U.S. dollar continues rally against euro, amid possible rate hike delay

Investing.com –

Investing.com — The U.S. dollar rallied by more than 1% against the euro on Tuesday, amid weaker than expected services data in the euro zone and expectations for a delayed interest rate hike by the Federal Reserve.

EUR/USD fell 0.0116 or 1.06% in U.S. afternoon trading to 1.0807, moving steadily lower from a daily-high of 1.0956 in European morning trading. European markets reopened on Tuesday after a four-day weekend for the Easter holiday.

The pair likely gained support at a low of 1.05 from March 11 and resistance at 1.11, the high from Mar. 4. On Monday, EUR/USD moved above 1.10 for the first time since Mar. 25, before falling back to 1.094.

While the Markit Eurozone Services Business Activity Index increased from 53.7 in February to 54.2 in March, expansion in output still fell below previous estimates of a 54.3 reading. Increases in Germany, Italy and Spain accelerated growth while the United Kingdom’s service-sector PMI peaked at 58.9, to reach a multi-month high.

Price discounting throughout the euro zone drove growth on the continent.

“The PMIs are indicating somewhat sluggish GDP growth of 0.3% for the first quarter.,” said Chris Williamson, Chief Economist at Markit. “However, the important message from the survey data is that the pace of expansion looks set to gather pace in coming months.

Meanwhile, in the U.S. Federal Reserve Bank of Minneapolis president Narayana Kocherlakota said at a speech on Tuesday that the Fed may not need to raise its benchmark Federal Funds Rate until the second half of 2016.

“In light of the outlook for unduly low employment and unduly low inflation, the Fed can be both late and slow in reducing the level of monetary accommodation,” Kocherlakota said in a speech to the Chamber of Commerce in Bismarck, N.D.

The comments came in light of a disappointing U.S. jobs report last Friday when the U.S. Bureau of Labor Statistics said in its monthly jobs report that the economy added 126,000 in March, halting a streak of 12 consecutive months of job growth that exceeded 200,000. The modest job increases nationwide marked the weakest period of hiring in 15 months. In terms of average weekly earnings, employees nationwide received the smallest annual gains in wages since last June.

The labor force participation rate, which measures the number of people who are either employed or actively looking for work, also painted a bleak outlook. During the month of March, the rate ticked down to 62.7%, the lowest level in 36 years.

In mid-March, Federal Reserve chair Janet Yellen indicated that the Fed could begin raising interest rates when it was “reasonably confident” that inflation will move toward its target inflation of 2%. Yellen added that the Fed will take a “data-driven” approach to potential liftoff by keeping a close eye on wage and GDP growth before raising rates.

Yields on the U.S. 2-year, meanwhile, have ticked up to 0.520, after reaching a two-month low at 0.47 late last week. At Tuesday’s 3-year note auction of U.S. Treasuries, yields stood at 0.865% with average demand of $ 24 billion. Many analysts believe the lower yields reduce the possibility that the Federal Reserve could increase rates by June.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, edged up on Tuesday by 0.95 points to 98.16

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Euro Short Covering Underway, but Long-term Outlook Still Bearish

DailyFX.com –

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Euro Short Covering Underway, but Long-term Outlook Still Bearish

Fundamental Forecast for Euro:Neutral

The stage was set for EURUSD short covering, and the Fed decimated the US Dollar mid-week.

The retail crowd’s penchant for selling the Euro is proving to be a reliable contrarian indicator.

Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.

The FOMC meeting proved to be the powder keg it was hyped up to be, helping spark a massive EURUSD short covering rally that produced the biggest single-day rally in over three-years. EURUSD closed the week up +3.00% at $ 1.0814, after setting fresh yearly lows at $ 1.0458 on Monday. With a build in Euro short positioning among future market speculators ahead of the FOMC meeting – to 193.8K net-short contracts for the week ended March 17 – there’s been and remains plenty of tinder to keep EURUSD elevated in the near-future.

The rapid build in short positioning ahead of the FOMC meeting brought the market back in line with the extreme positioning seen in early-February (196.3K net-short contracts for the week ended February 3), right before a month-long consolidation developed in EURUSD. Now that the Fed has essentially changed the goalposts on raising rates – pushing the likelihood of the first rate hike for either October or December, per the federal funds futures contracts – the weak data coming out of the US provides good reason for the massive net-long US Dollar position to be unwound.

