First palm-crop sag down since ’98 continues bull market: Commodities Palm-oil production in Indonesia, the world’s largest supplier, is declining for the first time in 15 years after heavy rains and drought. The sagged down is triggering a bounce back in prices from the weakest point in 45 months. The country’s output of the most-consumed edible oil will relinquish 1.9 percent to 26.5 million metric tons this year, according to the median of five grower estimates recorded by Bloomberg. That’s the first decline since 1998, according to data from the U.S. Department of Agriculture which predicts a crop of 28.5 million tons. Deutsche Bank AG says futures traded in Malaysia, a global benchmark, will average 2,800 ringgit ($867) a ton next year, 5.4 percent more than now. Financial values skyrocketed 12 percent in October, the most since 2010, and are up 23 percent from this year’s closing low in July. Plantations in Sumatra got almost twice the normal rainfall and a shortened dry season in Kalimantan curbed output after drought in the past two years weakened trees. The commodity is consumed in everything from Nestle SA instant noodles to Unilever soaps. McDonald's Corp. uses it for cooking in Asia and South America. “Bad weather disrupted crops almost all over,” said Asmar Arsjad, 74, a Sumatra farmer and secretary-general of the Indonesia Oil Palm Smallholders Association, which represents about 4 million producers across the 3,300 mile-wide (5,300 kilometers) archipelago. “People expected that production will increase in October. Because of the rain, floods, it dropped.” Bull Market Futures traded on Bursa Malaysia Derivatives in Kuala Lumpur rallied 8.9 percent this year to 2,656 ringgit, heading for the first annual gain since 2010. The Standard & Poor’s GSCI Index of 24 raw materials, which doesn’t include palm, slid 4 percent and the MSCI All-Country World Index of equities jumped 18 percent. The Bloomberg Treasury Bond Index lost 2.3 percent. Indonesia boosted palm-oil output fivefold since the last drop in 1998, USDA data show. As recently as September, the Indonesia Palm Oil Board was expecting another record year, with a forecast of 28 million tons. On September 30, the group estimated production at 26.7 million tons to 27 million tons, and Chairman Derom Bangun said a further reduction is possible. Yields were curbed by excessive or untimely rains this year, said Evi Lutfiati, the head of climate information at the Meteorology, Climatology and Geophysics Agency in Jakarta. In North Sumatra, Riau and West Sumatra, rainfall in October was as much as 500 millimeters (19.7 inches), compared with 200 to 300 millimeters normally, and Kalimantan had rain in May and June that cut the four-month dry season by more than half. Unexpected Decline Palm is grown year-round within 10 degrees of the equator, and producers crush the fruit to make the oil. Output is usually lowest in January or February and peaks in September or October. Indonesian production was lower than expected in the first half of 2013 and didn’t recover as anticipated in the second half, the Palm Oil Board’s Bangun said. Supplies probably will be lower than expected, Deutsche Bank said in a November 15 report by analyst Michelle Foong in Kuala Lumpur, raising its price forecast by 8 percent. Michael Greenall, a Singapore-based analyst at BNP Paribas SA, said prices may rise to 2,800 ringgit in the first quarter, citing lower growth in Indonesian supplies and less fertilizer use. Futures in Kuala Lumpur rose in December in nine of the past 10 years, according to data compiled by Bloomberg. Yield Bounced Back The unexpected supply drop will be short-lived because yields will surge next year, said Dorab Mistry, the director at Godrej International Ltd. Mistry, who predicted in September that prices may plunge to 2,000 ringgit by January, said he and other analysts underestimated the cyclical low in output and the impact of the weather. Futures may climb to 2,800 ringgit if production is poor in the first two months of next year, he said November 14. He speaks tomorrow at a conference in Indonesia. Supply will expand next year, according to the Indonesian Palm Oil Association in Jakarta, which represents suppliers of about 60 percent of the nation’s output. Singapore-based Golden Agri-Resources Ltd., the second-largest plantation operator, expects output growth of as much as 10 percent