late New York trading yesterday.

“Clearly the dollar is stronger than we would expect at this point in the economic cycle,” English said in his Focus on Finance statement.

The government’s plan to control public spending and reduce debt will reduce the pressure on the exchange rate, he said.

Lower costs will make exporters more competitive and allow them to take advantage as key global markets show signs of recovery, English said.

Monday, November 2, 2009

Australia Will Raise Key Rate to at Least 3.5% (Update2)

By Jacob Greber

Nov. 3 (Bloomberg) -- Australia’s central bank will raise its benchmark interest rate today by at least a quarter percentage point, the second increase in four weeks, amid signs the economy is strengthening, economists and traders say.

Reserve Bank Governor Glenn Stevens will boost the overnight cash rate target to 3.5 percent from 3.25 percent at 2:30 p.m. in Sydney, according to 18 of 22 economists surveyed by Bloomberg News. The rest expect a half-point increase. Futures traders are betting on a quarter-point boost.

Keeping borrowing costs at “very low levels” may be “imprudent” and threaten its inflation target, the bank said last month, amid surging consumer confidence, house price gains and Chinese demand for natural resources. Stevens, the first Group of 20 policy maker to raise borrowing costs since the height of the global recession, has also signaled this year’s 29 percent gain in the nation’s currency may help contain inflation.

“The case for a larger-than-expected increase is always strongest at the early stages of the tightening cycle,” said Bill Evans, chief economist at Westpac Banking Corp. in Sydney, who predicts a half-point gain. “The risks of tightening too slowly are also high when policy is at its most stimulatory since imbalances are more likely to emerge.”

The Australian dollar rose for a second day to 90.80 U.S. cents as of 1:13 p.m. in Sydney from 90.40 in New York yesterday.

Australia’s economy is growing faster and generating more jobs than Treasurer Wayne Swan forecast six months ago, helped by A$20 billion ($18 billion) in government cash handouts to consumers and Stevens’ record interest-rate cuts between September 2008 and April, when he slashed the benchmark rate by 4.25 percentage points to a half-century low of 3 percent.

Economic Growth

Stevens raised the rate by a quarter point Oct. 6. The only other countries to raise borrowing costs this year are Israel and Norway.

Gross domestic product will expand 1.5 percent in the 12 months to June 30, 2010, Treasurer Wayne Swan said yesterday after scrapping his May prediction of a 0.5 percent contraction. GDP will accelerate to 2.75 percent the following fiscal year, he said. The economy grew 1 percent in the first six months of this year.

Unemployment is also expected to peak at 6.75 percent in the second quarter of next year, well below the 8.5 percent rate Swan forecast in May for the three months through June 30, 2011.

“The Australian economy has turned out to be quite a lot stronger than we thought,” Reserve Bank Assistant Governor Philip Lowe said last month. “It’s entirely appropriate we go back to a more normal setting in monetary policy. And that’s the process that’s under way.”

House Prices

There are also signs of a surge in some asset prices. A report published yesterday showed Australian house prices jumped 4.2 percent in the three months through September from the previous quarter, when they rose by the same amount. The nation’s benchmark S&P/ASX 200 index of stocks has climbed more than 20 percent this year.

Stevens should raise borrowing costs today to keep a lid on an “irrational exuberance” in the housing market that is “arguably now out of line,” Mark Joiner, National Australia Bank Ltd.’s chief financial officer, told the Australian Financial Review in an interview published on Oct. 31.

Still, Stevens has scope to limit today’s increase to a quarter-point move, which would add A$50 to monthly repayments on an average A$300,000 home loan.

Reports published in recent days show bank lending unexpectedly fell in September for the first time in nine months amid weaker demand for business credit, and manufacturing growth slowed in October.

Inflation Slows

The consumer price index rose in the third quarter by an annual 1.3 percent, the smallest gain since the second quarter of 1999, after advancing 1.5 percent in the previous three months, a government report showed on Oct. 28.

Inflation isn’t “sufficiently high to justify the Reserve Bank accelerating to a half-point hike,” said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney.

Investors are certain Stevens will raise the overnight cash rate target by a quarter point, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. They expect only an 8 percent chance of a half-point increase, the index showed at 8:33 a.m.

The Reserve Bank, which scrapped its forecast in August for the economy to contract this year, will publish revised predictions on Nov. 6. Its most recent estimate was for GDP to expand 2.25 percent in 2010 and 3.75 percent in 2011.

“The Reserve Bank’s rate hikes will come regularly -- at every meeting until February -- but in small steps,” said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney. “There is little to be gained from spooking the horses” today with a half-point gain.