Political and Economic Developments

The European Central Bank extended its ‘emergency support’ operation to banks, rates at 1.00% for another year, the 17th consecutive month as global unemployment is estimated to have increased by 30 million since 2007. How long is an emergency and what about ‘new normal’? Looming government spending cuts in the UK, banks and building societies have had to write off 70% more consumer debt in Q2 compared to the previous one; credit cards £2.1B out of a total £3.47B, both new records. Not surprising then that lending criteria have tightened, net unsecured loans £173M in July versus closer to £2B in 2003-2005’s boom, 48% of credit card applications turned down last year. Net mortgage lending £86M in July, as low as it got in 2009 and well below 2007’s peak at £10.5B. Note that outstanding household debt at £1,456B, or £23,100 per person, is the highest among G7 countries. Lending to companies shrank again in July, the eleventh month in a row, as non-financial corporations paid back £2.0B cutting net debt by 3.1% Y/Y; some may be resorting to the capital markets and the lucky are hoarding cash. Irish PM Cowen says the immediate windup of Anglo Irish Bank could cost €70B.
Revised data show US households are saving a greater part of their disposable income, on average close to 6%, as they try to repair balance sheets, prospects uncertain as unemployment remains at 9.6%; record low mortgage rates are helping, 30-year fixed rate a record low 4.32%.

Dollar Traders Will have to Determine Currency’s Safe Haven Role with Friday’s GDP Revisions, Bernanke Commentary

The economic docket was relatively light for the US dollar; but that wouldn’t prevent the currency from drifting off its fundamental mooring. The favored reserve fiat would put in for its second consecutive decline. Looking at the trade-weighted Dollar Index, the current pattern for price action looks very similar to the development from last week. Not surprisingly, the underlying market conditions that contributed to the brief retracement and general congestion back then are present now. It is first important to establish that the 48 hour decline from the greenback is not yet a bear trend. Rather, this move is more appropriately labeled as a correction that falls within a range that has developed through the week. The intraweek swings the currency has put in for this past week were short-term reactions to fundamental catalysts; but it has been a tangible struggle to gain a footing on a clear trend. We can trace this hesitancy back to underlying investor sentiment itself. Today, we see the Dow Jones Industrial Average slip below the 10,000 mark while keeping within the previous session’s coverage; and US-based crude oil reversed for a second day. In conjunction with the stalled EURUSD, this lax correlation between markets suggests risk appetite has tempered.

From today’s fundamental offerings, the lack of volatility (much less a trend) should not come as a surprise. On the docket, the initial jobless claims figures for the week through August 21st eased more than expected to a 473,000-annual clip. The positive implications this data may have had were summarily offset by the report that 310,000 filings were added to continuing claims owing to extended benefits – a poor reflection of the recovery effort by employment. The same questionable outcome is afforded to the MBA’s mortgage foreclosure reading for the second quarter which slipped from 4.63 to 4.57 percent; and yet it is still just off its record high. This data could easily be construed to support a bearish outlook; but the fundamental gravity heading into the end of the week is too great for this second tier data to significant alter traders’ expectations. Instead, the ranks are waiting to absorb and interpret tomorrow’s top event risk. On the docket, we have the revision of the second quarter GDP reading. Normally, the market’s interest stops with the first reading; but the magnitude of the expected revision and intensified speculation of a stalled recovery in the second half of the year has made this second reading perhaps more influential than the first. Given the disappointing housing, manufacturing and inventory developments over the past weeks; it shouldn’t surprise that there is talk of a 1.0 percent reading or lower. The other major event for the day is the Jackson Hole Symposium. A meeting of mind on monetary policy, this forum has been used to delivery forecasts in the past. There is fringe speculation that Bernanke may lower his growth outlook or event announce new stimulus.

For dollar traders, the outcome of this collective event risk is actually much more complicatedthan establishing whether it is good or bad for the economy. Normally, the impact this wave has on risk appetite would impact the dollar as a safe haven. Yet we have seen this role diminish somewhat recently as greenback has deviated from other capital markets. That said, the more panicked the crowd; the more they need shelter.

Growth fears weigh on euro

Currency markets can be moody. Immediately after the release of the weak US labour market report last Friday, EUR-USD rose by 1.5 cents to over 1.33. But after the Open Market Committee decided that, given the disappointing economic recovery, the proceeds from maturing agency bonds and mortgage-backed securities held by the Fed should be used to purchase additional Treasury bonds, the euro began to lose ground.
On Thursday, EUR-USD dropped below 1.28, and was around this level towards the end of the week. USD-JPY fell to a 15-year low of 84.73 initially, but then recovered to just under 86.

The movement in the currency market shows a return to the familiar pattern seen during the financial crisis: once again, bad news from the US prompted a widespread flight from risky assets (equities, commodities, credit products) back into safe havens. Government bonds and gold are much in demand. In the forex market, the dollar and the yen benefit particularly from crisis fears.

Oddly enough, it was the FOMC meeting and not the labour market data, that sparked these market reactions, even though, after the release of the US labour market report, it had been widely expected that the Fed would take action.

The measure taken by the US central bank is not at all aggressive, quite the contrary in fact. The Fed is only using principal payments to purchase 2 to 10-year US Treasuries, thus keeping the balance sheet at $2054bn. Monetary policy is not becoming more expansionary, but remains as expansionary as it was before. Real concern about a double dip or a deflationary scenario would have prompted a different reaction.

Furthermore, the amounts concerned are relatively modest: in spring, the New York Fed had estimated the total volume of bonds due to mature by the end of 2011, or already paid back prior to maturity, at “at least $200bn”. For the first month (mid-August to mid-September) the central bank is envisaging reinvesting $18bn. In relation to the Fed’s balance sheet and public net borrowing, which are set to reach well over $1000bn in 2010 and 2011 respectively, the reinvestments seem almost puny.

The hefty market reaction might have been triggered by the rather pessimistic outlook of the Bank of England in its latest inflation report and slightly worse-than-expected economic data from China, suggesting that the growth outlook for Europe (and the rest of the world) might not be as rosy as originally predicted. This, combined with heightening fears of deflation in the US, probably tipped sentiment in the markets. In view of the previous gains of the euro and other European currencies against the dollar and on equity markets, market participants decided to take profits.