in 2014, Chief Financial Officer Rafael Buhay Concepcion Jr. said November 12. Global production will exceed demand by the most ever in the year that began October 1 as output surges to a record 58.3 million tons, including 31 million tons from Indonesia, the USDA estimates. World stockpiles will expand 18 percent to an all-time high of 9.2 million tons. Output in Indonesia may climb to 28 million tons this year from 25.7 million tons in 2012, agriculture minister Suswono said at a conference today. Oilseed Glut This year’s rally may slow demand. Indonesia will boost the tariff on shipments to 12 percent next month from 9 percent, said the Industry Ministry. The tax on shipments from Malaysia will rise to 5 percent, from the 4.5 percent rate that has been in place since March, the government said. The two countries account for about 86 percent of global supply. Prices may come under pressure from soybeans, a competing oilseed. Oil World, a Hamburg-based researcher, raised its forecast for global supply by 1.8 percent to 286.5 million tons on Nov. 19, citing the improved crops from Brazil to the U.S. Goldman Sachs Group Inc. listed soybeans among its most-bearish commodity forecasts for 2014, predicting year-end prices of $9.50 a bushel in Chicago, from $13.20 yesterday. Palm oil futures still are up 24 percent since touching a 45-month low of 2,137 ringgit on July 26. Those predicting a return to lower prices may be underestimating the extent of the supply drop in Indonesia, said Greenall, the BNP analyst. Inventories in Indonesia probably fell to 2.04 million tons in October from 2.6 million tons a year earlier, according to the median of estimates from five plantation executives, traders and refiners compiled by Bloomberg. Reserves in Malaysia, which discloses official data every month, stood at 1.85 million tons in October, 26 percent less than a year earlier. Water Deficit While rain hurt yields this year, severe droughts in mid-2011 and mid-2012 had a delayed impact on production in the second and third quarters of this year, said Ling Ah Hong, director of Ganling Sdn., a Malaysian research and consulting company. The dry spell caused floral abortion, when cells die before they can mature, said Ling. “It’s the impact from last year and two years ago,” said Tony Liwang, a senior researcher at PT Sinar Mas Agro Resources and Technology, a unit of Golden Agri. “We had a water deficit last year. That shocked the trees. Female flowers didn’t grow.” Biodiesel demand in Indonesia may keep prices elevated. One third of palm output may be used in the fuel in one or two years if the government is consistent in applying the policy, Mahendra Siregar, the head of the Investment Coordinating Board, said November 7. About 3 percent of the crop is used as fuel now, according to the Indonesian Biofuels Producers Association. Golden Agri’s profit will rise 43 percent to $426.4 million in 2014, according to the mean of 19 analysts’ forecasts compiled by Bloomberg. Shares of the company surged 15 percent in October, the biggest gain since April 2009. Deutsche Bank raised its recommendation on the stock to “buy” from “sell.” “The bottom line is that we’re facing higher prices coming through in the next few months,” said Greenall at BNP Paribas, who’s covered plantations for 25 years. “This year and next year, you’ll see a dip in production growth.”
Stocks slump as typhoon to protests trigger outflows: Southeast Asia Stocks in the Philippines, Thailand and Indonesia, the best movers worldwide during the past five years, are leading losses in emerging markets this month as foreign outflows approach a record on indications of slowing development. The Philippine Stock Exchange Index has plunged down 6.3 percent in November while equity gauges in Thailand and Indonesia relinquished at least 5.8 percent, after tripling since 2008. Foreigners pulled a combined $1.98 billion from the three markets this month, bringing outflows this year to $5.48 billion, the most on a yearly basis since Bloomberg started gathering data in 1999. Devastation from Typhoon Haiyan in the Philippines, political unrest in Thailand, a plunging currency in Indonesia and prospects for trimmed Federal Reserve stimulus are denting investor confidence in economies that expanded an average 6.5 percent last year, more than twice the pace of global growth. Macquarie Investment Management has shifted