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Sterling bounce up in Asia session

Asian stock markets have gone through a sell session for the second time in a row this week on the back sharp declines in of financials. Meanwhile the Pound has bounced up against the Dollar after yesterday’s sell off.
Tokyo Nikkei Index has declined 3.3% and Hong Kong’s stock markets have also posted declines beyond 3% on Tuesday.

Financials and energy firms have lead declines on Tuesday, following Wall Street’s path, banks’ shares have been sold despite buoyant quarterly earnings’ results by Bank of America. Investors seem to be hesitant to believe that the global banking system is back to normal yet.

The GBP/USD has dropped to 1.4465 on early Asian session, bounce up to 1.4575 intra-day high, and hovers below 1.4570/80 resistance level.

The USD/JPY has also bounced up from 97.70 intra-day low, the Dollar has bounced to 98.45 high on late Asian session.

The Euro has remained rangebound, trading from 1.2900 to 1.2950, approaching to the highest level of the range ahead of the European session opening.


Trade deficit speculation drag yen

The yen fell for the first time in four days against the euro and the dollar before a government report tomorrow that may show Japan posted a trade deficit last month, damping the currency’s appeal as a refuge. The euro traded near a five-week low against the dollar on speculation the European Central Bank will cut interest rates further and signal it may pump money into the region’s economy to spur growth. The yen also pared the past week’s advance against the euro as technical indicators showed the Japanese currency’s recent gains were excessive.

Japan’s currency dropped to 126.70 per euro from 126.48 in New York yesterday. The yen has still gained 3.6 percent against the euro in the past week and earlier reached 126.09, the strongest level since March 16. The yen declined to 98.02 per dollar from 97.89, and weakened to 68.61 against Australia’s currency from 68.20.

The dollar traded at $1.2924 per euro from $1.2921 yesterday, when it reached $1.2889, the highest level since March 16. The U.S. currency was at $1.4515 versus the British pound from $1.4539.

The euro may weaken on concern the recession in the 16- nation region will worsen. Germany’s ZEW Center for European Economic Research may say today its gauge of current conditions fell to minus 90 in April, the lowest since September 2003, from minus 89.4 in March.


Euro still under pressure.
The euro is expected to remain under pressure from the dollar and the yen this week amid a focus on central-bank policy.
A week of losses for the euro took the shared European currency to the verge of dropping below the $1.30 mark for the first time in a month.
The euro had rallied after the Federal Reserve in mid-March announced an expansion of its government debt purchases and other unconventional monetary-policy measures. If coming Euro Zone Data disappoint, Euro could fall as far as $1.25 at least, underscoring the less-proactive [European Central Bank] approach."
Traders and analysts also are speculating about what easing measures the European Central Bank could announce at its May 7 policy meeting. Late Friday in New York, the euro was at $1.3026, down from $1.3171 late Thursday, and at 129.18 yen, from 130.82 yen. The dollar was at 99.25 yen, from 99.32 Thursday. The U.K. pound was at $1.4784, from $1.4925, and the dollar was at 1.1674 Swiss francs, from 1.1480 francs.
Another likely theme for the week is the marked subsidence of global risk aversion. This blush of optimism has come amid some encouraging earnings reports from U.S. financial companies and a resurgence in commodity prices, helping to feed a global stock market rally over the past six weeks and boosting risk- and growth-sensitive currencies.
Last week's best performers against the dollar were the U.K. pound and the Canadian dollar. These two currencies will continue to be watched as currency-market proxies for the relative level of risk sentiment.
The pound is a currency that would be expected to perform strongly in light of the improved conditions for risky assets, and to some extent it has. (WSJ)


Kohn: U.S. economy will stabilize and recover this year
Federal Reserve Vice Chairman Donald Kohn said the U.S. economy may stabilize in the second half and begin a slow rebound after a strengthening of fragile financial markets. Consumer spending appears to have steadied, and the housing contraction has slowed, Kohn said yesterday at the University of Delaware in Newark. “These developments may be an early indication that conditions are falling into place” for real gross domestic product “to decline at a slower rate in the second quarter and to stabilize later this year,” he said.

Policy makers are trying to revive credit and end what may be the worst U.S. economic slump since World War II by holding the benchmark interest rate to as low as zero and extending credit to companies other than banks.

The Fed has used its balance sheet to back lending, money markets and securitization, expanding its total assets by $1.3 trillion over the past year to $2.19 trillion. Congress approved a $787 billion economic stimulus package in February that may pump $185 billion into the economy this year.

“We are still dealing with the consequences of the developments that precipitated the downturn,” Kohn said. “Accordingly, my best guess is that we are in for a relatively gradual recovery, though a very wide range of uncertainty surrounds that outlook.”

Kohn’s comments are in line with remarks last week from Fed Chairman Ben S. Bernanke, who said there are signs that the sharp decline in the U.S. economy is slowing, indicating a potential first step toward a recovery from the worst recession in a generation. Kohn’s speech provided a more- detailed economic outlook than Bernanke’s April 14 comments.

“Financial markets have improved some since last fall, though they remain disrupted and fragile,” Kohn said. “The path of the economy will depend critically on how quickly the current stresses in financial markets abate.”

Fed officials decided last month to boost purchases this year of mortgage-backed securities to $1.25 trillion, and housing agency bonds to $200 billion. The Fed’s Open Market Committee also voted to buy $300 billion of longer-term Treasury securities over the next six months.