In our view, the growth concerns are still exaggerated. Although economic momentum in the US is now slacker than in earlier recovery phases, the economy is still expanding. Current consensus estimates are forecasting growth rates of just under 3% for 2010/11, the Fed’s forecasts were significantly higher in July. Final domestic sales rose markedly in Q2 for the first time, both ISM indices are still showing an increase in economic activity, and, according to the quarterly reports, most companies see their business outlook as positive. We therefore see no reason to throw in the towel.

The European data give no cause whatsoever for undue scepticism. The Q2 growth figures, which have just been released, show that GDP in the eurozone rose by 1.0% quarter-on-quarter.
Growth was largely driven by Germany, where, according to preliminary figures, GDP grew by a stupendous 2.2% compared to the previous quarter. This, together with solid figures from France, the Netherlands and Belgium, more than compensated for the weak results in the southern eurozone countries, where growth was curbed by fiscal austerity measures. Thus overall, there has been an improvement in production capacity utilisation. And the leading indicators as well as anecdotal evidence from companies do not suggest a setback.

Against this backdrop, we are inclined to regard the euro’s current weakness against the dollar as a correction. In the longer term, we still see the euro above 1.30. Market participants should keep a close watch on US economic data in particular.
They should also bear in mind that money market rates in the eurozone will probably continue to rise in the coming months and that a strong dollar is hardly in the interests of the US economy.

US labour market report sends dollar to new lows

Market participants’ assessment of the economic outlook, and of course the direction of monetary policy (the Open Market Committee is holding its next meeting on Tuesday) will probably be influenced by the US labour market figures, which were published today. Beforehand, markets had been bracing themselves for a disappointment. They were particularly worried that the increase in private sector jobs, which had only been moderate as it was, might have ground to a halt, forcing the Fed to resort to more quantitative easing.

Thus the dollar’s slide continued this week: the ICE US Dollar Index Futures fell below its 200- day moving average. By mid-day on Friday, the euro had gained almost 2 cents against the dollar, rising to just under 1.32, and rose to over 1.33 after the release of the US employment data. The dollar also fell against the yen, which climbed to an 8-month high of 85.15. Only the Swiss franc was as weak as the dollar this week. EUR-CHF rose from 1.35 at the end of last week to over 1.38 – despite signs that the SNB was selling some of its bloated foreign currency reserves.

The July US labour market data were indeed disappointing: employment declined by a total of 131,000. Although new jobs in the private sector rose by 71,000, this pales to insignificance compared with the 252,000 job cuts in the public sector, which far outnumbered the Census-related job losses (143,000). The significant downward revision of the June figures by almost 100,000 to –221,000 also had a negative effect. Here the additional job cuts were divided evenly between the public and the private sector.

Nevertheless, we are still not expecting the FOMC to send out any new monetary policy signals on Tuesday. The Fed is likely to maintain its expectations of a moderate recovery with a gradually improving labour market, but is likely to emphasise the risks and uncertainties a bit more than in June. Otherwise, the committee will probably merely reiterate its intention of maintaining its exceptionally expansionary monetary policy for an extended period.

On the whole, we are not expecting the other economic data due to be released next week to bring any unpleasant surprises. The US trade balance deficit will probably have widened again in June, but this information is actually already contained in the Q2 GDP figures. Eurozone Q2 GDP data, released next Friday, could have a positive impact on the euro. Here expectations are quite high, however. And furthermore, not even the ECB’s more hawkish comments have been able to boost the euro much recently.

Overnight News

• European bourses are trading higher playing catch up with the recovery late Friday on Wall Street

• News of a potential higher inflation forecast in BOE’s upcoming inflation report saw an early test of barriers at 1.6000 in GBP/USD

• Markets look forward to the FOMC rate decision tomorrow with further alarms sounded for QE2
  

ASIA

JGBs gained overnight, with futures rising towards a seven-year peak, after US Treasuries surged on weakerthan- expected US jobs data that stoked expectations of monetary easing by the Federal Reserve. Nikkei fell 0.7% in very thin trade after jobs data signalled the US economic recovery was flagging and fanned talk that the Federal Reserve may consider further policy easing at a meeting this week. Strength in the JPY weighed on exporters after the USD approached a 15-year low against the JPY on Friday following the payrolls data, according to market players. (RTRS)

In other news, China extended a record buying spree of Japanese debt in June as sovereign debt concerns buffeted the EUR, purchasing a net USD 5.9bln of short-term bills although it was a net seller of longer dated notes. (RTRS)

Elsewhere, the introduction of additional stimulus measures in China would cause over capacity, asset bubbles and drive speculation and price surges in the property market, according to deputy head of the financial institute of the State Council’s Development Research Centre. In other news, China’s economy will enjoy a strong, stable second half, putting it on course for full year growth of about 10%-11%, according to the head of the Development Research Centre, Zhang Yutai. Also, former Chinese central bank deputy governor Wu Xiaoling said the nation shouldn’t introduce additional stimulus measures. (People’s Daily/ Shanghai Securities News)

US

The Federal Reserve is set to downgrade its assessment of US economic prospects when it meets on Tuesday to discuss ways to reboot the flagging recovery. Faced with weak economic data and rising fears of a double-dip recession, the Federal Open Market Committee is likely to ensure its policy is not constraining growth and to use its statement to signal greater concern about the economy. It is, however, unlikely to agree big new steps to boost growth. Smaller measures to help the economy could initially take the form of a decision to reinvest proceeds from maturing mortgage-backed securities held by the US central bank, thereby preventing the Fed’s balance sheet from shrinking naturally. (FT FrontPage)

In other news, the US economy will improve slowly and another round of fiscal stimulus wouldn’t be effective, according to former Treasury secretaries Paul O’Neill and Robert Rubin. (Sources)

Elsewhere, Goldman Sachs revises US growth forecast and sees US real GDP growth to average 1.5% at an annual rate in H2. Co. previously forecasted growth to rise from 2.5% in Q1 to 3.5% by H2. Co. says they now look for a more gradual pickup-from 1.5% in Q1 to 3% in Q4. The 2.5% Q4/Q4 average is about 0.9% points below the previous forecast. Says annual average basis of their forecast for growth in 2011 drops to 1.9% from 2.4% and says expects jobless rate to rise to 10% by early 2011 and remain there for the rest of the year.
Elsewhere, Barclays revises GDP outlook for Q3 to 2.5% from 4%. (CNBC)

