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Asia Stocks, Won Drop on Economy Concern

Thu, 23 Feb 2012 11:59:37 GMT

Asian stocks fell and the South Korean won weakened as reports signaled slowing global economic growth and Hewlett-Packard Co. (HPQ) forecast profit that missed estimates. Oil dropped from a nine-month high after a report showed U.S. stockpiles increased.

The MSCI Asia Pacific Index lost 0.2 percent as of 3:03 p.m. in Tokyo, with five stocks declining for every four that advanced. Standard & Poor’s 500 Index futures were little changed. The won sank to a one-week low against the dollar and China’s yuan fell by the most in almost three weeks. Oil slumped 0.4 percent to $105.91 a barrel. Copper declined for the eighth time in 10 days.

European services and manufacturing output shrank in February, Markit Economics said, and Taiwan cut its 2012 growth forecast yesterday. U.S. sales of previously owned houses missed economists’ forecasts, according to an industry report. MSCI’s Asian stock index has climbed 12 percent this year and is poised for a tenth weekly advance as China cut banks’ reserve ratios and Greece won a second bailout package.

“Investors are very skeptical about whether a recovery can proceed without another hurdle jumping up again,” said Angus Gluskie, who oversees about $350 million as managing director at White Funds Management in Sydney. “The austerity measures running through Europe are likely to take the edge off growth.”

Economy Watch
Swiss Re Ltd., the world’s second-biggest reinsurer, Commerzbank AG, Allianz SE and Target Corp. are among companies scheduled to report earnings today. Data may show Hong Kong’s exports shrank 7 percent in January, while Taiwan’s industrial production contracted 15.3 percent, according to economist surveys by Bloomberg.

Technology companies slid 0.6 percent for the biggest drop among 10 industries in the MSCI Asia-Pacific Index (MXAP), which has climbed 0.5 percent this week. Samsung Electronics Co., the largest consumer-electronics company in Asia, sank 3.1 percent. Kyocera Corp. (6971), which makes printers, fell 1.7 percent.

Hewlett-Packard Chief Executive Officer Meg Whitman said yesterday that the company’s PCs, printers and information- technology services haven’t been compelling enough to attract customers. The company’s revenue from servers, printers and storage gear also declined. Mazda Motor Corp. (7261), Japan’s least profitable major carmaker, dropped 6.8 percent after saying it may raise a record 162.8 billion yen ($2 billion) selling new stock.

China Markets
The Hang Seng China Enterprises Index (HSCEI) of mainland companies listed in Hong Kong dropped 1 percent. The Shanghai Composite Index lost less than 0.1 percent. China’s benchmark money-market rate rose to a five-week high as lenders paid higher interest rates for government funds at an auction today. The central bank said it got 6.8 percent for 30 billion yuan ($4.8 billion) of six-month deposits at an auction conducted on behalf of the Ministry of Finance.

China’s Premier Wen Jiabao may signal next month that curbing pollution, inequality and the risk of financial instability eclipse the benefits of faster economic growth, a Bloomberg survey indicated. Wen will target an expansion of less than 8 percent in his report to the National People’s Congress in Beijing on March 5, according to 8 of 15 economists in the poll. The median estimate of 7.5 percent compares with the 8 percent goal maintained from 2005 to 2011, even during the 2008-09 world recession.

Yuan Weakens
The Chinese yuan fell 0.08 percent to 6.301 per dollar, the biggest decline since Feb. 6, according to the China Foreign Exchange Trade System.

Australia’s currency was little changed against the dollar at $1.0648 after sliding 0.4 percent earlier. Prime Minister Julia Gillard called a leadership ballot for Feb. 27, setting up a second showdown with her predecessor Kevin Rudd as weeks of escalating tension damage the Labor government. The move aims to bring to a head 11 days of escalating rivalry between Gillard and Rudd, as opinion polls show the Labor party’s popularity is hovering near a record low.

The cost of insuring Australian bonds from non-payment rose, according to traders of credit-default swaps. The Markit iTraxx Australia index advanced 3 basis points to 146 basis points, according to Westpac Banking Corp. The gauge is set for its biggest increase since Feb. 10, data provider CMA said.
Ten-year Treasury yields increased two basis points to 2.02 percent. The dollar was little changed at $1.3258 per euro. The won slid 0.2 percent to 1,128.10 per dollar.

Jobless Claims
Initial claims for jobless insurance in the U.S. probably totaled 355,000 last week, according to the median forecast in a Bloomberg News survey of economists before the Labor Department reports the figure today. The figure was 348,000 for the seven days ended Feb. 11, the least since March 2008.
“In the short term, I would expect the dollar to be supported,” said Emma Lawson, a currency strategist at National Australia Bank Ltd. in Sydney. “Concern over the supply of oil and how it may affect the global economy is keeping the market cautious.”

Crude futures in New York have jumped 6.4 percent in the past month amid concern Iranian oil supplies may be disrupted. U.S. crude stockpiles rose 3.55 million barrels last week, figures from the industry-funded American Petroleum Institute showed. An Energy Department report today may show inventories climbed 1.35 million barrels to the highest level in almost five months, according to a Bloomberg News survey of analysts.