to Chinese stocks, while Samsung Asset Management sent money to Malaysia and the Thai state pension fund is investing in Europe and the U.S. “It’s likely we will stay underweight for the time being” in Southeast Asia said Samuel Le Cornu, who helps oversee $1 billion, including the Macquarie Asia New Stars Fund, which returned an annualized 37 percent during the past five years. That beat 99 percent of peers tracked by Bloomberg. Bond Sales Investor pessimism is also reflected in the nations’ debt and currency markets. Indonesia sold less than half its target in a debut domestic dollar debt offering on November 25, while Thailand issued about half its planned amount of government-backed debt at above-market yields. Foreign investors sold a net $1.3 billion of Thai bonds this month, according to Thai Bond Market Association data. The rupiah has weakened 6.2 percent against the dollar in November to the lowest level since 2009, while the baht has slumped 3.1 percent and the peso dropped 1.2 percent. The Philippine stock index declined 0.6 percent as of 10:05 a.m. in Hong Kong, leading losses in Asian indexes. Indonesia’s gauge retreated 0.3 percent. Losses in the three countries’ stocks helped spur a 5.8 percent decline in the MSCI South East Asia Index this year through yesterday. The regional gauge, which also includes shares in Singapore and Malaysia, is trailing the MSCI All-Country World Index by 24 percentage points, the most for any year since 2000. Turning Point The Southeast Asia measure has dropped 15 percent since May 22, when Fed Chairman Ben S. Bernanke first signaled the U.S. central bank may reduce its bond-buying program if the world’s largest economy strengthens. The Fed will begin paring back stimulus in March, according to the median estimate of 32 economists in a Bloomberg survey conducted November 8. “Stock markets in Thailand, Indonesia and the Philippines have been the hardest hit since the Fed indicated its intention to taper,” Yingyong Nilasena, the chief investment officer at Thailand’s Government Pension Fund, which oversees more than $19 billion, said by phone on November 22. “That was the turning point.” The three countries now face growing domestic challenges. Damage from the Nov. 8 typhoon in the Philippines, which left at least 5,500 people dead and displaced 3.5 million, is estimated at $6.5 billion to $14.5 billion, according to catastrophe modeling firm AIR Worldwide. The local economies of the affected areas in central Philippines, which account for about 12.5 percent of gross domestic product, may contract 8 percent to 10 percent next year, Finance Secretary Cesar Purisima said November 12. Philippine growth slowed to 7 percent in the third quarter from 7.6 percent in the previous period, the government said yesterday. Trimmed Estimate Thai protesters besieged government ministries this week and urged civil servants to join a push to oust Prime Minister Yingluck Shinawatra, an escalation of rallies that began a month ago against an amnesty proposal for political offenses stretching back to the 2006 coup that ousted her brother Thaksin. The government cut its 2013 growth forecast to 3 percent this month, from a projection of as much as 4.3 percent in August. The economy expanded at a slower-than-estimated 2.7 percent pace in the quarter ended September 30 amid weakening exports and declining consumption. “I’ve been selling for tactical reasons,” Alan Richardson, whose Samsung Asean Equity Fund outperformed 96 percent of peers tracked by Bloomberg during the past 12 months, said by phone on Nov. 21. “Social unrest over Thai politics is expected to get worse before it gets better.” Rally Outlook Indonesia’s central bank has raised borrowing costs five times since May to the highest level in more than four years as policy makers seek to support the rupiah, combat inflation and rein in the nation’s current-account deficit. Tighter monetary policy has so far done little to stem declines in the currency, which depreciated beyond 12,000 per dollar yesterday for the first time since March 2009. “The recent weakening in the rupiah will push imported inflation higher,” Enrico Tanuwidjaja, an economist at Nomura Holdings Inc. in Singapore, said on November 27. While the International Monetary Fund estimates growth in the three economies will slow to about 5 percent this year, that’s still higher than the Washington-based