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Pound Strengthens as U.K. Seen Skirting Recession; Kiwi Advances

The pound rose against most of its major counterparts before a report forecast to show the U.K economy avoided a triple-dip recession.

Sterling gained for a fourth day against the euro, the longest streak this year, amid prospects the European Central Bank will cut borrowing costs as early as next week, while Bank of England policy makers remain split on the need for more stimulus through so-called quantitative easing. The yen rose against the dollar as a report showed Japanese investors were net sellers of foreign bonds for a sixth-straight week. New Zealand’s dollar surged for a second day.

“The U.K.’s central bank is seen adding to monetary easing, but the fact that it hasn’t done so yet is spurring buying of the pound,” said Hideki Shibata, a senior rates and currencies strategist at Tokai Tokyo Research Center Co. in Tokyo. A positive growth figure from the U.K. will damp “expectations of additional easing.”

The pound gained 0.3 percent to $1.5315 as of 6:46 a.m. in London from yesterday. Sterling rose 0.1 percent to 85.18 pence per euro after strengthening 0.5 percent in the prior three days. Europe’s common currency advanced 0.2 percent to $1.3045 and rose 0.1 percent to 129.60 yen. Japan’s currency gained 0.2 percent to 99.34 per dollar, halting a two-day decline.

Financial markets in Australia and New Zealand are closed today for national holidays.

Skirting Recession

The U.K. economy grew 0.1 percent in the first quarter after contracting 0.3 percent in the preceding three-month period, according to the median estimate of economists in a Bloomberg News survey before the preliminary estimate is released today. Britain suffered consecutive declines in gross domestic product in the middle quarters of 2012 and 2009.

The Bank of England extended its Funding for Lending Scheme yesterday by one year, which is aimed at providing cheaper loans to companies and consumers. The BOE’s Monetary Policy Committee kept its QE target at 375 billion pounds ($574 billion) on April 4 as a push for more by Governor Mervyn King and two other officials was defeated by a majority on the central bank’s nine- member panel.

“The BOE expressed stronger preference for credit stimulus measures than for more QE,” Valentin Marinov, the head of European group-of-10 currency strategy in London at Citigroup Inc., wrote in a research note dated today. The next BOE meeting seems “less likely to announce more easing unless the data out of the U.K. deteriorates significantly.”

The pound has fallen 3.4 percent this year, the second- worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has dropped 11 percent, while the euro gained 1.9 percent.

ECB Outlook

The ECB will cut its key interest rate, already at a record low 0.75 percent, at its May 2 meeting as the euro-region economy slumps, banks including Nomura International Plc, UBS AG (UBSN) and Royal Bank of Scotland Group Plc (RBS) predict.

“We stand ready to act if economic conditions continue to provide bad news, as unfortunately has been the case in recent data that became available,” ECB Vice President Vitor Constancio said yesterday.

Spain’s unemployment rate probably reached a record high of 26.5 percent in the first quarter, according to the median estimate in a separate Bloomberg survey ahead of the report today. It was an unprecedented 26 percent in the fourth quarter.

In Germany, Europe’s largest economy, the Ifo institute said yesterday its index of business confidence dropped for a second month in April.

“We’ve said that the ECB will cut rates in the second quarter but now think it’s more likely to come in May,” said Kikuko Takeda, a senior analyst in London at Bank of Tokyo- Mitsubishi UFJ Ltd. “We have more negatives than positives for the euro.”

Japanese Investments

The yen was supported today by data that countered expectations that money will flow out of Japan amid expanded monetary easing by the central bank.

Japanese investors cut holdings of overseas bonds in the week through April 19, marking the longest streak of net sales since January 2010, figures from the Ministry of Finance showed. They divested a total 3.43 trillion yen ($34 billion) in the six-week period.

The Bank of Japan (8301) will hold a policy meeting tomorrow when it releases its outlook for the economy and inflation. It may raise its forecast for price gains for fiscal 2014, according to people familiar with the central bank’s discussions. The BOJ earlier this month unveiled a plan to double holdings of government bonds and stock funds in the next two years in a bid to end 15 years of deflation.

RBNZ Rates

“Dollar-yen is about to open the door to a new world of 100-125, and is just being stopped at a checkpoint at around 100,” said Tokai Tokyo’s Shibata. “It’s just a matter of time for the pair to open that door” in part because of the BOJ’s monetary easing.

New Zealand’s kiwi dollar jumped 0.7 percent to 85.31 U.S. cents and climbed to as much as NZ$1.2079 per Australian dollar, the strongest since October 2009. The Reserve Bank of New Zealand yesterday kept its key interest rate unchanged and said economic growth has accelerated.

“The market was clearly looking for a more dovish tilt from the RBNZ,” Jonathan Cavenagh, a Singapore-based currency strategist at Westpac Banking Corp. (WBC), wrote in a research note dated today. The kiwi should continue to outperform the Aussie “with the respective central bank policy rates moving in NZ’s favour over the coming 12 months,” the note said.

Swaps traders have priced in 11 basis points of New Zealand interest-rate increases over the next year, compared to 53 basis points of cuts in Australia, according to Credit Suisse Group AG indexes.

Benchmark interest rates are 2.5 percent in New Zealand and 3 percent in Australia. That compares with as low as zero in the U.S. and Japan.

To contact the reporters on this story: Kevin Buckland in Tokyo at kbuckland1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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