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NOK: Preview of Norges Bank meeting

Mon, Mar 23 2009, 17:39 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


        • Norges Bank is expected to slash policy rates another 50bp to 2.0% at the Monetary Policy Meeting on 25 March.

        • We also expect the central bank to revise its interest rate path slightly lower, indicating a final 25bp rate cut in Q2, and risk an additional insurance rate cut. Hence, Norges Bank is expected to signal that rates will bottom out at 1.5 - 1.75%.

        • The NOK has performed strongly since the beginning of March. But we still think the currency offers some value on a 3M horizon.

        Norges Bank to cut rates by 50bp

        The NOK has performed strongly since the beginning of March. EUR/NOK has fallen from 9.06 to 8.60 and we have now reached our 3M target. Hence, the question is whether the NOK offers more value in the short-term. We think so and expect the monetary policy meeting on Wednesday to lend further support to the NOK.

        We expect to see a test of 8.40 over the three months. We will take a closer look at our EUR/NOK forecasts later this week.

        NOK fundamentals are strong

        But let's take a look at the fundamental NOK picture. The NOK stands out compared to other currencies on a number of accounts.

        - The Norwegian internal and external balances are very healthy. Despite the drop in the oil price, the budget surplus including the pension fund is forecast at NOK 270bn or 15% of mainland-GDP in 2009 according to the newest budget update from the government. We think there is a growing focus on balances in evaluating currencies. And Norway is certainly in a league of its own.

        - The economy is doing relative well compared to Euroland and the US. We expect mainland GDP to contract by just 0.5% in 2009 compared to our expectation of -2.7% in Euroland and the US.

          Published on  Mon, Mar 23 2009, 17:39 GMT

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          Don't fight the Fed

          Fri, Mar 20 2009, 10:35 GMT
          by Signe Roed-Frederiksen

          Danske Bank A/S


            • While we believe that long-term Treasury yields are set to rise as the financial and economic backdrop improves, the Fed's bold move to buy up Treasuries is likely to put a "cap" on yields and we expect Treasuries to range trade in the short term.
            • However, given our expectations of a stabilisation in the economy by late Q2 we should continue to receive indications that the worst of the contraction in activity is behind us. This should make the Fed more hesitant to scale up quantitative easing further.
            • With the "Bernanke put" in the Treasury market exhausted, any hints from the Fed that the easing cycle is coming to an end could result in a major surge in yields. We therefore recommend investors with a longer investment horizon to use the current setback in yields to open short positions at the longer end of the curve or to move into steepening trades.
            • The Fed decision has also fuelled increased speculation of ECB buying government bonds down the road. We still believe that the ECB is miles away from seriously contemplating the buying of government bonds.

              Another aggressive move from the Fed

              The Federal Open Market Committee (FOMC) took yet another aggressive move at their meeting Wednesday evening, committing to purchase up to USD 300bn in longer-term Treasury securities over the next six months, concentrated in the 2- to 10- year sector of the nominal Treasury curve. This corresponds to between 20-30% of the gross issuance in the coming six months.

              In addition, the Fed will expand its MBS purchase programme by USD 750bn to a total of USD 1,250bn and increase its purchase of agency debt by up to USD 100bn to USD 200bn. The Fed also scaled up on the rhetoric on the interest rate stating that the Fed funds rate would be held exceptionally low for an "extended period" compared to "for some time" at the January meeting.

              Following the announcement, the 2-10 curve flattened substantially with 10-year Treasury yields dropping by more than 40bp, while the 2-year segment moved 16bp lower. Mortgage yields followed 30-year Treasuries down and 30-year Freddie Mac investor rates dropped to 4.25%.

              Published on  Fri, Mar 20 2009, 10:35 GMT

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              EUR/GBP: To parity or not to parity?

              Wed, Dec 24 2008, 14:53 GMT
              by John Hydeskov

              Danske Bank A/S


                • A year ago, parity in EUR/GBP was a distant fantasy. Now, traders attach more than 30% probability that the pair will rise above 1.00 within three months. But how severe is the situation for the pound? Why has sterling ended up being the least wanted G10 currency in 2008? What would it take to push sterling the final step above the 'magic' parity? Is it likely to happen?

                • We conclude that another downward revision of UK growth prospects relative to the Euro zone, or an adoption of quantitative easing from the Bank of England's Monetary Policy Committee, another downturn in financial equities, or a further rise in implied FX volatility could potentially push EUR/GBP beyond 1.00. However, we believe that such an erratic move would not prove long-lived.

                What would it take to push EUR/GBP to parity?

                EUR/GBP is affected by a number of factors, and we cannot identify which dominates since this varies over time. From calculations on our short-term financial model (see FX Market Update), we find that relative interest rates (3M-1Y forward spread) and carry-to-risk (3M deposit spread in relation to expected FX volatility) describe movements in EUR/GBP best, but other factors can be important drivers over shorter periods.

