Thursday, December 24, 2009

Central Banks Avoiding Dollar to Kill 2010 Rally, Barclays Says

By Candice Zachariahs

Dec. 24 (Bloomberg) -- The U.S. dollar’s gains may end in the middle of 2010 as central banks shy away from adding greenbacks to their reserves and the Federal Reserve raises rates at a slower pace than investors expect, Barclays Plc said.

Long-term demand for dollars is set to weaken after the currency’s share of global reserves added in the third quarter slid to less than 30 percent, a decline “unprecedented in a period of U.S. dollar weakness,” Barclays said in a note to clients. The dollar stemmed 11 months of declines versus the 16 most-traded currencies in December, gaining against all but two, after investors increased bets the Fed will remove monetary stimulus next year as the economy recovers.

“We see the dollar strengthening in the first six to nine months of 2010 when the focus is on liquidity withdrawal and tightening of rates,” said Steven Englander, chief U.S. currency strategist at Barclays in New York, in a telephone interview. “Once the market gets past this initial fear of tightening, the reality will be that the Fed isn’t going to be tightening very fast and we’ll see dollar selling again.”

The Dollar Index -- which measures the currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona -- has dropped 4.2 percent this year. It has climbed 4.1 percent in December and traded at 77.928 as of 9:28 a.m. in Tokyo. The U.S. dollar has registered its biggest declines against the Brazilian real, Australian dollar and South African rand dropping by more than 25 percent this year against each.

Global Reserves

Global reserves probably gained by about $180 billion in the third quarter with U.S. dollar-denominated reserves accounting for about $50 billion or less than 30 percent, Barclays estimated, using data from the International Monetary Fund and U.S. official reports.

The bank adjusted for changes in the value of currencies over that period to capture “actual buying and selling, rather than passive gains and losses” Englander wrote in the note.

The dollar declined against all but the yen among the 16 most-active currencies this year. That prompted China and Russia, holders of the world’s biggest and third-biggest currency reserves, to express concern about their U.S.- denominated investments.

“Emerging market central banks are selling their local currencies and buying U.S. dollars to prevent appreciation of their currencies,” Englander said. “They’re avoiding having a bigger concentration of U.S. dollars in their portfolio by turning around and selling dollars against the euro and other currencies.”

Canadian Dollars

Canada’s Finance Minister Jim Flaherty said this week that China, may be poised to buy Canadian dollars as it seeks to shield its $2.3 trillion worth of reserves against the U.S. dollar’s decline. Russia’s central bank said last month it will add Canadian dollars to its reserves and may include more currencies to reduce its dependence on the U.S. dollar.

Declines in the greenback mostly stalled this month as traders bet on a 48 percent chance that Fed Chairman Ben S. Bernanke will increase the target rate for overnight lending between banks by June. Policy makers will end most emergency lending programs and debt purchases by March because of “improvements in the functioning of financial markets” and stabilizing labor markets, the Federal Open Market Committee said on Dec. 16.

Unemployment, Retail

Reports this month showed the U.S.’s jobless rate unexpectedly fell, retail sales beat forecasts and purchases of existing homes rose to the highest level in almost three years in November. Benchmark rates are as low as zero percent in the U.S. compared with 8.75 percent in Brazil and 3.75 percent in Australia. They are 0.1 percent in Japan and 1 percent in the Euro region.

Barclays forecasts that the Federal Reserve will begin raising rates at the end of the third quarter of next year, while the European Central Bank’s tightening cycle will begin at the start of 2011. The Fed’s target rate will reach 2 percent by the end of 2011, Englander said.

Barclays on Dec. 10 forecast the euro will fall to $1.40 in six months before rallying to $1.45 by the end of 2010. The euro traded at $1.4333 today.

Monday, December 14, 2009

Traders Bet on Euro Drop Versus Dollar, First Time Since April

By Candice Zachariahs

Dec. 14 (Bloomberg) -- Futures traders are betting that the euro will fall against the dollar for the first time in seven months, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 511 on Dec. 8, compared with net longs of 22,151 a week earlier. That’s the first time since April 28 that short bets outnumbered longs.

The dollar has gained for the past two weeks after a Dec. 4 report showed that U.S. employers cut the fewest jobs in November since the recession began and unemployment unexpectedly fell, prompting traders to bet that the Federal Reserve will bring forward interest-rate increases. Retail sales and consumer confidence in the U.S. increased more than forecast, separate reports showed Dec. 11.

“Investor sentiment is turning away from the euro and tending to become less opposed to the dollar,” said Gareth Berry, a Singapore-based currency analyst at UBS AG. “It’s difficult to know for sure if it’s made a decisive switch, but certainly the correlation with risk appetite and the dollar has been loosening.”