Even if the short EURUSD position is unwound, the Euro viewed in isolation is still a weak currency fundamentally. Bond prices across the region continue to rise, with yields in Germany negative out to 7 years right now. The 5-year German bund yield closed the week at -0.11%, while 5Y5Y inflation expectations came in at +1.760%; as yields fall and inflation expectations rise, Euro-Zone based investors will be forced to seek yield outside the region, thereby exchanging Euros for foreign currencies in order to invest in higher yielding foreign assets.

Over the next few weeks, EURUSD may not offer the best opportunity for seeing weakness in the Euro; that could go to the commodity currencies, which have had historically strong end-of-March trading sessions per QE-era seasonal studies. Allowing more time for the market to recalibrate to the Fed’s new goalposts and the US economy to move through early-Q1 data (which has been deplorable, even recession-like) will most likely be the best path forward in EURUSD. –CV

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Euro in Freefall, but Losses against Dollar May Soon Find Relief

DailyFX.com –

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Euro in Freefall, but Losses against Dollar May Soon Find Relief

Fundamental Forecast for Euro:Neutral

The Euro is in a fast moving, trending market right now, and the safer trade is on the short side.

Volatility in the US Dollar this week highlights the exhausted nature of the current rally.

Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.

It was one of the worst weeks of the entire year for the Euro, with EURUSD losing another -3.32% (closing at $ 1.0489), EURJPY dropping by -2.83% (closing at ¥127.42), and EURGBP slipping by -1.30% (closing at £0.7119). EURUSD has now dropped by -6.67% in March and -15.26% in 2015, thanks in part to speculation arising not only around the European Central Bank’s initiation of QE, but also the expectation of the Federal Reserve kicking off a rate hike cycle by mid-year.

The initiation of QE, on the surface, is not the sole reason for Euro weakness; instead, it is QE’s impact on the core countries’ yield curves that’s changing the Euro’s undercurrents. First, it’s important to consider the constraint of QE: no bonds with yields below the ECB’s interest rate corridor of -0.20% are being purchased. For Germany, this means that bond buying with be directed at the longer-end of the yield curve, as debt with 0-3 year maturities has already seen their yields hover below the corridor floor. This has already resulted, and will likely continue, in the core countries’ (and especially Germany’s) yield curves flattening out, with long-end yields converging near the corridor floor.

A flattening yield curve in Germany reduces interest rate differentials for the Euro, undermining the currency’s appeal and pushes it further into the territory of being a funding currency. (One needs to look no further than the German 5Y yield compared to Japan’s: it has been lower for the past several weeks and the differential has widened.) Market participants have taken the flattening yield curves in the core as a reason to pile back in to short Euro positions, with net-shorts among futures market speculators having risen back to 181.1K contracts as of March 10, 2015.

While pressure on the Euro may continue versus a broad basket of currencies, the recent losses versus the US Dollar have gotten into excessive territory. The greenback itself is seeing a rate of change develop that’s unseen since 2008 or 1987 – when the markets were roiled by financial crises. Despite terribly weak US economic data ex-labor, investors have taken the Fed at its word and have effectively priced in the first rate hike coming as soon as June 2015.

This week’s FOMC reading is far and away the most important event on the calendar for the EURUSD, and even if the Fed drops the seemingly important word “patience” from the policy statement, we may be looking at a ‘blow off’ type of event, rather than the sparkplug for the next leg down in EURUSD. Not only is the market quite short Euro, but it is also very long the US Dollar: as of March 10, there were 81.3K net-longs among speculators in the futures market, the highest amount ever (exceeding the previous all-time high of 73.2K). If the Fed is switching from a language-based policy (forward guidance) to a data-dependent one, then the market might quickly recalibrate and turn its focus to disparaging US consumption and inflation data that’s developed over the past few months. Even though the Euro may be in freefall at the present time, there may just be a point of relief coming up on the horizon in the near-future – at least for EURUSD. –CV

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Euro Collapse No Longer a Major Concern for US Companies – Analyst Blog

The European Central Bank (ECB), in its bid to boost the Eurozone’s flagging economy, began its quantitative easing (QE) on Monday. The QE is guiding the long-term bond yields in the region to near zero, while the central bank continues buying the government debt using the newly-printed euros. This should be flooding the markets with euro.

Last Friday, the ECB announced its 1 trillion euro ($ 1.1 trillion) bond-buying program. Since then, and particularly from Monday with the commencement of the QE plan, weakness in the euro grew. The US dollar achieved a 12-year high and has gained over 31% against the euro over the last 12 months.