Also, new US whistleblowing incentives within the Dodd-Frank financial reform act – that could net informants multimillion dollar pay-outs – are likely to generate a surge in allegations against US-listed companies and Wall Street banks, lawyers say. (FT)

Overnight News

ASIA

JGBs dipped overnight, with futures handing back earlier gains, amid jitterish trade ahead of closely watched US jobs data later in the day that is expected to set the direction for a market that has scaled steep peaks this week. Nikkei edged down 0.1%, after an unexpected rise in weekly US jobless claims underscored the economy’s weakening and sent Wall Street lower a day before the monthly US payrolls report. (RTRS)

In other news, Japanese Prime Minister Kan said he is closely watching the economy’s performance to see if fresh stimulus is needed, as worries that the world’s second largest economy is losing steam. (RTRS)

US

Christine Romer, one of President Obama’s top economic advisers, is stepping down, an exit that comes as the White House struggles to keep the recovery on track with Congressional elections looming in November. (RTRS)

In other news, foreign central bank’s ownership of US Treasuries rose by USD 6.456bln to USD 2.326trl in the week ended August 4. Also, the US Federal Reserve’s balance sheet increased slightly USD 2.309trl on August 4 compared with USD 2.308trl on July 28, according to the Fed. (RTRS)

A week spent speculating which banks might fail their ‘stress tests'

Overview

A week spent speculating which banks might fail their ‘stress tests’, and whether these were worth doing at all, indices alternating between fairly large up and down days to end the week in positive territory. Jakarta, Mumbai and Thailand set new highs for 2010. The Japanese stock market closed near the lowest levels in two years, pressured by a strong yen (86.27) and dragged down by the banks index. The US dollar has lost ground against all major currencies this week, the Australian dollar leading at $0.8972 (a ten-week high) and the Swiss franc at 1.0400, best this year. The Hungarian forint weakened to 292.00 per Euro because of new PM Viktor Orban’s refusal to implement IMF-suggested austerity measures. Top-quality Treasuries remain well bid, those of weaker Eurozone countries still all too close to their records over Bunds. US asset-backed securities the first casualty of new financial regulation, so the SEC has had to allow a 6-month grace period for implementation. [Rating agencies can now be sued for fraud and reckless behaviour so they are not allowing their ratings to be published in prospectuses]. ICE Sugar rallied to 18.66 cents per pound, its most expensive since March though a fraction of February’s unsustainable 30.40 peak. Most Baltic Freight rates are at their lowest in a year or more.

Political and Economic Developments

The Bank of Canada raised it key rate by 25 basis points to 0.75%; Brazil raised its Selic rate 50 basis points to 10.75%, slightly less than expected on negative inflation in June. UK Q2 GDP came in a better than expected +1.1% Q/Q taking Y/Y growth to +1.6%, helped in part by June Retail Sales which rose by 1.0% M/M and +3.1% Y/Y excluding auto-fuel. No doubt the football World Cup had an effect, but this keeps it at the average of the last decade. With June Core CPI also running at +3.1% Y/Y (RPI +5.0% Y/Y and among the highest in two decades) yet Gilts maturing within 9 years yielding under 3.00%, real interest rates are decidedly negative. Pity then that National Savings and Investments was forced to withdraw its index-linked securities (RPI +1.00% per annum) to all new investors, the first time in their 35-year history, because of huge inflows. Hometrack has annual house prices rising by under 3.00% or shrinking since December 2007, Rightmove suggests +3.7% Y/Y, though the Halifax and Nationwide calculate 6.3% and 8.7% respectively. Gains on main homes tax free. German and Eurozone Purchasing Managers’ Indices, IFO and Consumer Confidence Surveys all upbeat versus June’s.

Underlying Themes

For several weeks now politicians and central bankers have been suggesting we shouldn’t be so gloomy, that in fact the economy was growing and banks were sound, many giving lengthy TV interviews on these subjects. Mercifully chairman Bernanke in his semi-annual testimony to the Senate Banking Committee spared us the usual drivel. Saying the number one concern for small businesses was a lack of demand not access to credit and that funding was not a constraint on large firms, that state and local governments were under fiscal stress, plus the worrisome structural problems of high unemployment, were all drags on economic recovery; above all the ‘economic outlook remains unusually uncertain’. Perhaps they have at last grasped the enormity of the problem; perhaps they now know there are no more tools in the box; perhaps they now understand that deleveraging and rebuilding overstretched balance sheets takes a very long time. Perhaps the Bank of England’s MPC is also adopting a more realistic approach. After predicting UK CPI would be back at target by the end of this year (their usual mañana mentality) chief economist Spencer Dale suggested this might now not happen until the end of 2011, and that the country would not get back to normal ‘for an awfully long time’.

What to watch for next week

Monday Japan June Trade Balance, German Import Prices due from this day, US New Home Sales and UK July Hometrack Survey. Tuesday Japan June Corporate Service Prices, EZ16 M3 Money Supply, UK CBI July Distributive Trades, US Consumer Confidence, German August GfK Consumer Confidence and US May CaseShiller House Prices. Wednesday Japan July Small Business Confidence, ECB Bank Lending Survey, July CPI for the various German states due and US June Durable Goods Orders. Thursday Japan June Retail Trade, Large Retailers’ Sales, UK Net Consumer Credit, Mortgage Approvals, German July Business Confidence, Unemployment, EZ16 Business Climate and Confidence and the Fed’s Beige Book. Friday Japan June Unemployment, Household Spending, CPI, Industrial and Vehicle Production, Housing Starts, Construction Orders and Tokyo July CPI. Then EZ16 June Unemployment, CPI, US Q2 GDP, July Chicago Purchasing Managers and final University of Michigan Confidence Survey. Monday 2nd August holidays in Canada and Iceland.

Positioning and Technical Analysis

The last week of another thin summer month and many markets are tottering at fairly pivotal levels. August will probably see trends develop and more chaotic conditions predominate. Watch FX weekly closes for important breaks; another round of generalised US dollar selling is due, something which should prop up commodity prices. Top-notch Treasuries and Corporate bonds should remain well bid maintaining the pressure on credit spreads. Stock markets will probably be subject to increasingly violent intra-day swings.