The euro traded at $1.4634 as of 12:01 p.m. in Tokyo from $1.4615 on Dec. 11 when it declined to $1.4586, the weakest level since Oct. 5.

The euro will fall to $1.45 in one month and $1.40 in three months, UBS forecasts.

Futures are agreements to buy or sell assets at a set price and date. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange as of Tuesday.

Yen Favored for Carry Trades as Japan Faces Deflation (Update1)

By Oliver Biggadike and Theresa Barraclough

Dec. 14 (Bloomberg) -- The yen is poised to replace the dollar as the top funding currency for investments in cities from Sydney to Sao Paulo after borrowing from Japan became almost as cheap as U.S. loans for the first time in four months.

Rates on 90-day yen loans between banks have fallen the most in 13 years amid record deflation that prompted the Bank of Japan to start a $113 billion lending program last week. By easing demand for private-sector loans, the move helped shrink the gap between U.S. and Japanese London interbank offered rates by two-thirds over the past three months to 0.024 percentage point, the least since Aug. 26, data compiled by Bloomberg show.

Investors are betting Libor rates in the U.S. will be higher by June as it recovers from the recession quicker than Japan, according to Bloomberg data. The U.S. will expand 2.6 percent in 2010, twice as fast as Japan, median forecasts in Bloomberg surveys of as many as 82 economists show. That may entice traders to shift to yen from dollars to buy assets in higher-interest countries like Australia and Brazil, weakening Japan’s currency and shoring up the dollar, as advocated in public statements by both governments.

“The dollar’s role as a funding currency is fleeting at best,” said Samarjit Shankar, a foreign-exchange group managing director in Boston at BNY Mellon, the world’s largest custodial bank at more than $20 trillion in assets. “When central banks start raising rates, the yen will be left behind as the primary funding currency.”

The yen fell 7.7 percent in the five months after the last time Japanese loans became cheaper, in August 1993. That plunge followed a 45 percent gain in the previous three years, when American rates were mostly lower.

Libor Spread

Japan’s currency also tended to slide as the Libor spread between the two countries widened during the 13 years that U.S. loans cost more, from 1993 until Aug. 24. The yen depreciated 24 percent in five months in 1995 as that spread expanded by 41 basis points, or 0.41 percentage point. It weakened 13 percent in 2005 as Japan’s borrowing costs became almost 2 percentage points cheaper than in the U.S.

This year’s falling U.S. loan costs encouraged investors to sell dollars in carry trades, which seek to profit by using money from low-interest economies to buy assets in higher- yielding countries. Since American rates began dropping in March, the dollar has lost 9.4 percent against the yen, almost twice as much as the U.S. currency had weakened in the prior 10 months.

The three-month yen Libor rate fell to 0.28 percent on Dec. 11, from 1.09 percent on Oct. 8 last year, following its biggest 14-month plunge since 1996. The U.S. rate last week was 0.25 after its largest drop since 2002.

Cash and Carry

Since U.S. borrowing costs fell below Japan’s in August, buying Australian dollars with U.S. funds has produced a 9.9 percent profit, Bloomberg data show. With Brazilian real, the trade gained 6.9 percent. Using yen as a funding currency would have gained less than half as much against the Aussie and barely broken even versus the real.

“The difference between U.S. dollar and Japanese interest rates in general, including Libor rates, is one of the main drivers of the dollar-yen,” said Masafumi Yamamoto, Tokyo-based chief foreign-exchange strategist at Barclays Capital. Based on British Bankers’ Association surveys, Libor rates are what banks charge each other for loans and serve as benchmarks for $360 trillion worth of financial products globally from home mortgages to corporate bonds.

Weaker Yen

“A higher dollar Libor rate than yen Libor rate means stronger dollar versus yen,” said Yamamoto, who predicts Japan’s currency will fall to 96 by June and to 100 by the end of 2010, an 11 percent drop from its Dec. 11 close, at 89.10. Median estimates from as many as 41 strategists surveyed by Bloomberg see the yen weakening to 93 by mid-year and to 97 six months later.

The dollar traded at 88.86 yen today, after falling 1.6 percent against the yen last week, down 2.5 percent for the year. The greenback bought $1.4624 per euro, after gaining 1.7 percent for the week and down 4.7 percent for the year. The U.S. Dollar Index measuring its performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona added 0.9 percent last week and is down 5.8 percent for the year.

Investors are betting that the Bank of Japan will keep its 0.1 target rate through next year and that the Federal Reserve will abandon its near-zero benchmark.