Asia FX edges up on Greece amid some profit-taking

Wed, 22 Feb 2012 09:55:48 GMT

SINGAPORE: Most emerging Asian currencies rose slightly on Tuesday after euro zone policymakers reached a deal on a Greek rescue fund, while some investors took profits on the belief the accord had already been largely factored in.

Euro zone finance ministers approved a second bailout programme for Greece that includes new financing of 130 billion euros ($172.47 billion) and aims to cut Greece's debt to 121 percent of GDP by 2020. That pushed up the euro to near $1.33.

Despite the agreement, currency players did not chase emerging Asian currencies. Regional stocks failed to rise amid concerns the deal is just a short-term fix. "I am more inclined to think of a consolidation or slight corrections for Asian currencies after recent rallies. Too much optimism has been priced in already," said Frances Cheung, senior strategist for Credit Agricole CIB in Hong Kong.

The Indian rupee and the Singapore dollar may be most vulnerable to the corrections, given India's current account deficits and low yields of Singapore bonds, Cheung said. The yield for two-year Singapore government bonds stood at 0.302 percent, while the yield for two-year South Korean government bonds was at 3.460 percent.

Still, the corrections should not upset a bullish trend among emerging Asian currencies as the region may benefit from sustained fund inflows, dealers and analysts said. "It is hard to find somewhere else to invest money amid ample liquidity except Asia. So, they (Asian currencies) will gradually strengthen," said a Singapore bank dealer.

Credit Agricole's Cheung said some currencies such as the won and rupiah may find support from bond inflows. "The coming weeks brought heavy maturing European debts, so Asian bonds could potentially benefit from diversification if those European bonds are not rolled over," Cheung said.

RINGGIT
Dollar/ringgit slid on the Greece deal, while its downside was limited as investors covered short positions. The pair also has support at 2.9950, the low of Feb 8. A Kuala Lumpur-based dealer said he would sell dollar/ringgit only on rallies, especially above 3.0250, even if he expects the pair to fall further.

WON
Dollar/won turned lower as foreign investors continued to buy Seoul stocks and on stop-loss dollar sales. But its slide was strictly limited on importers' demand and short-covering. South Korea reported a trade deficit of $3.86 billion for the year to Feb 20, data showed. "Everything in dollar/won is up to how liquidity boosted in financial markets can offset slowing exports," said a foreign bank dealer in Seoul.

"The pair may head to 1,110 on risk sentiment. But I will build up long positions for $100 million around there to carry as I doubt how much more offshore funds will sell dollars, given their recent offers."

SINGAPORE DOLLAR
US dollar/Singapore dollar edged up on short-covering. The pair turned lower with the Greece deal boosting the euro, but investors continued to cover short positions as the agreement has been priced in.

Euro higher but Monday euro zone meeting ahead

Tue, 21 Feb 2012 09:47:21 GMT

NEW YORK: The euro gained against the dollar and the yen on Friday on hopes for a rescue package for Greece but gains were capped before a key meeting on Monday with investors hesitant to make big bets before a long US holiday weekend.

Greece edged closer to winning the 130-billion-euros rescue as officials said Germany was optimistic a deal could be struck despite misgivings that Athens would stick to commitments.

Euro zone finance ministers were due to vote on the package on Monday, which in the United States is the Presidents Day market holiday. Given the stakes, however, some US traders are expected to be at their desks that day.

Traders said uncertainty could keep the euro rangebound until a rescue is finalized. "We're still very hesitant until a deal is done," said John Doyle, a currency strategist with Tempus Consulting in Washington, D.C.

The euro rose against the dollar, last up 0.1 percent to $1.3153, though off the day's high of $1.3198. For the week, the euro fell 0.4 percent against the dollar.

Against the yen, the euro rose 0.8 percent to 104.55 yen, down from a peak of 104.66 yen, the highest since Dec. 5. The euro also posted its best weekly gain against the yen since Jan. 29, with a 2 percent gain, using Reuters data.

Greece, which has a 14.5 billion euro bond redemption payment due on March 20, needs a rescue to stave off a disorderly default. Analysts expect the euro could gain further early next week against both the dollar and the yen once euro zone officials give their seal of approval to a Greek bailout. Asmara Jamaleh, currency strategist at Intesa Sanpaolo in Milan, said it could go as high as $1.3300 though not beyond $1.3400.

But even if gains materialize in the short term they are not expected to hold given so many interests have to agree and provide funding even as euro zone economic growth is questionable in the near term.

"The long-term implications still point to a weaker euro/dollar and any rally is just temporary relief before the next major leg lower towards 1.2000," said Christopher Vecchio, currency analyst at DailyFX in New York.

YEN WEAK
The Japanese currency also weakened against the dollar, still pressured by the Bank of Japan's surprise decision this week to boost its asset-buying scheme by $130 billion.

The dollar rose 0.8 percent to 79.48 yen, according to Reuters data, and hit its highest since Oct. 31. That day Japan sold a record 8.07 trillion yen in currency intervention after the dollar hit a post-World War Two record low of 75.311 yen on electronic trading platform EBS.

Friday's gains left the dollar in sight of the post-intervention high on Oct. 31 at 79.553 on EBS and 79.51 on Reuters, though traders reported offers at 79.30/50.