Daily technical outlook

EURUSD

Trading strategy: standing aside

Yesterday’s trading sessions have been rather quiet after the slide to as low as 1.2550 against the dollar. First intra-day resistance is currently limiting gains around 1.2615 but the short-term studies remain bullish as long as the euro doesn’t return below the 1.2300 handle. However, the 4 hrs charts are showing signs of trend exhaustion and a break above 1.2650 is needed to regain strength and confirm that the drop to 1.2550 was corrective. Today’s economic calendar contains some important data releases such as the German Zew at 10:00 GMT and the US Trade Balance at 13:30 GMT. Keep an eye on the 1.2650 region in case euro rebounds – breakout should provide an earlier buying opportunity – 1.2715 being a more important barrier. On the lower side – 1.2550 is where to look for shorting opportunities. Current quote is 1.2589 @06:00 GMT

Support: 1.2550, 1.2500/20, 1.2465, 1.2400 and 1.2300
Resistance: 1.2615, 1.2650, 1.2700/10, 1.2750 and 1.2800
Market sentiment: long term – bearish, medium term – bearish, short term – bullish, intra-day – bearish

GBPUSD

Trading strategy: small short at 1.5100, stop at 1.5170 (0.5% risk), 1st objective at 1.5050, 2nd objective at 1.4900

Resistance was found around 1.5080 – into former support zone provided by the rising trend line connecting previous weekly lows. The bounce came after the sell-off to 1.4950. Whole downside action is not convincing and the decline to 1.4950 was short-lived, thus we shouldn’t hurry to consider the trend line break a sign of trend reversal. Short-term sentiment remains bullish but the intra-day studies are favoring selling while the pound doesn’t reconquer 1.5100. Current quote is 1.5011 @06:00 GMT

Support: 1.5000, 1.4950 and 1.4850/80
Resistance: 1.5100, 1.5200/25, 1.5250/70 and 1.5300
Market sentiment: long term – bearish, medium term – bearish, short term – bullish, intra-day – bearish

Forecast on JPY Crosses (EURJPY, GBPJPY, AUDJPY)

EURJPY

EURJPY closed @ 10975 which was ABOVE the open and breached the previous day's high. The High was PRECISELY at Precise Trader's Res Tgt 2 and the Low was PRECISELY at Precise Trader's Sup Tgt 1. The Hourly Oscillators are Bullish and the Price is Above the MA, so the Bears have to be Sidelined. Hourly Trend is Sideways Up while 10910 holds and Daily Trend is Limited Down while 11335 holds, so expect the Price to be Choppy with a potential to Break Higher. The Daily Trend was within the Prior two Day's Range but the Bulls gained aggressively towards the Close. The Hourly Trend has been in a Range Trading with an Upside Bias,10925-10 are the Critical levels to watch to maintain the Bullish Outlook . On the 5 min is along the Steep Up Channel and the Patterns are suggesting Higher Highs are expected . The Opening Price Principles suggests that EUR is Flat with a Strong Bias and JPY is Weak , so both the Cross may drag the EURJPY Higher , so the Bears may have to be Sidelined until 10870-10790 levels are regained.

BULLS: 10985 10915 10835 BEARS: 11060 11140 11225

Today's Strategies: LONG near 10950 10910 with a tight stop with a 50 pips price target.

GBPJPY

GBPJPY closed @ 13295 which was ABOVE the open and was within prior day's trading range. The High was PRECISELY at Precise Trader's Hrly Level and the Low was 10 pips from Precise Trader's Sup Tgt 2. The Hourly Oscillators are Bullish and the Price is Within the MA, so the Bears have to be Sidelined. Hourly Trend is Sideways Up while 13190 holds and Daily Trend is Sideways while 13625 holds, so expect the Price to be Choppy with a potential to Break Higher. The Daily Trend breached the Prior Day's Low but the Bulls gained aggressively towards the Close. The Hourly Trend has been in a Range Trading with an Upside Bias,13260-13190 are the Critical levels to watch to maintain the Bullish Outlook . On the 5 min is along the Steep Up Channel and the Patterns are suggesting Higher Highs are expected . The Opening Price Principles suggests that GBP is Flat with a Strong Bias and JPY is Weak , so both the Cross may drag the GBPJPY Higher , so the Bears may have to be Sidelined until 13260-13190 levels are regained.

BULLS: 13260 13190 13120 BEARS: 13425 13515 13615

Today's Strategies: LONG near 13320 13260 with a tight stop with a 50 pips price target.

AUDJPY

AUDJPY closed @ 7390 which was BELOW the open and breached the previous day's low. The High was PRECISELY at Precise Trader's Res Zone 1 and the Low was 25 pips from Precise Trader's Sup Tgt 2. The Hourly Oscillators are Turning Bullish and the Price is Below the MA, so the Bears have to be CAUTIOUS. Hourly Trend is Sideways Up while 7360 holds and Daily Trend is Sideways Down while 7815 holds, so expect the Price to be Choppy with a potential to Break Higher. The Daily Trend breached the Prior Day's Low but the Bears gave up most of their gains towards the Close. The Hourly Trend has been in a Range Trading with an Upside Bias, 7375-60 are the Critical levels to watch to maintain the Bullish Outlook . On the 5 min is along the Steep Up Channel and the Patterns are suggesting Higher Highs are expected . The Opening Price Principles suggests that AUD is Strong and JPY is Weak , so both the Cross may drag the AUDJPY Higher , so the Bears may have to be Sidelined until 7410-7350 levels are regained.

BULLS: 7410 7350 7295 BEARS: 7535 7575 7630

Today's Strategies: LONG near 7410 7350 with a tight stop with a 50 pips price target.

Forex: Swiss Franc surges after SNB statement

Swiss Franc has advanced against its major rivals reaching multi-week highs against Dollar and Pound after the SNB affirmed that Swiss economy is strong enough to cope with a strong Swiss Franc.

USD/CHF decline from 1.1545 high on Friday has extended 160 pips lower to a fresh 4-week low at 1.1170 so far, while the EUR/CHF decline from 1.4040 high on Tuesday has dropped 120 pips lower to 1.3755, approaching all time low at 1.3734. GBP/CHF decline from 1.6922 high on Tuesday has plunged 185 pips to 4-week low at 1.6435 so far.

The SNB has affirmed that Swiss economy continues growing despite the strength of the Swissy against the Euro, which according to the Bank is damaging Swiss export activity while omitting, for the first time, comments about movement to prevent excessive strengthening of the Swiss currency.

European markets extend rally as investor's sentiment improves; Euro and Pound pointing up

European markets have opened the week on a bid tone, extending the positive trend seen at the end of last week, following gains on Wall Street and Asian markets. On FX markets, Euro and Pound are trading higher against Dollar and Yen.