Future Chances

There’s at least an 88 percent chance the U.S. will raise rates in 2010, up from 78 percent on Nov. 24, futures on the CME Group show. Prices indicate a 46 percent likelihood of an increase by June, up from 30 percent on Nov. 30. By contrast, overnight interest-rate swaps traders see no chance that the BOJ will increase its benchmark next year, Bloomberg data show.

Trading in forward contracts on three-month swaps, used to hedge against Libor fluctuations by agreeing to pay or receive a specified rate starting on a future date, show U.S. borrowing costs rising above Japan’s within six months.

The yen hit a 14-year high of 84.83 per dollar on Nov. 27, less than three weeks after U.S. Treasury Secretary Timothy Geithner said a “strong dollar” is “very important.” Prime Minister Yukio Hatoyama said on Dec. 2 the yen’s rise can’t continue, Nikkei newspaper reported.

There is “no doubt” that accelerating yen gains would hit exporter profits, said Chief Cabinet Secretary Hirofumi Hirano on Nov. 26 in Tokyo. That would be a “huge risk” for auto makers, Nissan Motor Co. Chief Operating Officer Toshiyuki Shiga said on Nov. 19 in Yokohama.


Chances are increasing that Japanese policy makers will sell the currency to prevent damage to the economy from further gains, said Sophia Drossos, co-head of global foreign-exchange strategy for Morgan Stanley in New York.

Options traders are the least optimistic on the yen since before the bankruptcy of Lehman Brothers Holdings Inc. pushed up volatility in currency markets and forced investors to buy protection against yen gains. The cost on Dec. 4 of hedging for a month against a gain was the cheapest relative to guarding against a decline since February 2007, so-called risk reversal rates show.

Japan’s struggling economy and signs of a U.S. recovery are shifting the carry-trade funding advantage back toward the yen, where it had been since 1993, when the BOJ cut rates in an unsuccessful attempt to avert a recession that sparked a decade of deflation.


Employers in the U.S. eliminated 11,000 jobs in November, the fewest since the recession began, and unemployment fell to 10 percent from 10.2 percent a month earlier, the Labor Department reported on Dec. 4. The dollar rose that week against the yen by the most since 1999, advancing 4.7 percent.

“The U.S. economy will perform strongly; the Fed will tighten,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world’s biggest currency trader. “It makes the yen again a much more attractive vehicle for funding carry trades.”

In Japan, the economy has shrunk 7.7 percent since 2008’s first quarter, the steepest decline in at least 29 years. Prime Minister Hatoyama is boosting borrowing to a record 53.5 trillion yen ($607 billion) in the year ending March 2010 to support the economy and slow deflation.

Consumer prices have fallen 2.5 percent in the past year, the sharpest 12-month decline since at least 1970, sparking demand for the nation’s debt and pushing down bond yields as investors bet the securities’ fixed payments will gain purchasing power.

Real Yields

Mitsubishi UFJ Financial Group Inc. and Yasuda Asset Management Co. say they are buying the bonds even though Japan’s 1.23 percent 10-year yield is lower than in the U.S., U.K. and Germany. That’s because deflation has driven so-called real yields up to 3.78 percent, compared to the U.S.’s 3.7 percent.

From 2004 to 2007, carry trade investors who sold borrowed yen to invest in Mexican pesos, South African rand, Brazilian real and New Zealand and Australian dollars earned as much as 84 percent, Bloomberg data show.

The trades benefited from interest rates as low as zero in Japan and three-month bill yields as high as 8.4 percent in New Zealand. The popularity weakened the yen more as it fell as much as 13 percent in that period, further increasing carry profits.

Last year’s financial crisis magnified price swings and caused the trades to lose money. Dollar-yen volatility surged on Oct. 24, 2008 to 42 percent as Japan’s currency rallied 27 percent from 110.66 on Aug. 15, 2008 to 87.13 on Jan. 21, erasing carry trade profits from the previous four years.

‘World’s Weakest’

Now, narrowing interest-rate differences are making the yen the funding currency of choice again. Six-month borrowing costs in yen fell below dollar rates for one day last week after the Bank of Japan announced its 10 trillion yen ($112.7 billion) program on Dec. 1 to offer three-month loans to commercial banks at 0.1 percent interest. The central bank said on Dec. 10 that it had initiated the program with an 800 billion yen injection into the banking system.

Japan’s currency “may become the world’s weakest,” said Keiji Matsumoto, currency strategist at Nikko Cordial Securities Inc. in Tokyo.