Dollar-Euro Parity

There are calls now for a one-to-one exchange rate between the currencies, or in simple terms – dollar-euro parity might be in the cards. The parity existed when the euro was introduced, and it happened again in Nov 2002.

Changing money supplies and the contrasting central bank policies between the two regions have been fueling the chances of the parity. Moreover, there are heightened chances of the US Fed raising interest rates and cutting down the money supply. This will further make dollar-denominated assets more valuable.

What Role Does the Dollar Play Now?

Meanwhile, the Dow crashed about 332 points on Tuesday. Data from Wunderlich suggested the S&P 500 has dropped in 19 of the 27 occasions when the dollar strengthened. The Fed’s sooner-than-expected rate hike fears have also been dragging US equities down. So a strengthening dollar cannot be solely blamed for a dip in equities.

The latest slump in the domestic stock markets should not deter the mood altogether. Though there are adverse effects of a stronger dollar, there are positives too. The plunge in the euro — or let’s say the gain in the dollar — bodes well for a lot businesses in the US.

While it does offer Americans a great opportunity to travel to the other side of the pond at a lower cost, a major benefit of a stronger dollar scenario is that it slashes import prices. Moreover, a stronger dollar is said to be beneficial over the long term in drawing more capital to the country.

Speaking of imports, the US is the second largest importer in the world. According to the United States Census Bureau’s numbers for trade in goods with European Union, January imports from the European Union were at $ 31,588.8 million, as against exports of $ 22,265.7 million. Imports had also outpaced exports in 2014, as for imports of $ 417,836.7 million, exports totaled $ 276,698.4.

Separately, US heavily imports vehicle, machines, engines, pumps, pharmaceuticals, aircraft, spacecraft and alcoholic beverage from Germany and France. So these related companies should also be cheering the devaluation of the euro.

On the other hand, the stronger dollar negatively affects exporters. US firms lose out on the competitive space, as US products become more expensive for consumers in foreign lands — Europe, in this instance.

Also, euro-denominated earnings take a plunge. Price adjustments cannot be made straightaway. They need to incur the currency headwinds that affects revenues and profits in U.S. dollar terms.

However, certain US firms this time can move beyond the import advantage as they have a new strategy – “Reverse Yankees” – to offset pressures from the weaker euro.

Reverse Yankees: The Smart Bet by US Firms

Per this strategy, US companies have been increasingly offering euro-denominated bonds. According to Dealogic, euro-denominated issuance by US firms exceeded 33 billion euros in 2015. This is three times higher than the year-ago period’s number. The borrowing cost in euros is at an historic low. It is cheap relatively to dollar funding. Thus, some multinationals are taking advantage of this master strategy.

The Coca-Cola Company KO offered the largest amount ever by a U.S. firm in euro-bonds. In late February, Coca-Cola offered 8.5 billion euros worth of euro-denominated bonds. Very recently, Kinder Morgan, Inc. KMI also priced 1.25 billion euros of euro-denominated bonds. This is the company’s first issuance of bond offering in euros. It is a smart move by the company to enter the European market at a time of record low borrowing costs and a favorable currency exchange rate.

AT&T, Inc. T, The Priceline Group Inc. PCLN and even Warren Buffett’s Berkshire Hathaway Inc. BRK.A have jumped in to reap benefits of the demand and high prices for euro-denominated bonds. Apple Inc. AAPL was pretty fast in noticing the trend and had debuted after issuing 2.8 billion euros of bonds in Nov 2014. The iPhone maker was taking advantage of a market offering the lowest yields in over half a decade as compared to dollar-denominated debt.

Reportedly, US firms are selling euro bonds that offer about 1.5%-1.75% lower yields than equivalent bonds issued in the US. Apart from the lower borrowing cost advantage, the strategy also offers a hedge against currency devaluation risk.

For firms anticipating further strength in the dollar, and thus a weaker euro, paying off the bonds will be cheaper. If the euro improves, these firms may bank on their revenue stream in euros. The firms may lock the current exchange rates by borrowing in euros. They may later on pay off the bonds with their euro revenues.

Conclusion

A strong currency in general may often be seen as a short-term negative, particularly for the exporters. However, importers will always gain and this makes more sense for the US, which is the second biggest importer. The currency-hedging action and the “Reverse Yankees” trend now offer great protection to US firms.

Moreover, expanding in Eurozone through mergers and acquisitions will be cheaper now. In order to utilize this advantage, US healthcare companies have been busy of late in buying European companies.