                We note that the rise in EUR/GBP since August 2008 has occurred at a time when downward revisions of growth forecasts for both 2008 and 2009 have been sharper for the UK than for the Euro zone, cf. table 1. In the same period, the Euro zone- UK swap spread narrowed 155bp (chart 3), 3M implied EUR/GBP volatility has risen 11 percentage points (chart 4), the UK financials index has shed around 750 index points (chart 5) and EUR/GBP has risen 26 big figures (close to 40%).

                Under the simplified assumption that these factors are separable and non-integrated, and based on the experiences from August 2007 to today, we can estimate what would be required to push EUR/GBP towards parity from the current spot level (0.9450):

                1. A further downward revision of the forecast for UK economic growth of around
                0.2-0.4 percentage points relative to the Euro zone.

                2. The 2Y Euro zone-UK swap spread widens from 0bp to 30-40bp.

                3. The FTSE100 financials index declines by a further 200 index points.

                4. The EUR/GBP 3M implied FX volatility rises by 3 percentage points.

                In our view, 1-4 are likely to happen. Why?

                Ad 1): Declining retail sales is slow poison for the consumption-driven UK economy, but we are still nowhere near the slump in consumption that we saw in the early 1990s after the burst of the previous housing bubble. We are aware that the UK export sector is in a favourable situation because of the weak pound, but since other countries are rapidly scaling imports back, the effect from UK exports on GDP will probably be smaller than under ‘normal’ conditions. The risk on UK growth in 2009 is in our view very much on the downside.

                Ad 2): The MPC has not formally adopted quantitative easing like the Fed, but it has come quite close verbally. The recent Minutes from MPC meetings adopted a very soft tone and we would therefore not be surprised to see the UK base rate at 1% or perhaps even lower in the near future. Inflation is no longer a concern. Such a scenario is not (yet) a valid option for the ECB. A rate reduction to 1.5% will probably be the lowest level the ECB will go to, assuming the economic situation doesn’t deteriorate even further. A widening of the Euro zone-UK swap spread is therefore a reasonably strong possibility.

                Ad 3): Risk on the financial sector is still considered to be on the downside. For example, Barclays Bank, HSBC and RBS were all downgraded by Standard & Poors on Friday 19 December. It is not our base scenario that bank shares will continue to decline even further, but as long as the future conditions for banks remain somewhat unsettled and sentiment is downbeat, another slump cannot be ruled out. Ad 4): Volatility is very high compared to historical standards, and one has to be pretty creative to envisage what could push market implied uncertainty higher. The ongoing financial crisis has however taught us to think the unthinkable and unforeseen events have the power to push implied volatility higher as this measure theoretically has no upper limit.

                Summarising 1-4, we cannot rule out a move in EUR/GBP to 1.00. This would most likely be interpreted as a crisis of confidence for the pound. If confidence is lost, it would require more dramatic measures such as central bank intervention or the provision of higher interest rates on sterling assets at the expense of monetary stimulus to the real economy. The result could be that we would have to revise our long-term view on the valuation of sterling, i.e. start to think of sterling as being worth the same or even less than the euro, if the pound no longer enjoys the same privileges as the common European currency in the minds of investors.

                However, we are not there yet. We regard sterling as being meaningfully undervalued against the euro. In fact, EUR/GBP is now close to 20% above its long-term fair value, cf. chart 7. Nevertheless, this misalignment could be maintained for a long time.

                Published on  Wed, Dec 24 2008, 14:53 GMT

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                Speculative investors reduce USD longs significantly

                Tue, Dec 23 2008, 14:34 GMT
                by Kasper Kirkegaard

                Danske Bank A/S


                • The latest IMM data covers the week from 9 to 16 December, and shows that overall speculative positions were reduced significantly for all currencies, but JPY and CHF.
                • Speculative investors shed USD longs for a fourth week, as the dollar came under pressure, weakening against all G10 currencies.
                • EUR saw the largest short-term rally since the single currency was introduced, and gained close to 10% against USD in the week to 16 December. Net short EUR positions were scaled back, which in combination with the reduction in USD longs, implies a significant cutback in implied short EUR/USD positions.
                • Speculative investors reduced net short CHF positions marginally. CHF lost slightly against EUR in the week to 16 December, but has appreciated against EUR since, as the only G10 currency besides SEK.
                • Net GBP positions were broadly unchanged, despite EUR/GBP moving above 0.90 for the first time. However, the IMM data was collected before the accelerated move in EUR/GBP above 0.95.