"A move above 80-82 yen is probably in sight and then we would look at reducing our short yen positions slightly," said Dagmar Dvorak, investment manager at Barings Investment Management in London, which has total assets under management of around $47.5 billion.

"If risk aversion, however, increases and the market starts to test the Bank of Japan's resolve again by pushing the yen towards more expensive levels this would offer an opportunity to add to our short positions."Barings held a short yen position for most of last year, which they built more aggressively in September.

The dollar gained 2.4 percent this week against the yen, its best week since Nov. 6. Upbeat US jobs and factory activity data on Thursday continued to support the dollar against the Japanese currency, with US inflation data in line with expectations on Friday.

But with the Federal Reserve committed to keeping interest rates low, long-term dollar gains based on higher US yields were seen as unlikely.

Euro Area Leaders Consider Greek Exit at Their Own Peril: View

Mon, 20 Feb 2012 11:34:44 GMT

Leaders of the euro area’s wealthier nations are increasingly raising a provocative question: Might the common currency now be strong enough to end the bailout agony and let Greece go?
The short answer is no. In fact, the euro area is probably more vulnerable to a Greek disaster than ever.
Until recently, European officials dismissed the idea of Greece leaving the euro as unthinkable. They seemed to recognize that such a move would amount to mutually assured destruction. Aside from the horrendous legal complications, the exit of one country would raise concerns that further departures would tear apart the euro -- a fear that would become self-fulfilling as market turmoil overwhelmed governments’ finances.

Now, officials in Germany and other northern European nations are saying a disorderly Greek default and return to the drachma aren’t so unthinkable after all. Last week, German Finance Minister Wolfgang Schaeuble said the euro area was now better equipped to handle the potential repercussions than before. Luxembourg Finance Minister Luc Frieden also chimed in. Of course, this could all be a bluff, designed to pressure Greek leaders into accepting harsher austerity measures.

Face Value
Maybe, but such ruminations need to be taken at face value. With Greece’s outlook darkening and everyone suffering from bailout fatigue and political pressures back home, the idea might gain momentum even after the ink on the latest inadequate deal has dried. Finance ministers from all 17 euro-area countries are scheduled to meet today in Brussels to finalize a Greek aid package, after Greece yesterday identified 325 million euros ($427 million) in spending cuts to secure a bailout.
On the surface, Europe is looking more resilient than it did only a few months ago. Business confidence in Germany is on the rise. The European Central Bank has calmed markets by providing nearly 500 billion euros in emergency three-year loans to the region’s banks. Yields on Italian and Spanish bonds have fallen, creating the impression that investors are less concerned about troubles in Greece spreading to those countries.

The improvement, though, is largely cosmetic. The ECB has brought down bond yields by offering banks a no-brainer trade: Buy European government bonds yielding more than 5 percent with money borrowed from the central bank at a rate of 1 percent. The resulting demand from banks has buoyed bond prices and helped Spain and Italy issue more new debt. It also leaves financial institutions -- and the ECB itself -- more exposed to losses in the event of sovereign defaults or renewed market turmoil.

The banks’ exposure wouldn’t necessarily be a problem if overall confidence in financially strapped countries was genuinely recovering. Sadly, that’s not the case. In Italy, capital flight to other European countries is accelerating. At the end of December, the net claims of euro-area central banks on the Bank of Italy stood at nearly 200 billion euros, up from 89 billion euros in October and 19 billion in July. Such liabilities arise when Italians move their money out of the country, or when foreign investors stop putting theirs in.

Either way, the trend reflects just how fragile the euro area has become. If investors and regular account holders already see a difference between a euro deposited in Italy and a euro deposited in Germany, there’s a real danger that Greece’s withdrawal from the common currency would trigger bank runs and freeze government-debt markets. Should an economy as large as Italy, Spain or even France come under attack, the question wouldn’t be whether German taxpayers want to pay for a bailout, as is the case for Greece, but whether they are able to.

Germany itself is increasingly exposed to a Greek exit. As a result of capital inflows -- the mirror image of the movements out of Italy and other struggling countries -- euro area central banks now owe the German central bank nearly 500 billion euros. It’s hard to imagine how Germany would collect those debts from any country that left the common currency. More likely, as French economist Eric Dor of the IESEG School of Management notes in a recent paper, its own taxpayers would be left with the bill.

Avoiding such a dire outcome won’t be easy. European leaders will have to recognize some difficult truths: Greece and Portugal need a lot more debt relief to get their finances and economies on track, banks need to raise hundreds of billions of euros in capital to restore confidence, and only an overwhelming guarantee fund -- more than 3 trillion euros, by our estimate -- will protect solvent governments from speculative attack.

Pound Sterling / Euro and US Dollar exchange rates

Fri, 17 Feb 2012 09:30:49 GMT

The Pound declined against the higher-yielding currencies again, recording yet another 27-year low of 1.4560 against the Australian Dollar and this now represents the ninth consecutive week that the Pound has dropped to lowest level since 1985. The UK currency also lost ground versus the South African Rand and New Zealand Dollar, as global confidence continues to improve, while the ongoing threat of a UK recession makes the Pound less attractive to investors.