lender’s 4.5 percent growth projection for all emerging nations. The Philippine economy may get a boost from post-disaster reconstruction, central bank Governor Amando Tetangco said this month. Indonesia’s inflation rate, which hit a four-year high of 8.79 percent in August, slowed to 8.32 percent in October. U.S. Stocks Thai equities have rebounded after past periods of political tension. While the benchmark SET Index lost as much as 13 percent in four months after military leaders sent tanks to block Bangkok’s Government House and said they’d seized control of the capital on September 19, 2006, the gauge recouped its losses by May 2007. “I am almost always bullish on these markets because, political situations aside, they are where the growth is,” Donald Gimbel, a money manager at Geneva Investment Management of Chicago LLC, which oversees $7 billion, said on November 25. “These are small markets and once money decides they are the right places to go, it doesn’t take much money to move them higher.” Stocks in the three countries are still more expensive than emerging market peers, even after this month’s declines, according to data compiled by Bloomberg. The Philippine gauge is valued at 17 times projected earnings for the next twelve months, while Indonesia has a multiple of 13 and Thailand trades at 12 times. That compares with 11 for the MSCI Emerging Markets Index and 7.8 times for the Hang Seng China Enterprises Index. Thailand’s pension fund is investing in developed markets, Yingyong said. The Standard & Poor’s 500 Index climbed to a record on November 27 as data showed U.S. jobless claims fell while consumer sentiment exceeded estimates. Japan’s Nikkei 225 Stock Average closed at the highest level since 2007 yesterday, while the Stoxx Europe 600 Index touched a five-year high. Thailand’s growth should “remain sluggish for the near future,” Yingyong said. “We are investing more in overseas equities than domestic stocks.”
Abe no friend to emerging bonds as Nikkei leaps most since 1972 Emerging-market bonds are missing their allure among Japanese investors as Prime Minister Shinzo Abe’s stimulus policies drive the largest domestic stock hike in four decades. Investors in the world’s third-biggest economy purchased a net 1.84 trillion yen ($18 billion) of debt in Asia, Latin America, Africa, Eastern Europe and Russia during the first nine months of 2013, Ministry of Finance data show. That is less than half the amount bought in each of the last three years and is on course to be the tiniest yearly total since 2009. “Sales of emerging-market bond funds, which used to be quite popular, have been sluggish,” said Koya Iwabuchi, Tokyo-based general manager of the Investment Trust Marketing Group No. 1 at DIAM Co. Ltd., which oversees 11.8 trillion yen ($115 billion), said in an e-mail interview on Nov. 25. “We introduced two active funds on Japanese equities in May” to meet a pickup in demand for the products, he said. Since Abe took office on December 26, the Nikkei 225 Stock Average has obtained 53 percent and is set for the largest yearly increase since 1972. So-called Abenomics, a mix of fiscal and financial policies aimed at triggering growth and ending 15 years of deflation, weakened the yen 15 percent this year to the benefit of exporters including Toyota Motor Corp. and Panasonic Corp. The measures come just as the U.S. is preparing to rein in stimulus that fueled a flow of funds into developing nations, driving their borrowing costs to a record low in May. Bond Losses Local-currency notes of developing nations have already lost a record 8.4 percent this year in dollar terms, JPMorgan Chase & Co.’s GBI-EM Global Diversified Index shows. To revive an economy that’s averaged 0.6 percent growth in the past 15 years, Abe announced a 10.3 trillion-yen spending boost in January. In April, Haruhiko Kuroda, his handpicked Bank of Japan governor, doubled monthly bond purchases to more than 7 trillion yen in an effort to deliver a 2 percent inflation rate in about two years. Consumer prices excluding food and energy increased 0.3 percent from a year earlier in October, the most in 15 years, data showed today. Toyota’s shares have climbed 59 percent this year, set for the biggest advance since 1999. Asia’s biggest carmaker raised its net income forecast this month by 13 percent for the year ending March 2014. Panasonic, Japan’s largest