                Published on  Tue, Dec 23 2008, 14:34 GMT

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                EUR/SEK to remain elevated

                Tue, Nov 25 2008, 14:42 GMT
                by Stefan Mellin

                Danske Bank A/S


                Last week we wrote that EUR/SEK was likely to test 10.30 and even 10.40 in the coming weeks (it was trading at 10.22 then), and that we preferred to be long EUR/SEK during this period (see "PPM and EUR/SEK: Buy on 'rumour' sell on fact", 20 November). As it turned out we substantially underestimated the dynamics. On Friday the SEK experienced perhaps the craziest day ever as EUR/SEK first fell from 10.36 to 10.26 in the morning and the spiked to 10.69 in the afternoon, 43 figures in just a few hours. The 20 figure collapse since then suggests that this was an overshoot. Falling equity markets bolstered the move as rebalancing needs continue to put downward pressure on SEK crosses where a thin market exaggerates the movements. While we believe pure currency hedging among Swedish portfolio managers was one explanation behind the sharp rise in EUR/SEK, increasing risk aversion is at play too - last week in particular related to rumours and heightened worries of an immediate devaluation in Latvia. Both the IMF and the EU commission have responded positively to Latvia's request for financial support. IMF says it "stands ready to rapidly assist the efforts of a comprehensive economic program, in close cooperation with EU."

                Published on  Tue, Nov 25 2008, 14:42 GMT

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                Further reduction of EUR shorts, speculative investors turn bullish on oil

                Tue, Nov 25 2008, 14:29 GMT
                by Danske Research Team

                Danske Bank A/S


                • The latest IMM data covers the week from 11 to 18 November. While overall positions saw little change, EUR shorts were further reduced while CHF, CAD and GBP shorts were extended. Speculative positions in oil saw a major turnaround as net longs were established.
                • The reduction in EUR shorts marks the week's biggest change in currency positions. Since 21 October, EUR shorts against USD have constantly been reduced.
                • Net short CHF, CAD and GBP positions were extended, consistent with the moves in the spot rates seen during the time period covered by the week's IMM data.
                • The latest IMM data shows a reversal of the substantial negative net oil position. Following the fall in Brent crude oil below USD50/barrel, speculative investors have now again established net long positions.
                • Bond market speculative investors reversed the trend from the previous week by positioning for a flattening of the curve - positions in 2- years were sold off, while positions in 10-years were extended.

                Published on  Tue, Nov 25 2008, 14:29 GMT

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                Go short EUR/USD , EUR/CHF − long GBP/CAD

                Tue, Nov 18 2008, 17:52 GMT
                by Kasper Kirkegaard, John Hydeskov

                Danske Bank A/S


                • We recommend selling EUR/USD spot at 1.2650 for a move to 1.2050 (our short-term financial model estimate, see chart 1) and with a stop at 1.2850. The recent decline in oil prices has not been reflected in a lower EUR/USD spot rate (see chart 2). Moreover, we believe relative yields will move in favour of the dollar, as markets, in our view, still price too high a probability for just a moderate slowdown in the euro zone. While we see the Fed as close to the end of its monetary easing cycle, the ECB still has a long way to go. The USD has strong defensive characteristics and has historically fared well in times of trouble - the correlation between the USD and safe-haven darling CHF has risen dramatically since August (see chart 3). It is, furthermore, our expectation that repatriation flows, deleveraging and unwinding of speculative investments will continue to benefit the USD relative to the EUR.

                • We recommend buying GBP/CAD spot at 1.8450 for a move to 1.9350 (our implied short-term financial model estimate, see charts 4 and 5) and with a stop at 1.82 The pound took a beating in a massive gilt sell-off - net outflows of foreign investment from UK fixed income instruments seen over the past two months wiped out about 75% of the net purchases that were seen between November 2004 and mid-September 2008. Furthermore, the BoE's downbeat Inflation Report did not provide much relief. We acknowledge that much of the weakness in the pound can be accounted for by the grim UK growth prospects - the UK economy will probably contract by as much as 1.5% y/y in Q109 - and the interest rate outlook, where the base rate will likely be lowered to around 1.5% within the coming months. That said, sterling is now meaningfully undervalued against most currencies: According to REER analysis (post- 1993, see chart 6), GBP/CAD is some 15% undervalued. With oil prices plummeting due to the global recession unfolding and near-term prospects still soft, the CAD has not been sold off to the extent we would expect given the country's oil extraction costs. Furthermore, the loonie has historically tended to suffer in global slowdowns. We advise establishing the position prior to the BoE Minutes on Wednesday at 10.30CET, as we expect the BoE was not as unified as generally perceived by the markets when it slashed rates by 150bp at its latest meeting. Note that GBP/CAD is a EUR/USD in disguise: Combining a short EUR/USD with a long GBP/CAD will most probably reduce potential reward/risk.

                • We recommend selling EUR/CHF spot at 1.5160 for a move to 1.4600 (our short-term financial model estimate, see chart 7) and with a stop at 1.5360. The CHF has not benefitted as much against the EUR as we would expect when comparing to movements in other relevant asset prices, and even though a new spike in risk aversion is not our main scenario - which most likely would send the Swiss franc substantially stronger - we believe EUR/CHF will gradually correct towards its fair short-term level. Alternatively, we recommend preparing for a lower move in EUR/CHF via options: One way to position for a fall in EUR/CHF that is not driven by a new blow-up in the financial crisis (i.e. implied volatilities remain contained), would be through a reverse knock-out put-option with the barrier placed just below a support level (2 Week maturity, strike 1.51, barrier 1.44). Given the extreme risk reversal, this comes at a low price of105 CHF pips relative to the vanilla (190 CHF pips, indicative prices only), meaning that the break-even is just below 1.50.