Wednesday, December 9, 2009

Bollard Says He Will Raise N.Z. Rates Sooner; Currency Rises

By Tracy Withers

Dec. 10 (Bloomberg) -- New Zealand’s central bank says it will raise the benchmark interest rate sooner than it previously indicated as a stronger housing market leads the economy out of recession. The nation’s currency gained.

“If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today, after leaving the official cash rate at a record low of 2.5 percent. In October, he said rates would be on hold until the second half of next year.

Bollard said the economy has moved out of recession, buoyed by demand for housing and rising commodity prices. Higher house prices and a pickup in consumer and business confidence have fanned expectations he may raise borrowing costs as early as March to counter emerging price pressures.

“Clearly the record low cash rate is approaching its use-by date,” said Annette Beacher, senior strategist at TD Securities in Singapore. “Those of us looking for a modest ramp up in the tightening bias were not disappointed.”

New Zealand’s dollar rose to 71.97 U.S. cents at 9:55 a.m. from 71.23 cents immediately before the statement. The yield on a three-month bank-bill futures contract maturing in June increased to 3.81 percent from 3.56 percent.

All 12 economists surveyed by Bloomberg News expected today’s decision. Four, including Beacher, forecast a rate increase in the first quarter of next year and six predict the first move in the second quarter.

Inflation Target

Bollard is required to keep annual inflation between 1 percent and 3 percent. The consumer price index will rise 1.4 percent next year and accelerate to 2.6 percent in 2011, the central bank said today.

“A key uncertainty is the extent to which higher house prices are eventually reflected in increased consumer spending,” Bollard said. “At this point, credit growth remains subdued, suggesting households are being relatively cautious.”

Banks aren’t lending as freely to consumers and home-loan rates have risen to reflect their increased funding costs, he said.

Export earnings will be subdued because “the high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery,” said Bollard.

Tighter Conditions

“Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the cash rate and bank funding costs, reduces the need for more immediate action” on the official cash rate, Bollard said.

The economy grew 0.1 percent in the three months to June 30, the first expansion in six quarters, buoyed by low interest rates, tax cuts and extra government spending.

The economy will expand 1.9 percent in the first quarter of 2010 from a year earlier, the Reserve Bank said in new forecasts published today. That’s better than the 1.3 pace predicted in September. Annual growth will accelerate to 4.2 percent by the first quarter of 2011, the bank said.

“The economy continues to recover, reflecting world growth, higher export commodity prices, increased government spending and housing strength,” said Bollard.

House Prices

House prices have increased 9.4 percent since a low in January and property sales in October surged 36 percent from a year earlier, according to the Real Estate Institute.

A stronger housing market helped drive consumer confidence to a 22-month high in October, according to an index compiled by Roy Morgan Research and ANZ National Bank Ltd.

Prices of New Zealand’s commodity exports jumped the most in 23 years in November, led by dairy prices, according to an ANZ National index published last week.

Signs of a global recovery and rising commodity prices boosted business confidence to a 10-year high last month, according to a separate ANZ National survey.

“While business confidence has improved, actual business spending remains weak,” Bollard said.

Finance Minister Bill English said yesterday the economy is improving and may grow faster than forecast in his May budget. “The picture is patchy” and the government is yet to see business confidence convert into investment and jobs, he told parliament’s finance and expenditure select committee.

Jobless Rate

A challenge for the economy is the rising jobless rate, English said. Unemployment was at a nine-year high of 6.5 percent in the third quarter. The Reserve Bank expects the rate will increase to 6.6 percent by the first quarter of next year and decline to 6.3 percent a year later.

Central bankers around the world are now assessing when to remove stimulus as the global economy recovers. Australia and Norway have started raising interest rates and the Federal Reserve has committed to scale down buying of mortgage-backed debt.

Reserve Bank of Australia Governor Glenn Stevens raised his benchmark rate for an unprecedented third straight month last week to 3.75 percent. He will increase borrowing costs to 4 percent at his next review on Feb. 2, according to all 16 economists in a Bloomberg News survey.

Buoying New Zealand’s economy, auction prices for milk powder sold by Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, have jumped to a 16-month high, prompting the Auckland-based company to increase its payment to its local suppliers.

To be sure, the currency’s gains may slow the recovery by curbing exports, which make up 30 percent of the economy.

Banks have boosted estimates for the New Zealand dollar, assuming Bollard may raise rates as soon as March, according to a Bloomberg News survey. The currency will likely rise 6 percent to 75 U.S. cents by March 31, according to the median estimate in the poll of 32 strategists.

Commodity export prices in November were 17 percent higher than a year earlier, according to an ANZ National Bank index. After converting to local dollars, prices were 8.5 percent lower.