A report from the Bank of England suggested that the UK economy is likely to remain “weak” over the coming months, amid widespread speculation of a first quarter contraction, which would signal a technical recession. The Pound dropped to the lowest level in six months against the Kiwi, as UK jobless claims rose more in January than initial estimate.

The BoE actually raised its inflation forecast, which reduced expectations of further quantitative easing over the coming months. That should support the Pound and to an extent the UK currency has risen versus the Euro but that is largely due to speculation that the EU and IMF will delay the next bailout package for Greece.

The UK unemployment claimant count rose by a larger-than-expected 6,900 for January, while the jobless rate was unchanged at 8.4% as youth joblessness continued to rise. Bank of England governor Mervyn King stated that there would be a volatile and uncertain period for the UK economy, but he was more optimistic that a fresh recession would be avoided.

Nevertheless, he also stated that an increase in interest rates at this stage would trigger a recession and the bank remains committed to a policy of ultra-low interest rates. There was further evidence of improved sentiment, as the Nationwide consumer confidence index rose to 47 to February, from 38 previously. There will be speculation that the Bank of England will sanction further quantitative easing, although the latest survey evidence is liable to be critical for the Bank’s stance.

Euro / US Dollar exchange rates
The Euro struggled to push through resistance in the region of 1.32 against the Dollar and maintained a generally softer tone through the course of the day, amid volatile trading conditions. There was further rumours surrounding Greece and the lack of a bailout for the struggling nation, which helped sustain market volatility and weaken the Euro.

The Greek Finance Minister took a generally downbeat tone in his comments during the day with references to the fact that many Euro-zone nations did not want Greece to stay in the Euro-zone. The Eurogroup head Juncker stated that a deal was in reach by Monday, but there was little underlying confidence in the outcome as default speculation remained rife.

The European growth figures recorded a 0.3% decline in output for the fourth quarter, despite a stronger-than-expected reading for France, as Italian output fell sharply, maintaining concern that peripheral economies would remain trapped in recession. In the U.S, the data was mixed with a slightly firmer tone to the manufacturing data.

Australian Dollar
The Australian Dollar recorded another 27-year high against the Pound and continued to make widespread gains versus the majors, as global stocks continue to rise and increase investors’ appetite for higher-yielding currencies. Domestically, the Aussie Dollar also found support, as data showed that the government added the most workers in 14 months during the month of January and the jobless rate unexpectedly declined.

As China’s Currency Rises, U.S. Keeps Up Its Pressure

Thu, 16 Feb 2012 09:37:43 GMT

WASHINGTON — With little fanfare, China’s currency has appreciated significantly in the last year and a half, leading many economists to question whether the exchange rate is still the most important economic issue for the United States to press with China’s leaders.

The rise of the renminbi — up 12 percent since June 2010 on an inflation-adjusted basis and 40 percent since 2005 — has helped American companies by effectively reducing the cost of their products in China. In the last two years, American exports to China have risen sharply.

The renminbi remains undervalued, relative to all other currencies, by 5 to 20 percent, according to various estimates. But many business executives and economists say that other issues, like intellectual-property theft and barriers to entering Chinese markets, are now a bigger drag on the American economy.

In his Oval Office meeting on Tuesday with Xi Jinping, China’s vice president and likely next leader, President Obama discussed the currency as one of the trade practices that concerned the United States. That meeting — and tough public comments by Vice President Joseph R. Biden Jr. — continued a three-year campaign by the administration to convince Chinese leaders that a stronger currency is in their interest.

“We are making progress, but it’s not sufficient,” Lael Brainard, the Treasury Department’s under secretary for international affairs, said in an interview, “and we will keep on pushing.”

Administration officials and members of Congress have chosen not to emphasize the appreciation publicly, partly to keep pressure on China. Widespread discussion of the change could reduce support in Congress for a bill that would impose sanctions on Chinese imports to the United States and that Beijing strongly opposes.

Similarly, the notion that the exchange rate was no longer as serious a problem as it had been could complicate American efforts to rally international pressure, from Brazil and other countries hurt by the renminbi’s value.

Politicians are also wary of seeming soft on China, given that polls show many Americans blame China to some degree for this country’s economic problems. Mitt Romney, the Republican presidential candidate, has argued for taking stronger measures against China than Mr. Obama has.

But the fact that administration officials often continue to talk about the renminbi as if the situation had not changed brings its own risks.

“People on the Hill are talking the same way they were a few years ago,” said Nicholas R. Lardy, a China expert at the Peterson Institute for International Economics in Washington. “We should be acknowledging that they’ve made very substantial progress. I think that would give us more credibility.”

Eswar S. Prasad, a Cornell and Brookings Institution economist, added, “It’s hard to make the case the renminbi is very undervalued on a multilateral basis.” Other analysts say that an undervaluation of 10 percent of more remains significant.

Some Chinese officials have bristled recently over the lack of credit they have received for their movement. “Perceptions about the renminbi exchange rate in the international community are absolutely groundless,” Li Daokui, a member of the central bank’s monetary policy committee, recently said. The renminbi, he added, was “probably the only emerging economy’s currency that has been rising against the U.S. dollar” since last August.