                Published on  Tue, Nov 18 2008, 17:52 GMT

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                FX central bank previews: BoE, ECB, SNB and DN

                Wed, Nov 5 2008, 17:09 GMT
                by Kasper Kirkegaard, John Hydeskov

                Danske Bank A/S


                Thursday will be a busy day for central bank watchers: We have pencilled in rate cuts from the Bank of England (BoE), the European Central Bank (ECB) - each of 50bp - and we expect Danmarks Nationalbank (DN) to follow the ECB and lower rates by the same magnitude. Risk of an intermeeting cut from the Swiss National Bank (SNB) has risen.

                We expect the Bank of England (BoE) to cut the base rate by 50bp to 4.00% on Thursday 13.00CET. Even though CPI inflation remains skyhigh at 5.2%, price concerns have lost their importance as economic conditions have deteriorated extremely fast. We believe the UK is in recession and will probably remain there into 2010. Stimulation is very much required and there are rumblings that the BoE might be 'behind the curve'.

                Our expectation of 'just' a 50bp cut relies on three factors: 1) Even though the MPC's hawks have been muzzled, inflation concerns are not dead and buried. Large rate cuts can push current inflation higher and lead to persistently higher inflation expectations with negative and undesirable long-term consequences. 2) Every central bank wants monetary policy to contribute to stability - not the opposite. After having cut rates aggressively, the RBA had to stabilise the AUD - something that might have been avoided if the RBA had lowered rates more gently. 3) Since the BoE became independent, it has never lowered (or raised) the base rate by more than 50bp. One has to go all the way back to 1993 to see more aggressive easing.

                Published on  Wed, Nov 5 2008, 17:09 GMT

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                The Danish Central Bank hikes rates − again

                Fri, Oct 24 2008, 12:57 GMT
                by Kasper Kirkegaard, Stefan Mellin, Steen Bocian, John Hydeskov

                Danske Bank A/S


                Danmarks Nationalbank (DN) decided today (09.00CET) to raise its lending rate from 5.00 % to 5.50%. The discount rate and the interest rate on the banks' current accounts with DN remain unchanged at 4.50%. All interest increases will have from 24 October 2008. The policy spread between Denmark and Euroland is now 175bp – the highest ever recorded.

                According to statements from the DN’s press officer, Karsten Biltoft, the DN “has been forced to intervene to support the DKK in the past few days”. EUR/DKK has in fact been stronger than the central parity, 7.46038, but we have to reason to believe that this has been rather expensive for the DN. DN's currency amounted to DKK160.1bn in September. In September, DN intervened for DKK 0.7bn.

                On 7 October, DN hiked its lending rate by 40bp to 5.00%. DN cited the reduction of the spread between DN's lending rate and ECB's marginal rate as the main reason behind the rate hike. The central bank said that the interest rate spread recently has been negative, which has led to an FX outflow. It noted further that it had intervened in the FX market to support DKK and said that the intervention had reached a point which led to an increase of the lending rate. Less than 24 hours later, ECB participated in the coordinated rate cut with other major central banks, which brought the policy spread between Denmark and Euroland to 125bp.

                EUR/DKK is trading around the central parity after rate hike. Whether or not the rate hike will have its desired impact in the near future will depend upon how the global credit crisis evolves.

                Published on  Fri, Oct 24 2008, 12:57 GMT

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                FX forecast update: Better safe than sorry

                Wed, Oct 15 2008, 15:28 GMT
                by Kasper Kirkegaard, Stefan Mellin, John Hydeskov

                Danske Bank A/S


                Here are our latest thoughts on the G10 currency markets:

                • Panic! The financial crisis unfolded beyond our wildest imagination over the past month. The VIX index, a measure of expected volatility in equity markets, rose to a record-high of 77; the US Ted spread, the difference between secured and unsecured lending, sky-rocketed to 4.6 percentage points and the credit default swap spreads widened substantially. Most financial institutions - some more than others - found it hard to get short-term funding and perceived counterparty risk rose considerably. Global financial markets were balancing on the brink of a systemic meltdown and had "ceased to function" as Britain's Prime Minister, Gordon Brown, put it. Clearly, something had to be done.