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FOREX-Euro rebounds as dollar pauses for breath

(Recasts, adds details, fresh quote)

* Euro rises 0.9 pct after hitting 12-year low vs dollar

* U.S. retail sales eyed for rate hike clues

* Kiwi up 1.4 pct after RBNZ sounds less dovish

By Jemima Kelly and Anirban Nag

LONDON, March 12 (Reuters) – The euro rose against the dollar for the first time in two weeks on Thursday, recovering from a slump to a 12-year low in Asian trading as the greenback took a pause from its broad upward surge.

However, traders said the euro’s gains would prove short-lived, with many expecting the common currency to fall to parity with the dollar in coming months for the first time since 2002. Both technical indicators and options market pricing showed more losses are in store for the beleaguered currency.

On Thursday Bank of America Merrill Lynch became the latest major bank to revise its euro forecasts downwards. It now expects dollar parity by the end of the year, having predicted $ 1.10 in its previous projections.

The European Central Bank’s launch of a 1.1 trillion euro bond-buying progamme this week has dented the euro’s appeal by driving yields of many euro zone bonds to all-time lows. A 30-year German bond now offers a yield which is below a two-year U.S. Treasury note.

In contrast, investors are betting that the U.S. Federal Reserve will raise interest rates in the coming months – a view bolstered by strong jobs data last Friday but which could lose support if U.S. retail sales numbers due at 1230 GMT come in weaker than expected.

The euro rebounded 0.9 percent to $ 1.0637, still not far from its 12-year low of $ 1.04940 hit overnight but on track for its biggest daily gain since early February.

“The market was definitely wrong-footed by the move this morning, which I suspect initially began as a profit-taking exercise for some dollar longs,” said Daragh Maher, a currency strategist at HSBC in London.

“What (it) shows is that the market had become too one-way in its mindset. This has reintroduced a bit of two-way risk, and a bit of pain, I’m sure.”

The dollar index, which measures the greenback against six major currencies, lost 0.8 percent ahead of the retail sales data to 98.979, having hit 100.06 for the first time since early 2003 overnight.

“Unless we get protests from other trading partners about a weakening euro, I think the trend will continue. There have been some noises from the U.S. but as long as the Europeans are happy with the currency weakness, the euro can go down further,” said Yujiro Goto, currency analyst at Nomura.

Meanwhile, the New Zealand dollar advanced after the Reserve Bank of New Zealand sounded less dovish than markets had positioned for and kept interest rates steady at 3.5 percent.

The kiwi was at $ 0.7401, up 1.5 percent and pulling away from a five-week trough of $ 0.7192 struck on March 11.

(Editing by Gareth Jones)

Euro continues to probe 12-year lows, U.S. data awaited for cues

By Shinichi Saoshiro and Ian Chua

TOKYO/SYDNEY (Reuters) – The euro slumped to a new 12-year low on Thursday, reeling from an unrelenting onslaught after the European Central Bank startedits quantitative easing (QE) campaign, highlighting the monetary policy divergence between the euro zone and the U.S.

The 1 trillion euro bond-buying program the ECB launched on Monday by has dented the common currency’s appeal by driving yields of many euro zone bonds deeper into negative territory and others to all-time lows.

A 30-year German bond now offers a yield below that of a two-year U.S. Treasury note .

The euro fell as far as $ 1.0505 , the lowest since March 2003. A further slide would only heat up talk of parity with the dollar, a phenomenon last witnessed in 2002. The euro was last at $ 1.0511.

Furthermore, developments in Greece did the euro no favors, with Athens appearing to have made no headway in persuading euro zone partners to renegotiate terms of a 240 billion euro bailout.

The market awaited U.S. indicators including retail sales due later in the session to see if the latest data can reinforce the notion of an earlier interest rate hike by the Federal Reserve, a notion that has given the dollar such kick since last Friday’s robust employment numbers.

The plight of the euro, which has coincided with a rise in euro zone equities with Germany’s DAX <.GDAXI> scaling record highs, drew comparisons with what the yen experienced when the Bank of Japan unleashed its own bond buying-driven QE scheme.

The BOJ began its current QE program in April 2013 and enhanced it in October 2014. The dollar has soared from 93 yen to around 122 yen while the Nikkei share average <.N225> has climbed an eight-year peak since the QE launch.

“The situation is identical to what has taken place in Japan, when investors like foreign players sold the yen and bought stocks. Under ECB’s easing, prospects for euro zone shares are good while the euro looks bleak. Selling the euro and buying shares becomes a natural combination,” said Koji Fukaya, president at FPG Securities in Tokyo.