China’s economic rise has depended on a growing factory sector that benefits from a cheap renminbi. But the currency value’s has both benefits and drawbacks for the country, say economists, both in China and beyond.

An inexpensive currency effectively subsidizes companies that export goods — and their workers — at the expense of most Chinese households, whose buying power is diminished.

A more expensive renminbi gives Chinese households more buying power, by reducing the cost of imports to China. It also puts pressure on Chinese companies to develop more innovative products that bring higher-paying jobs, rather than competing mostly on price.

As a result, the debate over the renminbi in China often resembles a struggle between interest groups. Officials from the United States, Brazil, Europe and elsewhere have tried to strengthen the forces seeking a stronger renminbi by explaining how that will lead to more balanced, sustainable growth for the whole world.

Starting in June 2010, with the worst of the global recession fading and political frustration with China rising across much of the world, American officials and others began to have more success.

The renminbi has risen 8.5 percent against the dollar since June 2010, with the pace having slowed in the last six months. Taking into account the different inflation rates in the two counties, the effective increase is closer to 12 percent.

The rise has helped sharply reduce China’s current account surplus — a measure based largely on the difference between a country’s exports and imports. In 2007, the surplus equaled more than 10 percent of China’s gross domestic product, a level widely seen as unsustainable. Last year, the surplus fell below 3 percent.

The renminbi also rose substantially from 2005 to 2008, under pressure from President George W. Bush’s administration and other governments, before holding steady from mid-2008 until mid-2010.

The rise in the renminbi is not the only reason many economists think other issues, like the theft of patented technology, are more important to the American economy. Because many items are assembled in China, with parts made in other countries, a stronger renminbi affects only a small portion of the cost of many products officially made in China.

Less than 4 percent of the value of an iPhone, for example, comes from Chinese labor and parts, one academic study found.

Asian Currencies Advance on China Plan to Help Resolve Europe Debt Crisis

Wed, 15 Feb 2012 09:28:28 GMT

The Philippine peso and Malaysia’s ringgit led gains in Asian currencies after China said it will help resolve Europe’s debt crisis.

The country with the world’s biggest currency reserves is ready to participate in programs including the European Financial Stability Facility, People’s Bank of China Governor Zhou Xiaochuan said in a speech today, echoing comments made yesterday by Premier Wen Jiabao. The Bloomberg-JPMorgan Asia Dollar Index fell earlier as European leaders canceled a meeting slated for today to discuss a bailout plan for Greece.

The peso appreciated 0.2 percent to 42.675 per dollar as of 11:21 a.m. in Manila, after having declined 0.2 percent earlier, according to data compiled by Bloomberg. The ringgit climbed 0.1 percent to 3.0410 and Taiwan’s dollar strengthened 0.2 percent to NT$29.549. South Korea’s won advanced 0.1 percent to 1,122.85.

“The market always welcomes reassurances about China’s participation in the Europe situation,” said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd. “The immediate concern is still the Greek issue. China’s firepower will be useful at a later stage.”

China had currency reserves of $3.18 trillion at the end of 2011, according to official data. Europe is the Asian nation’s biggest export market, making up about 18 percent of its overseas sales. European finance ministers will hold a teleconference after canceling a Brussels meeting to prod Greece to do more to clinch 130 billion euros ($171 billion) of aid along with about 100 billion euros of debt relief from private bondholders. Greece needs the aid to make a 14.5 billion-euro bond payment in March.

Fund Inflows
All 10 most-traded currencies in Asia excluding the yen gained this year as global funds bought $14.7 billion more of South Korean, Taiwanese and Indian equities than they sold, according to exchange data. Developing Asia may expand 7.3 percent this year, compared with a 1.8 percent growth in the U.S. and a contraction of 0.5 percent in the euro area, according to estimates released last month by the International Monetary Fund.

The won gained as international investors were net buyers of the nation’s equities for an eighth straight day and the Kospi index of shares rose by the most in a week. “The won will move within a range until Greek issues are settled,” said Hong Seok Chan, a Seoul-based currency analyst at Daeshin Securities Co. “Exporters selling the dollar to benefit from a weaker won may” provide some support to the local currency, he said.

Malaysia’s Growth
The ringgit fell earlier to this month’s weakest level before data due today that economists predict will show the economy cooled. Gross domestic product rose 4.8 percent in the fourth quarter of 2011 after increasing 5.8 percent in the third, according to the median forecast of economists in a Bloomberg News survey before the government reports the figures at 6 p.m. local time.

“The ringgit is trading on a weaker bias on expectations that the Malaysian economy will slow,” said Azmi Shukri Rahman, a foreign-exchange trader at CIMB Investment Bank Bhd. in Kuala Lumpur. “The currency should trade within a tight range ahead of Greece’s debt ratification.”

Elsewhere, Indonesia’s rupiah and India’s rupee fell 0.2 percent to 9,045 per dollar and 49.28, respectively. The Thai baht declined 0.1 percent to 30.87, while China’s yuan was little changed at 6.3003.