                • Three out of three ain't bad. From economic theory (see for example Kindleberger: Manias, Panics and Crashes) we know that three things are typically observed in the final phase of a financial crisis (the discredit phase). Firstly, prices usually fall to clear the market. That has indeed happened: from 19 September to 10 October, global equities lost one-third of their value. Secondly, trading is usually cut off. Stock exchanges have been closed in Russia (-61% year-to-date), Indonesia (-44%) and Iceland (-89%). Finally, lenders of last resort step in and cut policy interest rates and ensure liquidity. Central banks in the US, UK, Euroland, Canada, Sweden and Switzerland announced a coordinated 50bp rate cut, see Coordinated rate cuts, and after a genuine dollar shortage and several additional liquidity injections, the Fed, ECB, BoE and SNB joined forces and provided unlimited dollar liquidity (full allotment) at fixed interest rates. In our view, financial markets are still dizzy and trying to get a hold on things. We remain in the discredit phase, and we believe it remains premature to consider the financial crisis over, as no obvious indicators to this have been observed. Accordingly, our well-known theme of financial deleveraging remains central to our approach to currency markets.

                • Rescue packages. Since the last edition of FX forecast update, governments across the world have discussed and agreed on rescue packages, all designed to curb the financial crisis (effect on the real economy. How should we think of the packages in relation to FX? Firstly, the packages will eventually unfreeze conditions in money markets. Spreads should therefore eventually narrow and market participants should expect fewer difficulties with getting transactions through. Secondly, it is still hard to compare the packages to get the relative picture right and draw strong conclusions on specific currency crosses. Thirdly, even though the rescue packages don't eliminate risk aversion completely, they reduce the systemic risk substantially. Safe-haven currencies that have appreciated due to a scale-down of risk-taking are accordingly put more at risk, ceteris paribus. There is however other factors benefitting these, see Why defensive currencies are still your friends.

                Published on  Wed, Oct 15 2008, 15:28 GMT

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                Danish Central Bank hikes rates

                Wed, Oct 8 2008, 08:04 GMT
                by Steen Bocian, John Hydeskov

                Danske Bank A/S


                Danmarks Nationalbank (DN) decided earlier today (7 October) (17.00CET) to raise its lending rate from 4.60% to 5.00%. The discount rate and the interest rate on the banks' current accounts with DN are raised by 0.25% to 4.50%. All interest rate increases are effective from 8 October 2008. Both the decision to hike rates, the magnitude by which rates have been hiked and the timing of the rate hike will surprise markets, although the likelihood that the bank would hike has increased in recent days.

                In the following statement, DN cited the reduction of the spread between DN's lending rate and ECB's marginal rate as the main reason behind the rate hike. The central bank said that the interest rate spread has recently been negative, resulting in an FX outflow. It noted further that it had intervened in the FX market to support DKK and said that the intervention had reached a stage which resulted in the increase in the lending rate. In the opinion of DN the size of the rate change reflects the need to re-establish a positive rate spread.

                In Factors affecting DKK published on Monday we argued that "Money market tensions will, in our view, be the dominant driver for EUR/DKK in the coming months. As long as EUR/DKK enjoys a positive carry some pressure on DKK will eventually remain". That proved to be right. We listed other factors that have received attention lately including the risk that foreign investors would not reinvest proceeds from forthcoming refinancing auctions, a potential repatriation of coupon money from government bonds, a general rise in risk aversion and M&A flows. We concluded that none of these is currently the driving factor behind the DKK.

                The Political Agreement on Financial Stability between the Danish government and the financial sector has so far failed to stabilise the DKK. However, that was never its real intention. The agreement is designed to ensure sufficient liquidity to solvent banks by providing a safety net and affording full coverage for all claims by depositors and senior debt (unsecured unsubordinated debt). However, it was never intended to reduce pressure on the DKK.

                In our view, the risk of further rate hikes has risen substantially (alternatively if ECB lowers its refi rate, DN could decide to lower its rates by less than ECB). DN has clearly shown that it will try to maintain EUR/DKK close to its central parity. We could see a repetition of actions taken in 2000, where DN felt forced to widen the rate spread to Euroland considerably in an attempt to stop pressure on DKK. This move proved effective and DKK appreciated against EUR following several months of higher DKK rates. When conditions in money markets begin to improve we believe DN will start to ease rates although it may be some time before this occurs.

                Published on  Wed, Oct 8 2008, 08:04 GMT

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                Why defensive currencies are still your friends

                Tue, Oct 7 2008, 12:55 GMT
                by Kasper Kirkegaard, John Hydeskov

                Danske Bank A/S


                Summary: FX markets have experienced pronounced shifts on the back of the worsening financial crisis. From implied volatilities we note that investors expect FX movements to remain substantial in the coming months (see chart 1). In this note we answer two essential FX related questions: 1) How should we inter-pret the approval of the US Troubled Asset Relief Programme (TARP) in relation to European govern-ments’ attempts to ensure financial stability? Here we conclude that EUR/USD can fall further. 2) Are re-cent FX movements (stronger JPY, USD and CHF) overdone, and will we see a retraction soon? By revisit-ing both short- and long-term models we find that the answer is ‘no’, and argue that we can see a further strengthening of safe-haven currencies.