consumer-electronics maker by market value, doubled its profit estimate last month and the shares have surged 125 percent, headed for the best annual gain on record. Carry-trade returns using the yen as a funding currency dropped in the second half of this year from the first and Japanese money managers have cut holdings of local debt in developing nations. The trades involve borrowing funds in countries with low interest rates and investing the money in higher-yielding assets elsewhere. Carry Trades Benchmark five-year bonds yield 0.18 percent in Japan, compared with 12.48 percent in Brazil, 4.69 percent in Mexico, 9.2 percent in Turkey and 7.88 percent in Indonesia, according to data compiled by Bloomberg. The developing countries’ bond markets are the four most popular with Japanese investors. Yen-funded carry trades involving purchases of Brazilian real returned 3.1 percent to investors since June, down from 7.9 percent in the first half, data compiled by Bloomberg show. Returns for the Mexican peso fell to 3.5 percent from 16 percent, while for the Turkish lira the gain shrank to 2.2 percent from 9 percent. Indonesia’s rupiah swung to an 11 percent loss from a 14 percent return. Less Outflows “If you are a Japanese investor, why would you want to put your money overseas to pick up marginal yields with far higher risks when actually you’ve got much stronger performing domestic markets with no foreign-exchange risk,” Simon Derrick, the London-based chief currency strategist at Bank of New York Mellon Corp., the largest custody bank with $27.4 trillion under administration, said in an interview in Singapore on Nov. 21. “There is less sign of outflows from Japan than there has been in times past.” Assets in the DIAM Japan Value Equity Fund increased about 27 billion yen this year to 33 billion yen, according to data provided by the company. Those in the DIAM Emerging Sovereign Open Class (BRL), which invests in the dollar-denominated bonds issued by developing nations and convert the proceeds into Brazilian real, saw assets drop about 35 billion yen to 98 billion yen. Japanese holdings of Brazilian debt fell 19 percent this year to 1.22 trillion yen in October and reached 1.14 trillion yen in August, the lowest since November 2009, according to theInvestment Trusts Association of Japan. Ownership of Mexico’s debt dropped 17 percent to 252 billion yen from a record 305 billion yen in May, while that for Turkey’s declined 16 percent to 138 billion yen from a peak of 165 billion yen in May. Holdings of Indonesia’s slid 20 percent to 123 billion yen since reaching a record 154 billion yen in May. Yields Rising The yield on developing nations’ local-currency bonds reached a record-low 5.16 percent on May 9 and has since surged 163 basis points, or 1.63 percentage points, to 6.79 percent as of November 28, JPMorgan GBI-EM Global Diversified Composite Yield to Maturity index showed. The 10-year U.S. Treasury yield rose 93 basis points to 2.74 percent in the same period. Japanese funds may step up purchases of emerging-market debt in the second half of 2014 as developing nations’ borrowing costs rise in tandem with U.S. yields, Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore, said in a phone interview on November 26. “Japanese investors are looking for more attractive levels to get in,” he said. “We are still looking at a very gradual and modest recovery” for the developing world next year, Varathan said. Growth Outlook Emerging economies will expand 4.5 percent this year and 5.1 percent in 2014, the International Monetary Fund predicted on October 8. Growth in developed nations is forecast to quicken to 2 percent from 1.2 percent. About $10 billion, or 3.2 percent of assets under management, have been taken out of emerging-market debt funds this year, including $37 billion since May, Rashique Rahman and Vandit Shah, New York-based analysts at Morgan Stanley, said in a November 26 report. Japanese investors will continue to look overseas for investments, though are likely to cut purchases of higher-yielding securities, according to Takahide Irimura, the Tokyo-based head of emerging-market research at Kokusai Asset Management Co., which manages $37 billion, said in a November 27 phone interview. “Fund flows to emerging-market bonds will be more selective than before, and massive inflows into broad emerging-market bond markets will not be repeated until we get a clearer picture of U.S. monetary policy,” he said.