Asia Currencies Drop, Led by Ringgit, as Moody’s Cuts Italy, Spain Ratings

Tue, 14 Feb 2012 13:13:39 GMT

Asian currencies weakened, led by Malaysia’s ringgit, after Moody’s Investors Service cut the debt ratings of six European countries including Italy, Spain and Portugal, sapping demand for riskier assets. The uncertainty over the euro area’s prospects for changing its fiscal and economic framework is among the main drivers of the action, the ratings company said yesterday.

Data tomorrow may show Malaysian economic growth cooled as the European debt crisis hurt exports and South Korea’s jobless rate rose to 3.2 percent in January from 3.1 percent the previous month, according to Bloomberg News surveys.

The Bloomberg-JPMorgan Asia Dollar Index (ADXY), which tracks the region’s 10 most-active currencies excluding the yen, fell 0.1 percent as of 10:43 a.m. in Hong Kong. The ringgit slumped 0.5 percent to 3.0415 per dollar, the Philippine peso dropped 0.3 percent to 42.580 and Indonesia’s rupiah fell 0.5 percent to 9,041, according to data compiled by Bloomberg.

“Europe’s downgrades are hurting risk-taking,” said Eric Hsing, a fixed-income trader at First Securities Inc. in Taipei. “It’s quite worrying that the austerity measures taken by these European countries will eventually hurt demand for Asia’s exports.”Euro-area finance chiefs will convene in Brussels tomorrow to decide whether to ratify a 130 billion-euro ($171 billion) rescue package for Greece.

Slower Growth
The ringgit touched 3.0438 per dollar, the lowest level in almost two weeks, before a report tomorrow that is expected to show gross domestic product expanded 4.8 percent from a year earlier in the last three months of 2011, based on the median forecast of economists in a Bloomberg survey. That compares with 5.8 percent growth in the previous quarter.

“Moody’s downgrade is affecting market sentiment,” said Akira Banno, a treasury adviser at Bank of Tokyo-Mitsubishi UFJ Bhd. in Kuala Lumpur. “The Malaysian currency could weaken to 3.05 to the dollar because people are cautious and may want to take some profit.”

South Korea’s won traded near a two-week low, slipping 0.1 percent to 1,123.21 per dollar.
“Negative news from Europe is putting downward pressure on the won,” said Yu Won Jun, a Seoul-based currency dealer at Korea Exchange Bank. “Still, exporters are waiting to sell the dollar as the won weakens, and this will limit won declines.”

Xi-Obama Meeting
Taiwan’s dollar weakened 0.1 percent to NT$29.557 after global funds sold $142 million more local shares than they bought yesterday, exchange data show. The island’s exports slumped 16.8 percent in January from a year earlier, after rising 0.6 percent the previous month, the government reported last week.

China’s yuan weakened 0.1 percent to 6.3010 per dollar ahead of a meeting between Vice President Xi Jinping and U.S. President Barack Obama today. China will continue to improve reform of the yuan’s exchange-rate mechanism, the official Xinhua News Agency reported yesterday, citing Xi in an interview with the Washington Post. Xi, who is expected to become China’s next president, will meet Obama in Washington today before travelling to Iowa and Los Angeles.

“The ratings cut in Europe is just negative to market sentiment rather than a shock to investors,” said Kenix Lai, a currency analyst at Bank of East Asia Ltd. in Hong Kong. “Investors on the yuan will focus on any outcomes from today’s meeting between Xi and Obama for implications on appreciation.”

What if Greece had to get a new currency?

Mon, 13 Feb 2012 09:41:06 GMT

The eurozone crisis is not just about political deals or high finance. It is also about confidence in the cash in people's pockets. The euro was meant to symbolise a more united and stable continent for every eurozone citizen.

But if the single currency begins to fragment, if a country or countries reintroduce national currencies, everyone in the eurozone could be affected. Haggling has continued over the terms of the latest Greek bailout, while political tension rises in Greece itself. And as austerity bites deeper, few believe the overall crisis will be solved soon.

Plan B?
So there has been a very different, private policy conversation recently, full of angst, about what might happen if the eurozone cannot stay together. David Marsh has written a history of the euro, co-chairs a central banking think tank and stays in close contact with the euro's key players. "I've spoken to people about this in chancelleries and in parlours of power across Europe," he says.

"I am convinced that there is a Plan B - people have told me that there is one," he adds. "But I don't know what it is and there's no reason why anybody should even think about making it open. It has got to be locked in a safe."

The reason for this secrecy?

Because when it comes to money, to the cash in people's pockets and bank accounts, then psychology lurks, and panic is always possible. In Greece, there has already been a "slow run on the banks", reports political scientist Aristotle Kallis, as people take cash out of their accounts or send it abroad.

"They still feel that something will go horribly wrong - either Greece is going to move out of the euro or be kicked out of the euro."And then, they fear, "there's going to be a devaluation of the new currency and all this money will be converted automatically to the new currency".

New currency
A government planning to leave the euro is likely to put in a discreet but urgent call to one of the top international currency printers - like the UK-based firm De La Rue. It prints everything from the UK's pound sterling to the newest version of the currency in Iraq, the dinar.

The company will not comment on any plans it may have for Europe, but is clearly ready should opportunity arise. So how long does it take to plan and introduce new notes and coins?