                US on least-wrong course: One week ago we outlined the possible implications of the US TARP (What does TARP mean for FX?), which was finally approved by the House of Representatives last Friday. The substance of the package is essentially the $700bn to purchase assets for which no liquid market exists. If the TARP works, it will price the assets above current fire-sale values and provide a safety net to trou-bled US banks. Fears persist, however, that the bail-out plan still is not enough to ensure stability and re-store trust among banks. It is important to emphasise that the plan cannot fully prevent an economic slowdown in the coming quarters, but it does establish a market for so-called toxic financial assets. We retain our positive stance towards TARP, as the US authorities have shown a real dedication to resolving the financial crisis and limiting the damaging impact on the real economy. On the back of the far-reaching US measures, the USD prospects look relatively positive.

                Euroland trying to find its legs: The financial crisis in Europe is worsening and the growth outlook is very dim. With regards to nationalising collapsing or ailing financial institutions, the UK took the lead, first with Northern Rock and later with Bradford & Bingley. Over the weekend, Germany’s government and financial institutions agreed on a €50bn rescue package for Hypo Real Estate, a commercial property lender, while BNP Paribas, France’s biggest bank, took control of Fortis bank after the governments of Holland, Belgium and Luxembourg failed to ensure its stability. At this stage, a joint euro-area financial rescue package ap-pears far off, simply because the euro area is not designed to deal with such issues on a supra-national level. It seems, in our view, more likely that governments will deal with the problems on a national level – as already has been the case in Ireland, Italy, Portugal and Greece – where governments have guaranteed deposits and bank liabilities. One result could be uneven financial conditions across Europe. It seems in-evitable that the euro zone will sink into recession: the economy shrank 0.2% in Q2 and most indicators point to another quarter of contraction. We are not positive on Euroland growth in 2009 either, and fore-see growth of just a modest 0.7%. We find it hard to believe that the EUR will stay overvalued, with finan-cial conditions not yet clarified and the economy facing a full-scale downturn. We remain therefore nega-tive on the EUR.

                Published on  Tue, Oct 7 2008, 12:55 GMT

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                Factors affecting DKK

                Mon, Oct 6 2008, 09:36 GMT
                by John Hydeskov

                Danske Bank A/S


                • • There has recently been some modest pressure on the DKK. We have reason to believe that this is due to the negative FX forward spread. Danmarks Nationalbank (DN) intervened to a limited extent in September - only DKK0.7bn. In this note we look at the factors affecting EUR/DKK. 

                • • Around this time of year, we are usually being asked about two things: First, whether the coupon money due in mid-November could have an impact on EUR/DKK if foreigners do not reinvest their proceeds. Second, could an outflow in relation to the refinancing auction arise if foreigners don't reinvest their holdings of non-callables, maturing on January 1 2009? 

                • • In both cases the answer is "no", as the proceeds from both events are too small. Coupon money to foreign investors is just DKK6bn and the proceeds from the refinancing auction amounts to modest DKK7.3bn. Thus even if all the proceeds is repatriated - which in our view is quite unlikely - it will not have any significant affect on EUR/DKK or should warrant any additional action from DN. 

                • • The new political agreement on financial stability between the Danish government and commercial lenders will, in our view, provide relief to DKK as it reduces systemic risk substantially and limits the risk premium attached to DKK relative to EUR, all other things being equal.

                • • Other factors, likely to impact on EUR/DKK going forward include the general level of risk aversion, capital flows and M&A flows. In our view, these do not represent significant upside risk to EUR/DKK. The DKK is currently not burdened by any significant outflows; the trade balance posts a healthy surplus while the current account, FDI and equity flows not are alarming.

                Published on  Mon, Oct 6 2008, 09:36 GMT

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                USD: What does TARP mean for FX?

                Mon, Sep 29 2008, 16:25 GMT
                by Teis Knuthsen

                Danske Bank A/S


                In this note we consider the details of recent US initiatives to deal with the financial crisis as well as implications for financial markets, including currencies.

                It now seems highly likely that the USD 700bn TARP (Troubled Asset Relief Program) will become a reality after weekend negotiations resulted in a deal between US government and Congress. Relative to the original plan, the revised plan includes restrictions on executive pay as well as increased oversight of the Treasury. It also mandates the Treasury to take an equity stake in the companies that benefit from TARP, probably in the form of equity warrants. Somewhat unclear is a plan to reduce foreclosures which was not in the original plan. We expect the overall plan to be presented for a vote in the House on Monday and in the Senate on Wednesday.

                What is the impact of TARP?

                We see TARP as part of a proposal for a systemic way of dealing with the financial crisis that consists of several different parts.