Stocks bolster with Euro on inflation as Oil maintains decline European stocks advance, with the benchmark index achieving a five-year high, while Spanish bonds pulled back on indications of surging inflation in the 17-nation bloc. The euro spiked up versus the yen and the pound soared higher while crude oil held drops down and gold rose. The Stoxx Europe 600 Index increased 0.4 percent to the topmost close since May 2008, and yields on Spanish five-year notes advance six basis points to 2.66 percent. Most Brazilian stocks depreciates while Canadian shares skyrockets as gold increase for the first time in three days in London. The euro moved higher to a four-year high against the yen and the pound reached the best performing financial value since January. West Texas Intermediate oil held near a six-month low and Brent crude relinquished 0.4 percent. Germany's annual inflation rate, computed using a harmonized European Union system, spiked up to 1.6 percent this month from 1.2 percent in October, damping bets the European Central Bank will loosen financial policy. Bank of England Governor Mark Carney said allowances under Britain’s Funding for Lending Scheme will only apply to business lending from 2014 in a move aimed at restraining the U.K.’s house-price boom. U.S. stock and bond markets were shut for Thanksgiving. “The more resilient German inflation is, the higher the hurdle is for more easing from the ECB,” said Eimear Daly, a currency-market analyst at Monex Europe Ltd. in London. “The inflation number from Saxony significantly boosted the euro.” The Stoxx 600 has bolstered 0.9 percent in November, on track for a third monthly increase. The European index has rallied 16 percent this year, compared with a 27 percent climb in the Standard & Poor’s 500 Index. Canadian Stocks Thomas Cook Group Plc rallied 15 percent in London today after the travel operator posted a 49 percent increase in full-year earnings. Rio Tinto Group, the world’s second-biggest mining company, added 3.9 percent after saying it will cost $3 billion less than projected to increase iron ore output capacity. The Standard & Poor’s/TSX Composite Index added 0.1 percent in Toronto as Detour Gold Corp. climbed 14 percent and Iamgold Corp. rose 3 percent. Bullion for immediate delivery rose 0.5 percent in London after falling as much as 0.3 percent, and gold for February delivery added 0.5 percent on the Comex in New York. Platinum gained 0.7 percent. DHX Media Ltd. jumped as much as 38 percent in Toronto after agreeing to buy Family Channel, Disney XD and other channels from Bell Media, a unit of BCE, for about C$170 million in cash. Vale Hikes The MSCI Emerging Markets Index rose 0.4 percent in a second day of gains, with Dubai’s benchmark index jumping 1.6 percent to its highest close in five years. Brazil’s Ibovespa closed little changed as 38 stocks moved lower while 29 climbed. Vale SA, the world’s biggest iron-ore producer, gained 2.7 percent in Sao Paulo, the most in six weeks on a closing basis. The company agreed to pay 22.3 billion reais ($9.6 billion) to settle a decade-long tax dispute with Brazil over profits at its foreign units, ahead of a deadline tomorrow. A gauge of U.K. homebuilders fell 1.6 percent after the Bank of England’s announcement. Barratt Developments Plc lost 4.9 percent and Persimmon Plc slid 6.1 percent. Economic confidence in the euro-area rose more than analysts forecast in November, with an index of executive and consumer sentiment increasing to 98.5 from 97.7 in October, the European Commission in Brussels said today. Consumer prices rose in Spain in November, separate data showed. Spain’s 10-year bond yields were little changed at 4.15 percent, while the rate on similar-maturity German debt slipped to 1.7 percent. Bond Risk Germany’s 10-year break-even rate, a gauge of inflation expectations that measures the yield difference between bonds and index-linked securities, rose two basis points to 1.44 percentage points after closing at 1.42 percentage points yesterday, the least since May 2012. The cost of insuring against losses on corporate bonds touched the lowest level since April 2010. The Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies fell to as low as 76 basis points. Futures on the Standard & Poor’s 500 Index expiring next month climbed 0.2 percent after the index rose