"I don't think you could do it much faster than four months," says Mark Crickett, one of De La Rue's consultants. But a government could not commission and take delivery of a new currency without word leaking out and panic spreading.

It is much more likely that a withdrawal for the euro would be announced suddenly, and then there would be an interim period - those four months, say - during which a temporary national currency would be used. Euro notes previously in circulation in a withdrawing country might be overprinted, or have special stickers added.

Rapid devaluation
But how would, say, Greek citizens react to the prospect of their euro cash being overprinted into rapidly devaluing new drachmas?

cAlthough the initial official exchange rate might be, say, one new drachma to one euro, economists expect a rapid devaluation of the new currency of 50% or more.

As capital controls within Greece would be likely to restrict Greeks' ability to convert euros to new currency at the devalued rate, those who have already been stockpiling old euros under their mattresses would probably head for the border.

In this kind of situation, says Mark Crickett, governments are left doing things like "sealing borders… to try to prevent the movement of currency". And that interruption to the free movement of goods and people could call into question a country's membership of the European Union itself.

Any such action by one government would also prompt panic in other weaker eurozone countries, as citizens assumed their governments might follow suit. Larry Hatheway, chief strategist of the UBS investment bank, has co-written one of the most extensive studies of what a eurozone break-up would mean.

"Imagine," he says, "that you are a Portuguese citizen, and someone walks into your office one day and says "Gee, did you hear the news? Greece just left the eurozone?"

"The logical response, it seems to me, would be to seriously consider whether to continue to keep your wealth, your assets, your money… in Portugal."

The 'unthinkable'
The political leaders' Plan B, some kind of firewall of finance and political commitment to prevent so-called contagion, should then emerge.

But could it counter the popular mood?

Attitudes to money across the eurozone could change radically after what Mr Hatheway calls "the unthinkable has happened". There would be many thousands of people trying to move euros across borders and trade them against rapidly depreciating new national currencies.

One very well-informed source told us the authorities in Germany were even discussing the possibility of the whole euro currency having to be redesigned and replaced if it was compromised by irregular trade.

And a prominent German newspaper, the Frankfurter Allgemeine Sonntagszeitung, has been recalling the Cold War when the Bundesbank kept an entire spare run of the West German currency, the D-mark, in storage - in case East Germany or the Soviet Union managed to compromise the circulating money with forgeries.

If the eurozone cannot hold together, the continent's cash may be about to return to a similar period of uncertainty, as people feel in their pockets the consequences of the politicians' failure.

Foreign Currency/Fixed Income Commentary

Sat, 11 Feb 2012 10:03:06 GMT

The Treasury Bond/Note uptrend channel – slow and gradual – continues. Currently the low yield level of this trend, for the 10-year note, is about 1.85% (it reached that a few days ago) and the high level is about 2.05% (that’s where it is now). That tells me it would be savvy to restore a full long position in cash or futures (whatever that means to a particular investor) and prepare to reduce that by perhaps 1/3 or 1/2 when the 10-year yield approaches 1.85% again.

Strength in the U.S. economy is building and becoming more consistent than it has been in a few years. I would not expect this strength in itself to lift bond yields. However, it may lift stocks and that could provoke asset reallocation out of Treasuries into shares. The underlying support from Fed policy will still prevent a major selloff in Treasury prices, but a big stock rally may alter the nature of the bond uptrend channel. I don’t expect that for some time, but I see it as the principal risk to my basic view.

The euro has enjoyed a good recovery in the last couple of weeks, retracing from the very low level of mid-January at $1.2626 to the present level near $1.3300. The significant problems still confronting both the European economy and the European financial markets make the euro very vulnerable. I would not suggest selling it outright immediately, but I would carry only a small long position now and be prepared to liquidate that soon. The key guidance would be that traders following short-term trends should take only small or moderate long positions when the trend is upwards as it is now, but larger short positions when the trend turns down.

Recent Developments and Outlook

Today produced the news that markets worldwide have waited for hungered for, during the last almost two years. Greek Premier Papademos announced around midday European time that Greek parliamentarians had agreed to austerity measures needed to persuade the EU and the IMF to provide the €130 billion, which Greece needs to meet its obligations, including the €14.4 billion bond maturing on 20 March. This provided the basis for a sharp rally in shares, both in Europe and in U.S. futures, a moderate decline in bond prices and a bump upward in the eurocurrency – but since there have been no details of the Greek agreement, these reactions did not continue; in fact they retraced and then reasserted themselves, but not in any dramatic or conclusive fashion.

European Union finance ministers are meeting in Brussels this afternoon to discuss and possibly approve the Greek rescue package (it is surely no coincidence that the Greek announcement came this morning), but at this hour there has been no word from that meeting, and some of the reporting suggests the EU may wait and see. German Fin Min Schaeuble has already said the deal is inadequate. I’m not even certain that the finance ministers have gotten details of the Greek plans.

Most markets have for days been preparing for a development like the Greek agreement not moving with real conviction, but apparently traders have wanted to be positioned for "good news" from Greece. This is another reason why the reaction has been only moderate.