Eurostoxx 50 Index advances 1.20% while German DAX Index rallies 1.3% and the French CAC Index adds 1.4% on the first two hours of trading. In the UK, the FTSE Index adds 0.65%.

Shares of basic resources and insurance companies are leading gains in Europe on Monday, with investor's optimism at higher levels as concerns about the sovereign debt ebbed, at least momentarily, and in absence of key macroeconomic data in the region.

On the negative side, BP shares are trading 2.7% lower on the FTSE 100, with the company's Chairman facing a crucial meeting with Barack Obama later this week, to address issues related with the oil spill in the Gulf of Mexico.

Euro and Pond higher on demand for risk

EUR/USD continues trading higher as investors' confidence picks up, and rebound from 1.1875 low on Jun 7 has extended above 1.2150, acting as support now and the pair trades at session highs testing resistance at 1.2230 at the moment of writing.

GBP/USD retreat from 1.4760 found support at 1.4505 low and the pair 's rebound has accelerated on European session with the pair extending above 1.4700 to reach session high at 1.4725 so far, with Friday's high, at short distance.

USD/JPY remains trading on a slightly upward trend from 90.85 low last week which extended so far to resistance area at 92.10, which is being tested at the moment.

Jobs report comes in second to rising sovereign debt fears

An extremely sharp move in the dollar ahead of the May employment report seems now to be rooted in heightened fears over sovereign risk. A Hungarian spokesman for its Prime Minister accused the former government of lying about the state of the nation’s finance and the economy’s health. The event raised the specter of sovereign risk sending bonds flying high alongside the dollar.

Eurodollar futures – In the event the jobs report showed a 22,000 downward revision to the pace of job creation for April and a suspiciously soft May reading of 431,000, which appears to be lacking in private jobs growth and heavy on government jobs possibly related to census hiring.

The yield curve faces conflicting forces today. Probably the strongest is the ongoing worry over sovereign debt around the world as the Hungarian news hits the air. Meanwhile several Fed speakers have aired view that would typically weigh on treasury prices and boost yields. The dissenting voice at the FOMC, Thomas Hoenig of the Kansas City Fed said that the central bank should raise the fed funds rate to 1% on account of a sustainable economic recovery. His Dallas counterpart Richard Fisher said that while the central bank was not yet ready to pull the trigger on monetary policy they may be “getting closer.”

Ahead of the employment report the Eurodollar strip was slightly lower in expectation of a sizeable job creation report, while the September treasury note was a half point higher with the yield at 3.33%. After the data treasuries soared, doubling gains and sending the yield down to 3.26%. Eurodollar prices built on gains with back-months now up 13 basis points.

Canadian bills – The Canadian employment report bond was more bullish than the later U.S. version. The economy created 24,700 additional jobs were added in May and the reading was almost twice the expected pace. However, the elevated reading in the risk barometer stole from the story today. Already the Bank of Canada has qualified further monetary tightening on developments in Europe. As such government bond prices were dragged higher across the curve with the September 10-year bond up 50 ticks at 121.27 after U.S. data. The 90-day bill strip isn’t facing the losses that would have occurred if the data was driving the story. Instead futures prices are gaining and yields continue to drop.

Australian bills – Even though Australian fixed income had finished ahead of the breaking news from Hungary, short-dated bill prices rose sending implied yields lower.

European bond markets – An earlier report indicated a marginal improvement in first quarter GDP across the Eurozone, but dealers remain cautious about the prospect of sovereign default rather than rapidly antiquating data. Peripheral European government bond yields continue higher while core bonds remain bid. Even the French-German spread widened as the disparate demand left French yields higher while those in Frankfurt moved lower.
The September German bund contract is fast-approaching a contract high at 129.10 today – a price achieved on the last round of panic on May 25. Shorter-dated Euribor contracts continue to display caution over liquidity at the front end but indicate a flatter curve at the back end where gains of five basis points are evident.

British gilt – The same flattening of the British yield curve was the order of the day. Short sterling futures faced a minor loss probably on liquidity fears in the months ahead, while gilt prices jumped. The September gilt future surged in line with bunds and treasuries after the employment reports.

Japanese bonds – The appointment of Naoto Kan as Japanese Prime Minster did nothing for the yen nor yield curve, both of which remain slave to unfolding international developments. Earlier in the week the yen suffered as dealers anticipate Mr. Kan will favor a weaker yen and be faster to limit debt issuance. The fear bid to fixed income today reversed the attitude towards the yen, which rises during crises, and helped peel a pip off the 10-year JGB.

Investors await U.S. economic update from Bernanke

Monetary policy has been cut to the bone. Governments can’t sustain easier fiscal policy because they failed to sock-away enough for rainy days like this when the times were good. Quantitative easing ultimately needs investors to follow the potentially costly lead of central banks and governments as they tried to pull the horse by its nose out of the swamp. Each of these measures for helping fight the recession and counter subdued recovery has limited potential looking ahead. That was today’s warning from the IMF as its Deputy Managing Director served up a stark warning as to why now is a good time to leave the planet and move to another solar system. Failing that, we can rely on demand for Chinese exports and stretch the difficult years a little longer.


Eurodollar futures – Global yields are higher on Wednesday. Risk aversion seems to have run out of steam despite the dour words delivered in Singapore by Mr. Naoyuki Shinohara of the IMF. The focus ahead appears to be testimony to be delivered by Fed Chairman Bernanke as he reports to Congress with his assessment of the health of the economy. Later on Wednesday investors will hear from all 12 Fed districts as to the localized state of regional markets in the Beige book. As noted yesterday, nobody seems to be listening to the increasing number of red flags from FOMC members who collectively raise the distinct possibility that rates will have to be raised at some point.


Eurodollar futures continue to allow for a steeper curve with yields falling at the front and rising at deferred contracts. The September 10-year note future is weaker by half a point this morning boosting the yield to 3.22%.


European bond markets – There are no expectations that the ECB will announce any policy changes on Thursday when it concludes the June monetary policy meeting. The press conference promises as always to be entertaining. Euribor futures mirror the path of U.S. counterparts with a minor steepening of the curve in evidence. The yield on the 10-year German bund fell to a record low in Tuesday’s trading while today the September futures contract has declined by 52 ticks to 129.27 where the implied yield has risen to 2.54%.