Against sterling, the euro fell to its lowest in over seven years at 70.11 pence . It slumped to a near two-year trough 127.64 yen .

The dollar index <.DXY> came within a whisker of 100.00 for the first time since April 2003. Versus the yen, the greenback traded at 121.64 , not far off an eight-year peak of 122.04 set on Tuesday.

Elsewhere, the New Zealand dollar advanced after the Reserve Bank of New Zealand sounded less dovish than markets had positioned for and kept interest rates steady at 3.5 percent.

“When you look through the statement, the threshold for cutting the cash rate right now is perhaps a little bit higher than what markets have been anticipating,” said Nick Tuffley, economist at ASB Bank.

The kiwi fetched $ 0.7294 after pulling away from a five-week trough of $ 0.7191 struck overnight.

The Australian dollar traded at $ 0.7577 , drawing a small lift from a moderate rise in Australian employment but still in proximity of a six-year low of $ 0.7561 hit overnight.

(Editing by Shri Navaratnam and Eric Meijer)

Euro extends slide as European stocks rebound

London (AFP) – German and French stock markets rebounded strongly Wednesday after upbeat comments from ECB head Mario Draghi but the euro hit new multi-year lows on expectations of a US rate hike.

Frankfurt’s DAX 30 index hit a new record-high at 11,718.41 points before easing slightly to 11,702.69, a gain of 1.76 percent from Tuesday’s close.

The CAC 40 in Paris won 1.83 percent to stand at 4,971.26 points in afternoon deals.

London’s benchmark FTSE 100 index edged up 0.16 percent to stand at 6,713.56.

The euro slid to $ 1.0560 — the lowest level since March 2003. It later stood at $ 1.0587, down from $ 1.0698 late on Tuesday in New York.

“Rising expectations for US interest rates and an escalation of the Greek crisis could push the euro down to parity against the US dollar and beyond,” said Jonathan Loynes, chief European economist at Capital Economics.

European stocks were however getting a boost from “Draghi’s optimistic take on QE and its effectiveness on boosting inflation and economic growth in the months ahead,” said Markus Huber, senior analyst at Peregrine & Black trading group.

The European Central Bank’s massive bond purchase programme will not reduce the incentives for governments to reform as it will magnify the benefits measures undertaken, Draghi said Wednesday.

– Greece pays more to borrow –

The ECB has embarked on a policy of so-called quantitative easing or QE, under which it plans to buy 1.14 trillion euros worth of bonds over the next 18 months. The aim is to pump liquidity into the system so as to ward off deflation and spur growth in the single currency area.

But QE has its critics, particularly in Germany, who argue that it reduces the pressure on eurozone governments to get their finances and economies in order.

The yield on German, Italian and Spanish 10-year government bonds have fallen to record lows as a result of the massive bond-buying programme.

But Greek bonds are not benefitting from the decline in yields owing to a new spike in concerns over its finances as well as the exclusion of Greek debt from the QE programme.

Greece on Wednesday raised 1.3 billion euros in three-month treasury bills at higher interest in an ongoing scramble for cash.

The country’s debt agency said it had accepted the entire amount offered by creditors, paying 2.7 percent compared with 2.5 percent in an equivalent sale a month earlier.

Greece needs to find some 6.0 billion euros this month to repay maturing treasury bills and loans from the International Monetary Fund.

The new radical left government elected in January on an anti-austerity platform has received no money from Greece’s outstanding EU-IMF bailout because it is still in negotiations with the country’s international creditors on a new loan deal.

Wall Street meanwhile staged a mild recovery after deep losses in the prior session on worries about the rising dollar.

Five minutes into trade, the Dow Jones Industrial Average crept up 0.15 percent, while the broad-based S&P 500 added 0.17 percent and the tech-rich Nasdaq Composite Index edged up 0.06 percent.

Weaker Euro Boosts Europe Stocks as Emerging Markets Fall

(Bloomberg) — The weakest euro since 2003 boosted stocks on the third day of the European Central Bank’s quantitative-easing program. Emerging-market shares fell for a ninth day after Chinese economic data trailed analysts’ estimates.

Europe’s shared currency slid 1.1 percent to $ 1.0583 at 7:37 a.m. in New York. Automakers and other exporters led the Stoxx Europe 600 Index 1.3 percent higher. Standard & Poor’s 500 Index futures increased 0.4 percent after the gauge wiped out its 2015 advance on Tuesday. Italy’s 10-year yield declined as much as six basis points to a record-low 1.162 percent.