Monday, December 7, 2009

Bernanke Sees ‘Formidable Headwinds’ for U.S. Economy (Update3)

By Craig Torres and Shobhana Chandra

Dec. 7 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. economy faces “formidable headwinds,” including a weak labor market and tight credit that are likely to produce a “moderate” pace of expansion.

“The economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate,” Bernanke, 55, said today in a speech to the Economic Club of Washington. He said inflation remains “subdued” and might even move lower.

Treasuries advanced as traders pared bets the central bank will increase interest rates before August. Bernanke, in response to a question after his speech, repeated the Fed’s statement that rates are likely to remain low for an “extended period.”

The yield on the benchmark two-year Treasury note fell seven basis points to 0.76 percent at 3:35 p.m. in New York. The Standard & Poor’s 500 Index was down 0.2 percent to 1,103.92 after rising as much as 0.4 percent.

“Bernanke suspects we will grow below normal recovery standards, and that pace could be around awhile,” said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. “Fed policy may stay where it is, essentially zero, for some time. There are serious risks out there.”

Job Losses

Payrolls have declined by more than 7.2 million jobs since the start of the recession in December 2007. Employers cut the fewest jobs in November in 23 months, and the unemployment rate unexpectedly fell, a Labor Department report showed last week. Payrolls declined by 11,000, and the jobless rate fell to 10 percent in November from 10.2 percent the previous month.

In response to a question from the audience about the direction of interest rates, Bernanke said: “Right now we are still looking at the extended period given that conditions remain low rates of utilization, subdued inflation trends, and stable long-term inflation expectations.”

“Obviously there has been some signs of strength recently, we will want to factor that in as we talk about this next week.”

U.S. central bankers meet for their final two-day meeting of the year on Dec. 15-16. At their last meeting in November, policy makers repeated their pledge to keep interest rates low for an “extended period.”

The consumer price index, minus food and energy, rose at a 1.7 percent annual pace in October, up from 1.5 percent the previous month. The core inflation rate rose at a 1.4 percent pace in August, the lowest rate since February 2004.

“Tight’ Credit

“Despite the general improvement in financial conditions, credit remains tight for many borrowers,” and the job market “remains weak,” Bernanke said in his prepared remarks.

The Fed chairman said the U.S. central bank has the tools and commitment to keep price increases in check, and that inflation could subside further.

“Elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here,” Bernanke said. “The Federal Reserve is committed to keeping inflation low and will be able to do so.”

The Fed chairman credited the U.S. central bank with pulling the economy “back from the brink,” and suggested that growth is unlikely to be strong enough to lower unemployment at a rapid pace. The speech was his first since his appearance at a Senate Banking Committee hearing last week on his nomination to a second term.

‘Modest’ Growth

“We still have some way to go before we can be assured that the recovery will be self-sustaining,” the Fed Chairman said. “My best guess at this point is that we will continue to see modest economic growth next year -- sufficient to bring down the unemployment rate, but at a pace slower than we would like.”

The Fed has channeled liquidity to banks and markets for asset-backed securities and the commercial paper market, helping to unfreeze bank funding markets. The London interbank offered rate, or Libor, for three-month loans in dollars between banks was 0.25 percent today, down from 1.42 percent at the start of the year.

The central bank is also purchasing $1.25 trillion in mortgage-backed securities. Costs on 30-year fixed-rate mortgages fell to 4.71 percent Dec. 3, the lowest since mortgage buyer Freddie Mac in McLean, Virginia, began compiling the data in 1971.

The Fed chairman cited the benefits of the central bank’s regional structure, saying it is “well suited” to be the lead regulator for supervising the largest financial institutions.

Held Hostage

“No firm, by virtue of its size and complexity, should be permitted to hold the financial system, the economy, or the American taxpayer hostage,” Bernanke said. “All systemically important financial institutions, not only banks, should be subject to strong and comprehensive supervision on a consolidated, or firm-wide, basis.”

The former Princeton University scholar and self-described Great Depression buff is defending the central bank against efforts in Congress to curtail its authority and independence.

A Senate proposal would remove bank supervision from the Fed, and House legislation would increase oversight of monetary policy. Legislation pending in both chambers would limit the Fed’s ability to lend to troubled institutions and remove the central bank’s rule-writing authority on consumer financial products.

The Fed chairman has prompted concern among lawmakers about taxpayer-sponsored bailouts and rescues that he says were used only to save households and the economy from financial collapse.

The House on Nov. 19 advanced a proposal to remove a three- decade ban on congressional audits of Fed interest-rate decisions, a measure backed by Ron Paul, a Republican from Texas.