                The first is TARP itself. The main purpose is to provide liquidity to lenders by letting the Treasury buy as much as USD 700bn in mortgage-related assets. The initial, immediate endowment is USD 250bn, which can be raised by USD 100bn following a Presidential report to Congress. The President can then ask for the final USD 350bn, unless Congress votes specifically to withhold the money. TARP will operate through reverse auctions, where a key feature will be to increase transparency on mortgage assets, presumably also allowing external parties to bid. Relative to outstanding mortgage debt, TARP should be big enough to have a meaningful impact (non-GSE mortgage debt is USD 5.6trn with delinquency rates of 5-6% so USD 700bn is indeed a considerable amount). Details on eligible securities under TARP remain patchy, and although the Treasury can probably start buying linear securities straightaway, it may take a while before structured products can be auctioned.

                The second is a plan under TARP legislation to allow the Federal Reserve to pay interest on bank reserves held at the Fed immediately rather than from October 2011, which was agreed under the Financial Services Regulatory Relief Act of 2006. By paying interest on reserves, the Fed can establish a floor for interest rates (thus potentially preventing the recent collapse in T-bill rates), and if necessary initiate a quantitative easing of monetary policy to stimulate the economy.

                The third is the substantial initiative to support money market mutual funds. Here there are three actions: one consists of non-recourse loans to depository institutions to buy asset-backed commercial papers from money market funds, another lets the Fed buy agency discount notes and the final is the deposit insurance D A N S K E B A N K 2 guarantee to money market funds from the Treasury by way of the Exchange Stabilisation Fund. Money market funds have assets of cUSD 3.4trn and are central to corporate financing.

                The fourth is another round of liquidity from the Fed. Recently we have seen the Fed increasing the list of collateral in the primary dealer credit facility and the term security lending facility (TSLF). We have also seen an increase in size and in frequency of the TSLF. And finally, banks have been allowed to move liquidity back and forth to non-bank affiliates.

                And the final one is the recent ban on short-selling by the SEC.

                The purpose of TARP as well as the other parts is to separate performing from troubled assets, slow financial deleveraging and reduce the risks of not just a systemic run on banks and money market funds, but also reduce the risk of an economic hard-landing. It is not a given that the plan will work. The whole point about transparency and price discovery is a bit vague, and among other things increases the risk of exposing additional bank losses. But it is probably a safe bet that even the first USD 250bn will go a long way in increasing liquidity in mortgage-related debt products these days.

                The rescue package is not a general bank bailout, so bank lending is likely to be under pressure for quite a while just as further bank failures can be expected. Neither does the plan address consumer credit or commercial real estate debt.

                Published on  Mon, Sep 29 2008, 16:25 GMT

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                SEK: Relative rates come back as key driver

                Wed, Sep 24 2008, 13:51 GMT
                by Stefan Mellin

                Danske Bank A/S


                For several months EUR/SEK has been mainly driven by risk aversion and stock markets performance. This continues to be the case and we also continue to believe that any meaningful rebound in the SEK will not materialize until the overall market sentiment improves. Now the situation appears to get worse by the day; VIX is edging higher again and stock markets fail to get a firm footing amid uncertainty whether the Paulson/Bernanke rescue plan will be passed through the congress without delay. If it does it might be a positive trigger but that surely remains to be seen. If it does not it will weigh heavily on the market and likely send EUR/SEK to new highs. Meanwhile the SEK gets hammered by difficult market conditions such as sharp rise in USD libor rates, 3-month fixed 27 basis points higher than yesterday. Swedish ditto were close to flat. From a strict carry perspective this is not SEK supportive.

                That being said it is interesting to note that the 2-year swap spread, which was firmly placed in the back seat over the summer months, has made a come back as a key driver for EUR/SEK. The chart below shows that the main drivers right now are VIX (risk appetite/aversion), stock market developments in absolute terms and rela-tive yields whereas relative stock markets (EuroStoxx vs OMXS) have lost power. Another anomaly over the summer was the positive correlation with EUR/USD. This is now changing as well.

                Even though risk sentiment will be No 1, if fundamentals are back on the agenda, what do we see? Well, in short, the growth outlook remains in the doldrums. The inflation picture is improving as exempliefied by the fact that households 1-year expectations have fallen from 3.7% in July to 2.4% in September according to NIER. We ex-pect to see a longer term inflation expectations to come down as well amid actual inflation is heading lower. The Prospera inflation expectations survey are released on 8 October and will be very important. Elevated price plans among food retailers have been used by the Riksbank hawks (Mr Öberg) for raising rates. Today's NIER survey showed these plans have moderated sharply. Hence, it is not difficult to make a case for more front-loaded repo rate cuts. The Riksbank main scenario is a first cut in Q3’09r. We see the first cut in Q1 but with an increasing chance for December. Barbro Wickman-Parak (dove) said last week: "One can, on the other hand, if it becomes apparent that economic activity is declining, reduce the interest rate more rapidly than was originally intended." Stefan Ingves' (hawk) speech at 15.00 today will be closely watched for any signs of a change in stance. We do not rule out a marginally softer tone although we basically expect him to differentiate between monetary policy and actions undertaken to facilitate market functionality. Due to credit market turmoil it is hard to say exactly how much the market is discounting in terms of rate cuts, but we estimate some 100bp through 2009, i.e., close to our forecast.