More from Bloomberg.com: Emerging Stocks Head for Longest Slump in Six Months on China

ECB President Mario Draghi reiterated on Wednesday the bank’s commitment to push inflation back toward its goal and to support recovery. As the ECB buys debt in its 1.1 trillion-euro ($ 1.2 trillion) program and China cuts borrowing costs to sustain growth, stronger U.S. jobs data has fueled speculation that the Federal Reserve may signal earlier interest-rate increases at its meeting next week.

“The most important thing that QE is doing is giving Europe a fantastically cheap currency,” said David Hussey, head of European equities at Manulife Asset Management in London. “This is shifting growth and demand around the world — Europe is an export-led economic bloc and that’s good news.”

More from Bloomberg.com: Pound Climbs for Seventh Day Versus Euro to Strongest Since 2007

The euro fell against 14 of its 16 major peers, dropping most versus South Africa’s rand and Singapore’s dollar. The 19-nation shared currency declined 0.8 percent to 128.62 yen. It fell to a five-month low against the krona after data showed the Swedish economy emerged from six months of deflation.

Exporters Climb

The Stoxx 600 rose after losing 1.2 percent in the past two days. All industry groups climbed on Wednesday, with carmakers adding 2.4 percent, the most in a month. BMW AG, which gets more than half its revenue from outside the euro region, increased 3.2 percent, and Daimler AG climbed 2.5 percent. A weaker euro makes European goods more competitive oversees, boosting demand.

More from Bloomberg.com: Goldman Advances to Have Group Discrimination Suit Tossed

France’s CAC 40 Index and Germany’s DAX Index advanced the most among 18 western-European markets, adding at least 1.7 percent.

Adecco SA rose 4.2 percent after the world’s largest provider of temporary workers posted better-than-expected net income for 2014.

Deutsche Post AG declined 3.1 percent after Europe’s largest postal service reported worse-than-forecast quarterly earnings and said operating profit growth this year may be limited to less than 3 percent. JC Decaux SA lost 4.9 percent as the Decaux family sold shares. Hennes & Mauritz AB dropped 2.5 percent as UBS Group AG recommended selling the stock.

S&P 500 futures expiring this month advanced after the index slumped the most in two months. The U.S. is the worst-performing developed market this year after Greece.

China’s Economy

The MSCI Emerging Markets Index dropped 0.3 percent. A gauge of 20 currencies declined for a 10th day, the longest slump this year.

Chinese stocks trading in Hong Kong fell to the lowest level since December after data showed industrial output posted its weakest start since 2009, and retail sales and fixed-asset investment trailed estimates. Hong Kong’s Hang Seng China Enterprises Index slid for a second day, losing 0.8 percent. The Shanghai Composite Index gained 0.2 percent even as most stocks fell.

China’s industrial output, investment and retail sales growth missed analysts’ estimates in January and February, suggesting more stimulus may be needed. Bloomberg’s gross domestic product tracker, which draws on that data as well as measures such as electricity production, shows economic growth slowing to 6.28 percent in the period, the weakest pace since the start of 2009.

Unexpected Cut

The Thai baht slid 0.7 percent after a surprise cut in interest rates. The Bank of Thailand’s monetary policy committee voted four to three to lower the one-day bond repurchase rate to 1.75 percent. Six economists predicted the decision, while 16 forecast the rate would be held for an eighth meeting, according to a Bloomberg survey.

Russia’s Micex Index rose 1 percent, rebounding from a 3.7 percent decline on Tuesday, the biggest drop in a year. The ruble was little changed after sliding 3.3 percent yesterday.

Ukraine’s $ 2.6 billion of bonds due July 2017 gained for a fifth day, advancing 0.32 cent to 47.04 cents on the dollar, sending the yield down to 49.66 percent. Bonds gained on optimism the International Monetary Fund will sign off on $ 17.5 billion in emergency aid today.

Record Lows

While Italian bonds stayed higher, most euro-area government securities pared gains that sent yields to record lows across the region. France’s 10-year rate dropped below 0.5 percent for the first time on Wednesday. The yield on equivalent German securities was at 0.22 percent after reaching 0.198 percent.

The average yield to maturity on the euro area’s government debt fell to 0.4696 percent on Tuesday, the least since at least 1995, according to Bank of America Merrill Lynch indexes. The average yield on investment-grade corporate bonds in euros dropped 2.5 basis points to a record 0.85 percent, the data show.

