Christin Tuxen
Danske Bank A/S
No weekend deal on US public finances. Policy makers are still in talks over both a temporary deal on raising the US debt ceiling and ending the partial government shutdown. On Sunday, talks in the Senate were the focal point and even though both parties sent positive signal, there are still no signs of an immediate resolution. This will likely continue to create market volatility until a deal is struck.
After posting the first weekly gains for a month USD is again lower this morning with JPY again among the biggest movers. Sentiment and positioning should be less stretched in EUR/USD than just a couple a weeks ago and with positive news from Ireland supporting the euro and US politics weighing on the dollar there should be potential for another move higher in EUR/USD.
Further set to support EUR is the continued compression in peripheral spreads. Not least Portugal and Italy have tightened versus Germany across the curve. Many issuers are closing in on their 2013 issuance targets and we are approaching very large coupon and redemption payments; over the next three weeks EUR70bn will be returned to investors. This will continue to underpin our view of further spread tightening going forward.
Note that as a result of the government shutdown again no IMM positioning data from the CFTC were released on Friday, leaving us largely in the dark on how the FX market has positioned itself over the past couple of weeks.
The Swedish krona might come under renewed pressure if the ‘low for longer’ case is further being priced in Sweden. The next target from a technical point of view is 8.90 for EUR/SEK. After a nine-year low was tested in NOK/SEK, we now think it is time to go against the trend and we recommend to buy the cross for a move towards the first target at 1.0895. We believe the market is in the process of pricing a more dismal outlook for Sweden, which is already priced for Norway. Relative core inflation supports the view that NOK/SEK is about to correct higher, see Scandi Markets Ahead: Low for longer in Scandinavia and value in long NOK/SEK to be published later today.
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