British gilt – The next big event for the U.K. will be the budget in two weeks time in which the government will detail plans to cut spending in an effort to reduce the debt burden already equivalent to 11.2% of GDP. Already the markets have warmed to the Conservative party’s approach who appear to understand the gravity of the situation. The gilt market pared gains made earlier in the week and yields backed up on Wednesday to 3.50% as investors watched a modest rebound in risk appetite, which included a surge in the value of the pound as euro-related pressure subsided.


Japanese bonds – The Nikkei fell over 1% in midweek trading and investors remained on the defensive boosting the bid for bonds. The June 10-year JGB future rose to 141.15 sending yields down by three pips to 1.19%.



Canadian bills – What’s good for the local dollar is possibly bad for Canada’s government bonds, which slid 42 ticks to 121.20 in Montreal. If a Reuters report suggesting a surge in Chinese exports is right, then commodity demand is alive and kicking. Moreover, so is global demand. That thought provoked a rally in the loonie today and saw dealers sell 90-day bills down by five basis points as the yield curve made a parallel upwards shift. The U.S. to Canada spread remains at its recent high of around 12 pips.


Australian bills – The Aussie bond market possibly reacted more to the news from Singapore from Mr. Shinohara than it did to a later story from Reuters suggesting a 50% surge in Chinese exports during May. Aussie yields possibly fell as further evidence emerged suggesting weakening business confidence while mortgage lending data also cooled suggesting that monetary policy was biting. The 10-year government bond slipped by three basis points to 5.29%.

The JPY weakened versus all of its most−traded counterparts

Market Review – Fundamental Perspective

The JPY weakened versus all of its most-traded counterparts as political wrangling over the fate of Japan’s Prime Minister Yukio Hatoyama damped the allure of the JPY as a safe-haven. The Prime Minister met late with Ichiro Ozawa yesterday, the party’s No. 2 official and architect of its 2009 election victory, to discuss his future. The GBP rose to the strongest level in 18 months versus the EUR after reports showed that U.K.’s house prices had their biggest annual gain in more than 2 ½ years in April and manufacturing stayed at the strongest level in more than 15 years last month. Also the GBP/USD climbed yesterday on bets that Prudential Plc.’s $35.5 bln takeover of American International Group Inc.’s main Asian unit may fail, easing concern the accord will prompt outflows of the GBP. The U.S. ISM manufacturing index grew in May at a faster pace than forecasted as factories added workers to meet the greatest export demand in two decades as well as a revival in domestic orders. The EUR/USD fell to 1.2111 yesterday to its lowest level from 1.2306 at its opening. It was the lowest level since more than four years.

The Bank of Canada raised its target rate for overnight loans between banks by 25bps to 0.50, the first Group of Seven country which increased rates since last year’s global recession. Nevertheless the CAD declined on June 1st against 13 of its 16 most-traded counterparts as the central bank said after its rate decision that the move today will be “weighed carefully” against growth in Canada and elsewhere, sowing uncertainty over the pace of further raises.

The AUD/NZD fell to the lowest level in a week as traders bet New Zealand’s central bank will increase the benchmark rate from a record low this month. The AUD/USD recovered after three days of decline on concern that a report may show that the nation’s economy expanded in the first quarter of 2010.

Summary of HIRE and Foreign Account Tax Compliance

On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment ("HIRE") Act (P.L. 111-147) (The "Act") which included the Foreign Account Tax Compliance Act containing new foreign account tax compliance rules.
Under the Act, new reporting and disclosure requirements for foreign assets will be phased in between 2010 - 2013:
1. Foreign Institutional Reporting: Foreign Institutions have new reporting and withholding obligations for accounts held by U.S. Persons (generally effective after 12/31/12, commencing 1/1/13).
2. Foreign Financial Assets ($50,000): Individuals with an interest in a "Foreign Financial Asset" have new disclosure requirements. If foreign financial assets are valued in excess of $50,000, the U.S. Taxpayer must attach certain information to their income tax returns for tax years beginning after March 18, 2010. (U.S. Taxpayers are not required to disclose interests that are held in a custodial account with a U.S. financial institution).
The penalty is substantial ($10,000, plus additional amounts for continued failures, up to a maximum of $50,000 for each applicable tax period). The penalty may be waived if the individual can establish that the failure was due to reasonable cause and not willful neglect.
3. 40% Penalty: A 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset understatement. Applicable assets are those subject to mandatory information reporting when the disclosure requirements were not met. The penalties are effective for tax years beginning after March 18, 2010.
4. 6 Year Statute of Limitations: Statute of limitations re: omission of income in connection with foreign assets: The statute of limitations for assessments of tax is extended to six (6) years if there is an omission of gross income in excess of $5,000 attributable to the foreign financial asset. The six year statute of limitations is effective for tax returns filed after March 18, 2010, as well as for any other tax return for which the assessment period has not yet expired as of March 18, 2010.
5. Passive Foreign Investment Companies: The Act imposes an information disclosure requirement on U.S. Persons who are PFIC shareholders.
A PFIC is any foreign corporation if:
a. 75% or more of the gross income of the corporation for the taxable year is passive income; or
b. The average percentage of assets held by such corporation during a taxable year which produce passive income or which are held for the production of passive income are at least 50%.
6. Foreign Trusts with U.S. Beneficiaries: The Act clarifies if a foreign trust is treated as having a U.S. Beneficiary, an amount accumulated is treated as accumulated for the U.S. Person's benefit even if that Person's trust interest is contingent. The Act clarifies that the discretion to identify beneficiaries may cause the trust to be treated as having a U.S. Beneficiary. This provision is effective after March 18, 2010.
7. Rebuttable Presumption/Foreign Trust - U.S. Beneficiary: The Act creates a rebuttable presumption that a foreign trust has a U.S. Beneficiary if a U.S. Person directly or indirectly transfers property to a foreign trust (unless the transferor provides satisfactory information to the contrary to the IRS). This provision is effective for property transfers after March 18, 2010.
8. Uncompensated Use of the Foreign Trust Property: The Act provides that the uncompensated use of the foreign trust property by a U.S. Grantor, a U.S. Beneficiary (or a U.S. Person, related to either of them), is treated as a distribution by the trust.
The use of the trust property is treated as a distribution to the extent of the fair market value of the property's use to the U.S. Grantor/U.S. Beneficiary, unless the fair market value of that use is paid to the trust.
The loan of cash or marketable securities by a foreign trust, or the use of any other property of the trust, to or by any U.S. Person is also treated as paid or accumulated for the benefit of the U.S. Person. This provision applies to loans made and uses of property after March 18, 2010.
9. Reporting Requirements, U.S. Owners of Foreign Trusts: This provision requires any U.S. Person treated as the owner of any portion of a foreign trust to submit IRS-required information and insure that the trust files a return on its activities and provides such information to its owners and distributees.
This new requirement imposed on U.S. Persons treated as owners is in addition to the current requirement that such U.S. Persons are responsible for insuring that the foreign trust complies with its own reporting obligations. This provision is effective for taxable years beginning after March 18, 2010.
10. Minimum Penalty re: Failure to Report Certain Foreign Trusts: This provision increases the minimum penalty for failure to provide timely and complete disclosure on foreign trusts to the greater of $10,000 or 35% of the amount that should have been reported.
In the case of failure to properly disclose by the U.S. Owner of a foreign trust of the year-end value, the minimum penalty would be the greater of $10,000 or 5% of the amount that should have been reported.
This provision is effective for notices and returns required to be filed after December 31, 2009.