Wheat advanced as much as 1.8 percent to $ 5.02 a bushel after the U.S. government made surprise cuts to its outlook for global stockpiles of the grain amid signs of improving demand. Corn rose as much as 1.3 percent.

To contact the reporters on this story: Nick Gentle in Hong Kong at [email protected]; Stephen Kirkland in London at [email protected]

To contact the editors responsible for this story: Stuart Wallace at [email protected]; Stephen Kirkland at [email protected] Stephen Kirkland

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ECB To Embark On Final Leg Of QE

VIENNA (dpa-AFX) – The European Central Bank on Thursday is set to detail its historic $ 1.1 trillion quantitative easing plan announced in January and present its latest batch of growth and inflation forecasts for the euro area, after what is likely to be an otherwise uneventful rate-setting session now that the drama over Greece has come to a halt.

Following the Governing Council session in the Cypriot capital Nicosia, ECB President Mario Draghi will announce the details of the ‘expanded asset purchase programme’ under which the central bank will buy EUR 60 billion assets, including euro area government debt, a month.

The move, which met strong opposition from Germany, is set to run from this March till at least September 2016 or a sustained adjustment in the path of inflation which is consistent with” the ECB’s aim of achieving inflation rates below, but close to, 2 percent over the medium term.

Further, the ECB statement is likely to be scanned thoroughly for the details of the crucial arrangement of risk sharing of state asset purchases with national central banks.

Even ahead of the QE announcement, debt yields in Eurozone dropped and they keep falling further. Analysts expect some more reduction in peripheral yields, but their future direction is largely dependent on how the ECB structures its bond purchases.

“It is still unclear when the ECB will actually start purchasing bonds,” ING Bank economist Carsten Brzeski said. “The crucial question remains whether QE will actually help beyond the pure psychological announcement effect.”

According to Brzeski, the negative deposit rate could push banks to search for yield, in turn driving investors to non-euro-denominated assets, consequently weakening the euro. “The most pressing issue is whether market participants are really willing (or able) to sell their bonds to the ECB given that regulatory requirements do not always make it easy to join the hunt for yield,” he added.

Draghi is also set to unveil the latest ECB Staff macroeconomic projections, revealing the forecasts for 2017 for the first time. Economists expect the growth outlook to be upgraded, thanks to lower oil prices and a weaker euro. However, the oil price fall could also lead to further reduction in inflation forecasts.

In December, the projection for this year was cut to 1 percent from 1.6 percent and the outlook for 2016 was slashed to 1.5 percent from 1.9 percent. The inflation forecast for this year was reduced to 0.7 percent from 1.1 percent and the outlook for 2016 was cut to 1.3 percent from 1.4 percent.

Euro area consumer prices fell for a third successive month in February, but the pace of decline slowed to 0.3 percent from January’s 0.6 percent, preliminary estimates from Eurostat revealed this week. In January, producer prices decreased the most since November 2009.

“It is obvious that these long-term inflation forecasts will increasingly gain importance in assessing the future path of the ECB’s monetary policy,” Brzeski said. “At some point, long-term inflation forecasts and the bank’s commitment to purchase EUR 60 billion assets per month until September 2016 could limit the ECB’s flexibility and put it in an uncomfortable situation.”

Other economic indicators give out promising signals on the euro area economy. The unemployment rate in the 19-nation currency bloc dropped to 11.2 percent in January, its lowest level in nearly three years. In February, Eurozone economic sentiment strengthened to a seven-month high and loans to the private sector fell at a modest pace in January.

Consumer spending is also strengthening as the improvement in the labor market situation boosts confidence. Figures from Eurostat on Wednesday showed that retail sales grew at the fastest pace in nearly two years in January. Elsewhere, a Markit Economics survey revealed that the private sector activity in all big-four economies expanded for the first time since April 2014.

If the economic situation continues to improve at the current trend, that could raise questions over the need for the QE and policymakers may also be faced with the task communicating an end to stimulus earlier than expected.

“We doubt that the policy will be expanded unless the inflation outlook deteriorates markedly and hence we suspect that its effect will be very limited,” Capital Economics economist Jennifer McKeown said. “Indeed, we might have seen most of the benefit, in the form of a weaker euro exchange rate, already.”

That said, the minutes of the January meeting had shown that policymakers saw ‘heightened risks of too prolonged a period of too low inflation’ and were also concerned about the moral hazard linked to the QE. The bank had released the minutes of a rate-setting session for the first time.