The economy contracted at a 5 percent annual pace in the first quarter, according to a Bloomberg News survey, following a 6.3 percent downturn in the final quarter of 2008.

Kohn said consumer confidence “took a major hit last fall, and my best guess is that it will recover slowly along with the financial markets and the economy.” Consumer confidence rose in April, according to a preliminary reading of an index tracked by Reuters/University of Michigan. The April sentiment reading rose to 61.9, up from 57.3 in March and a three-decade low of 55.3 in November.

“Once financial conditions stabilize, the economy regains its footing, and households sense that better prospects lie ahead, confidence could rebound more vigorously, leading to a more rapid pickup in purchases,” Kohn said.

The inventory of U.S. single-family homes, townhouses and condominiums decreased to a 9.7 month supply in February, down from 11.3 months in April last year as lower mortgage rates and lower home prices spurred purchases.

“Recent data suggest that the multiyear contraction in home sales and new construction may be nearing an end,” Kohn said. That may aid the economy, yet “because inventories of unsold homes are still very high relative to sales, it may take a while for any pickup in demand to translate into higher production,” he said.

In response to an audience question, Kohn said that because of a large inventory of unsold houses, “we’re going to continue to see at least some downward pressure on prices.”

The recession that began in December 2007 has come at a high cost to U.S. growth, employment and wealth.

Unemployment rose to 8.5 percent in March, the highest since 1983. U.S. home prices fell 8.2 percent in 2008, according to the Federal Housing Finance Agency. Household net worth fell $11.2 trillion in 2008, according to Fed data.

Even so, “I don’t think it is premature to start to ponder the shape that a recovery when it occurs, would be likely to take,” Kohn said.

Another obstacle for the Fed is that “there are sizable risks on both sides of the inflation forecast,” Kohn said. Without mentioning the word deflation, he said that “substantial declines in inflation would raise real interest rates.”

At the same time, “my colleagues and I are acutely aware of the risk of higher inflation as the economic recovery gains speed,” Kohn said.

The Fed is ready to raise interest rates “when needed,” he said, reiterating that the central bank is working with the Treasury Department to seek legislation that would help the Fed tighten credit after adding more than $1 trillion in assets to its balance sheet.

The consumer price index fell 0.4 percent in March from a year before, the first annual decline since 1955. The personal consumption expenditures price index rose 1.8 percent for the year ending February, within a range preferred by several Fed officials. (bloomberg/reuters)


BOJ lower economy estimation

The Bank of Japan will probably cut its forecasts for the economy and prices next week as the recession takes a toll on spending by companies and households.
The world’s second-largest economy will probably contract 4.2 percent in the year to March 2010, more than twice the pace the central bank projected three months ago. Consumer prices excluding fresh food will tumble 1.3 percent, also faster than the bank’s earlier estimate.

Governor Masaaki Shirakawa said this month that the economy has underperformed since January and weakening spending by companies and consumers will impair growth even as declines in exports and production moderate. Prime Minister Taro Aso’s record 15.4 trillion yen stimulus package is unlikely to sustain a recovery.

BOJ policy makers are expected to present a pretty cautious view of the economic outlook because the risk lingers that growth will stumble after being lifted temporarily by fiscal stimulu. The bank may place a big emphasis on the downside risks for the outlook.

With the benchmark interest rate already at 0.1 percent, the bank will probably be forced to buy more debt issued by the government and companies to inject money into an economy heading for the worst recession since 1945, analysts said.

The central bank releases the twice-yearly outlook on April 30 in Tokyo. The report will present board members’ forecasts for gross domestic product and consumer prices in the year ending March 2010 and the following 12 months. The semiannual reports, which are reviewed each January and July, also describe the bank’s policy direction.

In January, the board predicted the economy would shrink 2 percent this fiscal year before expanding 1.5 percent next year. Consumer inflation will tumble 1.1 percent this fiscal year and drop 0.4 percent in the next.

The economists surveyed said conditions will improve next fiscal year. They expect GDP will grow 0.9 percent and core prices will fall 0.5 percent.

There are signs that economies are emerging from freefall at home and abroad, but it will take more than a year before Japan can return to a sustainable growth path.

Japanese manufacturers planned to increase output in March and April, ending a five-month drop, a government report showed last month. Gauges of confidence among consumers, merchants and small businesses all rose in March.

"We’re starting to see signs that declines in exports and output are moderating,” Shirakawa said at an annual meeting of Japanese trust banks in Tokyo today. Even so, “downside risk remains” as declining corporate profits affect household income and employment, he said.

The central bank will probably stick to its view that the economy will start to improve later this fiscal year. Even so, it expected growth won’t take root at least until late 2010 and the bank will eventually be forced to push back its prediction for a recovery.

An unprecedented decline in exports has saddled manufacturers with too many workers and excessive capacity, the central bank’s quarterly Tankan survey showed on April 1, signaling more cuts in jobs and capital investment are likely.

Toshiba Corp. last week said it will cut 3,900 temporary jobs this fiscal year, on top of 4,500 eliminations announced in January. The chipmaker will also reduce research and development spending by 18 percent.

Production capacity and employment are becoming excessive. Investment and consumer spending continue to weaken and corporate failures may accelerate.

The policy board will probably keep the benchmark overnight lending rate at 0.1 percent before releasing the outlook report, according to 15 of the 16 economists surveyed. One predicted a cut to a range of zero to 0.1 percent.