Gary S. Wolfe, Esq. International Tax Practice offers the following legal expertise: IRS Tax Audits, International Asset Protection & International Litigation. Please see http://gswlaw.com for more info.
Gary S. Wolfe, A PROFESSIONAL LAW CORPORATION
9100 Wilshire Blvd., Suite 505 East, Beverly Hills, CA, 90212
(310) 274-3116

Why You Need to Avoid Finance Planners on the Internet

The majority of us are quite eager to maintain a strict level of control over our personal finances, however not all of us are able to achieve this lofty aspiration and sadly many of us will simply fall at the first hurdle. However, this does not mean to say that you are perpetually doomed to failure: rather, you just need a little help to get you there.
The internet is full of articles, support communities and tutorials all of which are designed to help assist you with any financial issues that may arise. However, it is crucial that you take these with a grain of salt and be wary about relying too heavily on any person who professes to be some sort of financial advisory genius or expert. You have means of verifying such bold claims and if you are foolish enough to accept this without question, you leave yourself dangerously exposed.
One of the major problems with these experts on the internet is that they typically churn out a standard template answer which is then applied to everyone, irrespective of the nature of their debt, or the reasons as to why they are in debt. This means that people run the risk of relying on erroneous information, which will not and cannot help them. Ideally, you should be drafting a financial plan by yourself, for yourself. Only you will be truly aware of what your current financial situation is like, and only you can truly know the current bills you owe.
Don't be foolish when it comes to dealing with debt. Make sure you follow your head whenever you are in doubt. Remember, common sense really is the best answer.

Maintaining your personal finance can be one of the toughest tasks that you will have to face in life. Make use of the personal finance tools to manage your personal finance effectively.

Papandreou asks for rescue plan to be activated

Greece requests aid

The Greek debt crisis and fears of increasing sovereign debt problems in other eurozone countries weighed on the euro again this week. EURUSD in particular slipped temporarily to 1.32, the lower end of the trading range of the last two and a half months. At the end of the week, however, after surprisingly upbeat economic data, and the announcement that the Greek government had officially requested aid, EUR-USD is around 1.33 again, still about 1.7% below last week’s level.

Eurostat has revised Greece’s budget deficit for 2009 from 12.7% to at least 13.6% of GDP.
Moreover, Moody’s has downgraded Greece’s rating from A2 to A3. The even greater budget gap makes Greece’s stability programme, which is aiming to cut the deficit to 8.5% this year, appear even more ambitious. Implementing additional austerity measures would probably prove difficult: the measures unveiled so far have already prompted strike action. Furthermore, an even tighter fiscal policy could exacerbate the recession, which would not help to cut the deficit.

Greece’s dilemma has been deepening because of the surge in interest rates. Prices of bonds with shorter maturities plummeted dramatically this week. This reflects investors’ fears of an impending default or debt restructuring, even though the Greek finance minister George Papaconstantinou has shrugged off this possibility as being absurd.
On Thursday, yields on 2-year bonds were over 10%, compared with 6.75% at the end of last week. 10-year yields jumped to 8.8% at times; thus spreads between 10-year Greek bonds and the equivalent German Bunds hit a new record of over 560 basis points. There is growing concern about contagion from Greece spreading to other eurozone countries: yield spreads between 10- year German and Portuguese government bonds, for example, climbed to a 13-month high.

Due to the sharp increase in the cost of financing on financial markets, the Greek prime minister George Papandreou officially requested aid from European governments and the International Monetary Fund (IMF) at midday on Friday.
There is no time to be lost: Greece must find €11bn for maturing bonds by the middle of May.

The fact that Greece is now asking for the rescue plan to be activated is allaying fears of the debt crisis spreading to other eurozone countries and the monetary union breaking up, and is thus easing pressure on the euro. Before the rescue plan takes effect, however, governments of the member states must decide on bilateral loans. The French government has already drawn up a draft bill and earmarked €3.9bn, over 60% of France’s maximum contribution. If all member states provided about 60% of their respective maximum contributions, the total for the whole of the eurozone would be about €18.5bn. Together with the IMF loan, which the German minister of economics Rainer Brüderle estimates at €12bn, this would more or less cover the amount needed by Greece for 2010. However, it is still unclear whether this will in fact suffice. The rescue plan agreed at the end of March envisages bilateral loans of up to €30bn for this year and additional IMF loans of €15bn. The extent of potential financial aid necessary in the following years is not yet known.

In Germany, the legal procedure for bilateral loans has not yet been agreed. But the government will now hardly be able to postpone voting on the unpopular aid until after the election in the state of North Rhine Westphalia on 9 May. According to finance minister Wolfgang Schäuble, voluntary aid would conform with the Constitution, as the no-bailout clause in the Lisbon Treaty only prohibits member states from being liable for the commitment of other states. He said it was in Germany’s interests to stop the Greek debt crisis from escalating.

If loans, on which interest rates of about 5% would be charged, were not granted, Greece would probably become insolvent. This is not an option: if its debts were restructured, German credit institutions, which hold Greek government bonds to the tune of around €40bn in their portfolios, would have to take massive write-downs.
This would cause capital base constraints, which would tighten lending further, and the banking crisis could flare up again.