yesterday to a record. The gauge of U.S. equities has rallied 2.9 percent this month and is on pace for the biggest annual jump since 1997. Exporters led gains in Asian stocks after U.S. data yesterday showed jobless claims in the world’s largest economy fell while consumer sentiment exceeded estimates. Earnings Growth “Asia’s earnings growth does remain largely leveraged to the global economy,” Michael Kurtz, the Hong Kong-based head of global equity strategy at Nomura Holdings Inc., said in an e-mail. “Our economists expect the U.S. economy finally to accelerate to a more robust pace in 2014.” Japan’s Nikkei 225 rose 1.8 percent, the most in a week, as Honda Motor Co., which gets more than 80 percent of its sales outside Japan, advanced 1.5 percent. The euro climbed 0.3 percent, rising a sixth day, to 139.12 yen, the strongest intraday level since June 2009, while the pound gained a third day, adding 0.4 percent versus the dollar. Indonesia’s rupiah weakened 1.1 percent versus the dollar to its lowest closing level in 4 1/2 years. The Australian dollar, known as the Aussie, snapped its longest losing streak versus the greenback since May, rising 0.4 percent to 91.14 U.S. cents. Capital spending increased 3.6 percent from the second quarter, compared with the median forecast in a Bloomberg survey for a 1.2 percent drop. Real Bounces Back Brazil’s real climbed 0.6 percent against the dollar, ending a three-day drop, while swap rates sank. The central bank raised Brazil’s benchmark interest rate to 10 percent from 9.5 percent yesterday, in line with analyst estimates, as a weaker currency and widening budget deficit spur inflation. Brazil’s Treasury said today the government’s primary surplus was 5.4 billion reais in October, trailing the median estimate among analysts for an 8 billion-real surplus. WTI crude fell less than 0.1 percent in electronic trading in New York to $92.25 a barrel, holding at the lowest level since June. A government report yesterday showed stockpiles rose for a 10th week in the U.S., the world’s biggest oil consumer. Brent fell to $110.86 a barrel. Natural gas futures gained 1 percent in a seventh day of gains, the longest rally since January 2011, data compiled by Bloomberg show.
Aussie seen plunging down amid RBA talk of intervention Traders are betting Australia's dollar will continue its largest retreat in five years as policy makers flag that intervention to decline the currency is an option, 30 years after they gave up exchange controls. Contracts giving the power to merchandise the Aussie versus the U.S. dollar have the highest premium over those allowing purchases since September. The bearish bets were at a four-year low last month. The Australian dollar’s 13 percent decline this year makes it the weakest mover after South Africa’s rand and Japan’s yen among 16 major currencies tracked by Bloomberg. While slouching commodity prices and mining investment are weighing on the Aussie, U.S. financial stimulus is acting as a brake on its sagged down, triggering Reserve Bank of Australia Governor Glenn Stevens to say this month he’s “open-minded” about intervention. The currency is 24 percent overvalued, according to an Organization for Economic Cooperation and Development measure that tracks buying-power parity. “You could argue that it’s somewhat expensive relative to fundamentals, as the RBA does, but like the RBA, my view is that those fundamentals will ultimately assert themselves,” Stephen Miller, a Sydney-based money manager at BlackRock Inc., which oversees $3.9 trillion, said in a November 26 phone interview. “I won’t be surprised to see” the Aussie in the “low 80s in a year’s time,” he said, compared with 90.92 U.S. cents as of 11:29 a.m. in New York. Traders Warned Stevens put currency traders on notice November 21 when he said that, while the benefits of intervention haven’t “so far” outweighed the costs, it “doesn’t mean we will always eschew” currency sales. “In fact we remain open-minded on the issue,” he told a forum of economists to mark next month’s 30th anniversary of the free float of Australia’s exchange rate. The nation’s dollar fell to a three-year low of 88.48 U.S. cents on August 5, from $1.0599 on January 10, as the central bank cut its main interest rate by a half-percentage point to a record 2.5 percent. There’s a better than 50 percent chance the RBA will reduce the rate further next