Draghi is also likely to face questions from reporters on the ECB’s, apparently tough, stance towards Greece. Early February, the bank suspended the waiver extended to Greek public securities used as collateral by financial institutions for central bank loans. However, the bank later raised the support for Greek banks under the Emergency Liquidity Assistance scheme, funding under which is costlier.

The ECB is set to announce the interest rate decision on Thursday at 7.45 am ET and the main refinancing rate is widely expected to be left unchanged at a record low 0.05 percent and the deposit rate at -0.2 percent. Draghi is set to hold his customary post-meeting press conference at 8.30 am ET.

Copyright RTT News/dpa-AFX

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Euro bond market proves irresistible for US corporates

* US borrowers in euro market hits unprecedented levels

By Philip Wright and Laura Benitez

LONDON, Feb 27 (IFR) – The euro-denominated bond market has been proving an almost irresistible port of call for high-grade US companies of late.

The number of such borrowers attracted to the sector has reached unprecedented levels, with low absolute coupons and tight spreads acting as a spur for US issuers to diversify funding avenues.

This is despite the cross-currency basis swap deteriorating steadily over the past couple of months, eroding some of the advantages on offer. At both the five-year and 10-year points of the curve, the levels have moved to around the negative 33bp area, having been in the mid-teens at the start of the year.

However, the list of market visitors has also included a number with euro commitments, so there are other factors at play.

“Despite the deteriorating swap rate, you can still save around 10bp-15bp by issuing in euros,” said a DCM syndicate banker. “But there’s not always a straightforward rationale for US companies to issue in euros. It can be for a variety of reasons. Some choose to leave it in euros for a while and leave it unswapped, so that direct comparison isn’t always important.”

The volume of debt being issued by US-domiciled investment-grade issuers has been on the march for a while now, data from Thomson Reuters show. From around 5bn in 2011, it more than doubled over each of the next couple of years – through 13.5bn in 2012 to 37bn in 2013 – and hit a high-water mark of some 62bn in 2014.

This year has already witnessed more than 23bn added to the tally. Just last week saw more than 15bn of such issuance, with the likes of Coca-Cola, AT&T and Mondelez offering multi-tranche transactions designed to appeal to a wide range of investors, and Priceline, Tyco Electronics and Moody’s adding single standalone maturities. Coca-Cola alone accounted for more than half the total – 8.5bn.

With a handful of mandates announced for imminent execution, the total for the first quarter of 2015 is already rivalling the 25bn issued in the fourth quarter of last year. By comparison, the first quarter of 2014 generated about 10bn on the way to the 62bn full-year total.

“A lot of non-European dollar funders are now thinking of euros as a funding currency,” said a banker at one of the leads on Coca-Cola’s transaction. “This is a function of spreads being tighter in Europe, yields being lower – meaning that the carry is lower – and expectations that the currency will weaken, creating a liability that will be lower in value in the future.”

CORPORATE SURGE

Something that has become noticeable is the proportion of corporate borrowers contributing to the score. February’s issuance comprised entirely such credits, a far cry from four or five years ago when there were just a paltry one or two that took the plunge.

True, January was FIG-heavy, with the likes of JP Morgan, Goldman Sachs, Citigroup and Morgan Stanley dominating proceedings. But a glance at the immediate pipeline shows names such as Kinder Morgan, Whirlpool, PPG and Flowserve, which when added to those that have already come to market makes for an impressive corporate roll-call.

And they are likely to receive a warm welcome from the European investor base, where impending QE purchases have caused spread-compression across asset classes, forcing them to look to widen the breadth of their holdings as they search out increasingly elusive returns. In addition, European accounts are generally more willing to embrace tenors that their US counterparts are not.

“The euro market has always provided greater flexibility than US dollars, especially for off-the-run maturities,” said Peter Charles, head of EMEA syndicate at Citigroup.

“As the bid for duration has increased, so have the realms of opportunities for issuers. Whereas doing 12-15 years would have been difficult previously because of limited investor capacity, the search for yield means that investors have been moving further along the curve.”

The fact that Coca-Cola stated that part of its 8.5bn proceeds would be used for the redemption of bonds maturing in March 2015 and repayment of 2017 and 2019 paper (all US dollar issues) spoke volumes about the attractive funding levels available.

But investor appetite notwithstanding, the window could be slowly shutting. Last week’s sudden influx of borrowers hinted at a rush to take advantage of conditions while they last as the low coupon rates and tight spreads are neutralised by the negative basis swap.

(Reporting By Laura Benitez and Philip Wright, editing by Matthew Davies)