IF this turns out to be another false dawn, one can expect stocks to decline for a couple of days, Treasury bonds and the bonds of Germany and Great Britain to rally, and the euro to weaken. IF it turns out to be as good inside as it is on the surface we will see further Treasury weakness, further stock strength, and further euro strength for a little while – BUT after that the vigilantes will pay more attention to Portugal whose financial situation is not as dire as that of Greece, but whose bonds have already been downgraded to speculative (or "junk") status. Greece may be sui generis, as ECB President Draghi indicated in his press conference today, but the markets will almost surely have a go at Portugal, also, so see what they can accomplish there.

Other important developments today:
The European Central Bank kept its target interest rate unchanged at 1.0%. In the subsequent press conference, Draghi evaded questions regarding whether the ECB would contribute to the Greek rescue. While the bank is not permitted to lend directly to governments, there have been proposals for the ECB to sell the Greek bonds which it holds (acquired to smooth the price transmission mechanism, which is within the bank’s purview) to the European Financial Stability Facility or to sell them back to Greece. Reporters wanted to know what Draghi is planning in that regard, but he left his options completely open.
The Bank of England also kept its target rate unchanged, at 0.5%, but increased its asset-purchase program by £50 billion to £325 billion (this was expected – but it still represents increased quantitative easing and increased accommodation).

The U.S. weekly Jobless Claims report fell 15,000 to 358,000, pushing this number now far below 400,000 and is another example of a strong U.S. economic indicator. There have been quite a lot of these recently (in particular the +243,000 in Non-Farm Payroll Employment reported last Friday), and this fact is making it more and more plausible that the United States economy is recovering in fact and not just "in a technical sense."

Central Bank policy remains very, very accommodative worldwide. Two weeks ago the Fed indicated that it would probably keep its target rate almost at zero until late 2014, extending that outlook from mid-2013 where it was before; and there is very widespread guessing that the Fed also will increase its quantitative easing with a new round of it: QE3. Like Mario Draghi, Ben Bernanke is saying nothing clear and keeping all options open. The BoE extended QE today. The ECB, besides keeping options open, is preparing to provide more very long-term liquidity through its Long-Term Reserve Operations (LTRO) giving banks 1% money for up to 3 years. The first tranche of this involved €489 billion and some observers think the next tranche later in February will be twice that amount. The upshot of all this, once you get past the details, is that the central banks will keep funding costs very low and directly or indirectly support bonds markets until economic recovery worldwide is on a very firm footing, until there is no question that growth and employment are strong.

As a result, I think the proper posture regarding Treasury bonds (and something similar for Bunds and Gilts) is to regard that market as an uptrend supported by Fed policy, but a gradual uptrend in a channel whose top (in yield terms) is currently about 1.85%, and whose bottom is currently about 2.05%. One should maintain a basic long position in these bonds or in the 10-year note futures contract, reducing it when near the 1.85% level and restoring it near the 2.05%. A few days ago the 10-year yield was about 1.85% and it has risen since; now it is near 2.05%; so it is time to replace the partial long position, which was taken off on the recent rally. I'm not suggesting the market will turn abruptly and rally now, but demand should reappear soon.

A few weeks ago the euro was being pummeled deep into the mid-$1.20s. Since then, it has recovered strongly and is currently enjoying a short-term uptrend, and appears to have formed a good technical base. It is difficult to believe, however, that the euro can be persistently strong. The dangers to the economies and especially the finances of the Euro zone are too grave and too unpredictable. While I sometimes have to chuckle at apocalyptic views of Europe which suggest that the eurocurrency will be discontinued, that Greece will leave the Eurozone, or that the Eurozone will be completely disbanded -- almost that the continent of Europe will physically disintegrate - the risks remain great that the common currency will lose credibility, because of excessive credit creation or it will lose investment appeal due to a renewed European recession. Keep in mind that the foreign exchange value of the currency is intrinsically relative, and the U.S. is currently showing more economic strength (although probably not more monetary or fiscal discipline) than the Eurozone – so the euro could lose in the ForEx market even if Europe is doing well on an absolute basis just because it is doing less well than the U.S. or China. So I think the way to approach the common currency is to be careful in long positions when it rallies as it is doing now and more aggressive in selling it when it turns down.

The British pound is overall not showing much of a trend. However, that in itself suggests that it will over months be stronger than the euro. When the euro fell to its bottom against the dollar in January, EUR/GBP also fell to a low at about £0.8220. It has since retraced upward to £0.8400, but remains well below the £0.8500 level, which was important support for months. I don’t believe it is likely to return to that level, but if it does it will be a good area to sell the euro/buy the pound.

The Japanese yen has generally continued to be remarkably strong, remaining in a roughly ¥76/78 range. As it gets toward ¥76 buyers of the yen get cold feet, fearing that the Japanese Finance Ministry will sell the yen in an intervention. The MoF has done that a couple of times and recently warned again that it might take some action. Consequently, in the last week or so the USD/JPY has risen through almost that entire range. If the MoF does in fact intervene that would almost surely be a good time to buy the yen again – previous interventions have produced only transitory moves higher in that cross and Japanese authorities have not shown an appetite for anything more than occasional symbolic interventions, not the sustained action which would be necessary to produce a lasting change in level or trend.