year, BlackRock’s Miller said. of 31 economists surveyed by Bloomberg, 22 predict no change to borrowing costs by March. RBA ‘Jawboning’ The policy of allowing the Aussie to trade freely, which resulted in declines of about 20 percent in the wake of the Asian financial crisis of 1997 and the global slump of 2008, is partly responsible for Australia’s unparalleled record of more than 20 years without a recession. Australia’s dollar plunged 30 percent to 63.08 U.S. cents within 17 months of the December 1983 decision to scrap its peg versus a basket of peers to combat speculators betting on gains in the currency. Australia’s relatively high rate, which compares with a target of near zero in the U.S. and Japan, has ensured the nation attracts its share of the money printed by the Federal Reserve to finance its $85 billion of monthly bond purchases. The U.S. central bank will start reducing the stimulus program in March, according to a Bloomberg economist survey. “The market is uncertain and uncomfortable holding long positions in the Aussie at the moment,” Hugh Killen, the Sydney-based global head of foreign exchange at Westpac Banking Corp., said in a November 22 phone interview. “The tone of the Aussie is being set by the RBA’s jawboning and rates outlook, as well as the discussions around the Fed taper that are strengthening the U.S. dollar.” Bounce Due Australia’s dollar is probably due a bounce as it has fallen quickly over a short period and 90 cents is a “big level,” Marianne Winkelman, director of global bond, emerging market and currency trading at Loomis Sayles & Co., said in an e-mailed response to questions received today. “The RBA should be pleased with themselves,” Boston-based Winkelman said. “Aggressive FX intervention is unlikely and unnecessary at current Australian dollar levels. The bank’s verbal intervention had an impact, and they may not have spent a dime.” The Aussie gained as much as 0.8 percent today, snapping six days of declines and climbing from a three-month low, after data showed business investment unexpectedly grew, reducing pressure on the RBA to ease policy. U.S. monetary policy will remain stimulatory compared with Australia, even after bond purchases end, keeping the Aussie above its long-run average, Joseph Capurso, a Sydney-based strategist at Commonwealth Bank of Australia, said on Nov. 27. The Aussie is trading below its five-year average of 94.59 U.S. cents, data compiled by Bloomberg show. Bullish CBA CBA predicts the currency will strengthen to 92 U.S. cents by mid-2014. That makes the nation’s biggest lender more bullish than the median estimate of more than 30 strategists surveyed by Bloomberg, which puts the Aussie at 90 cents by June. Traders are paying the biggest premium among Group of 10 currencies for options betting the Aussie will weaken further, according to data compiled by Bloomberg on 25-delta risk-reversal rates. The premium on one-month contracts to sell the local dollar versus the U.S. currency over those allowing purchases increased to 1.78 percentage points, the highest since September 18. The premium rose from 0.47 percentage points on Oct. 22, the least since October 2009. A weaker currency will help make Australia more competitive as it seeks to end its dependence on mining development in the north and west of the country and boost industries including residential construction in the south and east. The Commodity Research Bureau’s U.S. Spot index fell 4.4 percent this year, the most since 2011. Aussie Overvalued Even after this year’s decline, the Aussie is the fourth most-overvalued of 15 major currencies, according to the OECD measure. Its peak level by this gauge came two years ago. Stevens’s ability to combat the Aussie’s strength through intervention was reinforced last month when the government pledged to inject A$8.8 billion ($8 billion) into the RBA’s reserve fund. The central bank may seek to convert at least A$5 billion of this into foreign currency, UBS AG said in a November 26 client note. “The key issue is definitely the unrelenting effort by the RBA to talk the currency down,” Callum Henderson, the Singapore-based global head of currency research at Standard Chartered Plc, said by phone November 26. “The bar for intervention is very high. It’s a useful potential threat to mention, but it becomes less useful if they actually do it. For the time being, they’ll focus on words.”