This would jeopardize the German recovery, which just seems to be gathering pace in the second quarter. This week, for instance, the ZEW expectations rose by 8.5 points, and are now almost twice as high as their historical average.

The Ifo business climate leapt from 98.2 to 101.6, mainly because current assessment had risen sharply. Expectations continued to improve too and are nearing their all-time high. Other climate indicators in the euro area were also quite upbeat. Nevertheless, according to the latest IMF World Economic Outlook, disparity between the US and the eurozone is widening: for the eurozone, the IMF is still predicting growth of 1% in 2010, and it has reduced its forecast for 2011 marginally to 1.5%. However, the US forecast for 2010 has been lifted by 0.4 points to 3.1% and for 2011 by 0.2 points to 2.6%.

Despite the brighter US economic outlook, the FOMC is not likely to signal that it will abandon its zero interest rate policy in the foreseeable future. In the minutes of the last meeting, some committee members had already warned against raising interest rates prematurely, particularly because of the risk that core inflation could drop more sharply than was desired. Therefore, the phrase “extraordinarily low rates for an extended period” is likely to be maintained.

Nevertheless, the dollar could remain well supported next week, and not just because of the ongoing problems in the eurozone: US GDP data for Q1 will show that this time the main driver of growth in the US was not inventories but private consumption.

Eurozone economic data surprisingly robust, recovery gathering pace

Aid package for Greece eases pressure on euro

EUR-USD plunged to a fresh 1-year low of 1.3114 this week as the debt crisis intensified.
The European single currency could have bottomed out, however. In our view, the euro is unlikely to fall further, for the following reasons:

1. The escalation of the Greek debt crisis after S&P cut Greece’s rating by three notches to BB+ (i.e. junk status) had little impact on the forex market. Although the market for Greek government bonds had virtually collapsed and the panic – additionally fuelled by the downgrading of Portugal and Spain – increasingly spread to the government bonds of other “shaky candidates” in the eurozone, causing risk premiums on their sovereign debt to rocket, the euro fell less than one cent below last Friday’s trough. Apparently, at around 1.31/32, there is substantial demand, from Asian central banks for example, according to rumours.2. All official bodies, which are involved in the negotiations with Greece, have stated quite clearly that a Greek debt restructuring is not an option at the moment. Furthermore, their comments suggest that the financial support from the eurozone and the IMF should cover Greece’s funding requirements for the next three years, reputed to be around €100 to 120bn.

The negotiations with Greece are likely to be concluded this weekend, so markets will then have additional information about the rescue package. The political procedure will take a few days longer, however. The German Bundestag (the lower house) is due to decide early next week, and the Bundesrat (the upper house) next Friday. Apparently, an extraordinary Eurogroup meeting is planned for 10 May, at which member states are to give their final approval to the aid package. At this stage, there could still be the odd uncertainty here and there; in our view, however, policymakers are now well aware that the situation is serious. On the whole, we see a good possibility of things calming down a bit now.

3. In the last few months, economic data in the eurozone have been remarkably robust. Like the Ifo business climate, the European Commission’s survey results are now also indicating that the economic recovery is gathering steam in the second quarter. The comprehensive Economic Sentiment Indicator is now above the long-term average again; Germany’s economy is particularly buoyant, but the recovery is taking hold across the board. We are expecting growth to have been very modest in the first quarter due to the harsh weather, but to make up for this in the second quarter.

The ECB Council is holding its regular monthly meeting next Thursday. Here too, the focus will presumably be on Greece, both at the meeting and at the press conference. But as the eurozone governments are responsible for the aid package, the ECB will probably try to build up confidence. It will be interesting to see whether Jean-Claude Trichet reiterates the ECB’s willingness to implement unconventional measures if necessary to safeguard financial stability in the euro area: as a last resort, the central bank can purchase government bonds, in the same way as it buys, or has bought, covered bonds.

As far as the economic risks are concerned, given the improvement in the economic environment, the assessment could gradually become more positive. A few days ago, Bundesbank president Axel Weber stated that, while the medium-term outlook for inflation is still low, he now sees the upside risks as being somewhat higher than in the last projections in March. That also ties in with the slight increase in money market rates in the euro area. In the last few days, the three-month Euribor has risen by 2 bp to over 0.66. However, in view of the debt crisis, the markets are probably not expecting the ECB to adopt a more restrictive stance for the time being.

Conclusion

Against a backdrop of aid for Greece materialising, the pressure on the euro is likely to ease. The economic environment in the eurozone is becoming remarkably favourable, but because of the debt crisis, the ECB will presumably exercise caution with regard to tightening monetary policy. In the short term, the euro could be somewhat volatile until the Greek rescue package is all cut and dried. Furthermore, apart from today’s GDP figures for Q1, a number of important US data will be released next week. The ISM purchasing managers index and the labour market report next Friday are set to underline the upbeat picture of the US economy, thus limiting the euro’s scope to rise.

AUD/NZD drops to 6-month low 1.2230

The Aussie has been depreciating across the board, weighed by a mix of risk aversion and concerns about a "hung parliament" in Australia, pushing the AUD/NZD to a fresh 6-month low at 1.2230, before picking up to 1.2300 area at the moment of writing.

The pair has accelerated downtrend after breaking below Fib support at 1.2440 area and long-term support at 1.2340, according to the Varengold Bank Research Team: "After breaking the Fibonacci support level of 38.2%, the AUD/NZD crossed the horizontal support line around 1.2340. It reached its lowest level since the end of October 2009. This break might be a signal for further falls towards the Fibonacci support lines below."

Next support levels, according to the Varengold Bank Research Team, lie at 1.2230 and 1.1925. On the downside, support levels lie at 1.2422, 1.2577, 1.2730.

US treasuries gain on euro zone uncertainty

US long-term treasuries are on the rise this morning as investors look to hedge their exposure to equity markets amid ongoing euro zone concerns. The benchmark 10-year note is up 12/32 dropping the yield to 3.493. The 30-year note is up 18/32 reducing the yield to 4.391. Bond prices and yields move in opposite directions.

Investors are flocking to the safety of US treasuries as uncertainty over the long-run impact of the EU/IMF bailout package including grueling austerity plans for periphery economies is once again the focus of the marketplace. Equity markets are substantially lower in the European session as the banking sector suffers from exposure to government debt. Moreover, Portugal recently announced bipartisan agreement on new austerity measures which will use tax hikes and wage cuts to cut the budget deficit to a proposed 4.6% in 2010.