                In conclusion, while humbleness should be a virtue not least in these troubling times, we expect the SEK to continue to trade on a weak note in the coming months. EUR/SEK fair value is within the 9.50-60 range. But still we see a non-negligible risk that EUR/SEK takes another leg higher on further troubles in the markets or a softer Riksbank. Trading-wise however we prefer to look for opportunities to re-enter a long position in USD/SEK.

                Published on  Wed, Sep 24 2008, 13:51 GMT

                1

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                EUR/USD after extreme USD rallies

                Fri, Sep 19 2008, 08:54 GMT
                by John Hydeskov

                Danske Bank A/S


                Risks to EUR/USD remaining

                  • ·EUR/USD has fallen by more than 100%, annualised, during the past month.
                  • · Such moves are extremely rare; this is the first such dollar rally since 1992 and only the fourth since 1980. · Although the dollar may seem overbought by many yardsticks, the historical performance after extreme rallies suggests that further downside may be in store for EUR/USD in the coming months.
                  • · Rebasing past dollar rallies since 1980 to current spot levels, we find that on average EUR/USD has fallen to 1.32 after five months, before rising to 1.35 after one year.
                  • · If present performance repeats the patterns of the 1981 and 1984 dollar rallies, EUR/USD could fall below 1.30 before year-end.
                  • ·After 12 months the high-low range has been 1.19 -1.56 in today's terms, suggesting that directional volatility could become substantial in the months ahead.

                  Published on  Fri, Sep 19 2008, 08:54 GMT

                  1

                  0

                  UK: Thoughts on the SLS and EUR/GBP

                  Fri, Sep 19 2008, 08:01 GMT
                  by John Hydeskov

                  Danske Bank A/S


                  • • The Bank of England's Special Liquidity Scheme has allowed UK banks to swap illiquid assets for treasury bills since April. The SLS has been enormously popular among UK banks as this has given them funding in return for illiquid mortgage-backed securities.
                  • • The SLS should have come to an end on 20 October 2008 but due to 'disorderly market conditions' the BoE yesterday announced an extension to 30 January 2009. That was to provide additional time for banks to plan their access to the scheme in 'an orderly fashion'.
                  • • We argue that an end of SLS could generate temporary demand for sterling relative to the euro, all other things being equal. There are, however, several caveats to this.





                  Published on  Fri, Sep 19 2008, 08:01 GMT

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                  0

                  JPY performance and Japanese recessions

                  Tue, Aug 12 2008, 14:16 GMT
                  by Teis Knuthsen

                  Danske Bank A/S


                  The risk of a Japanese recession is rising. The link to the currency is inconclusive, however, with a drop in AUD/JPY during the last three recessions as the most obvious exception.





                  Published on  Tue, Aug 12 2008, 14:16 GMT

                  0

                  0

                  Sell GBP/SEK

                  Fri, Jul 25 2008, 12:47 GMT
                  by Stefan Mellin

                  Danske Bank A/S


                  •

                  When the less-liquid summer period arrives, the SEK tends to underperform and this year was no exception to the rule (see chart]. Given higher risk aversion, soft stock markets, concerns regarding the company reporting season with a special focus on Swedish banks’ credit losses in the Baltics, arguably it makes sense that the SEK has been hammered and that EUR/SEK is trading in the upper end of the historical range. The technical trend, even after the correction, is still favouring the upside. However, in the last two weeks the markets have made a U-turn with respect to risk, stock markets and the oil price. A lot of company reports, in Sweden and abroad, have been better than expected and the Baltic-related credit losses were smaller than generally feared, adding up to a better backdrop for the SEK. At the same time falling orders in the industrial sector support our view of a weaker economy/ labour market going forward. So the outlook is mixed (earnings vs valuation) and it remains to be seen which camp, bulls or bears, will come off best after the reporting season is over.

                  By contrast, the impact on the SEK from the economic news and fundamentals, e.g. the Riksbank, has been close to negligible: witness first the short-lived impact following the hawkish Riksbank/dovish ECB on 3 July, then the resilience after the surprisingly soft Minutes last week. Hence, while the SEK is still primarily risk driven, the fundamental backdrop is still SEK supportive. We expect two more hikes from the Riksbank this year, starting in September. In the short run, at least over the September meeting (even though it should be acknowledged that the weaker the oil price, the weaker the case for several hikes), we consider it highly unlikely that the “hawks” will give in even if the oil price moderates from the extremes – inflation expectations are still too high. The money market (OIS) is pricing less than one until year end and just above 50/50 for 25bp in September.

                  While EUR/SEK remains highly sensitive to swings in risk sentiment and stock markets (both in absolute and in relative terms), it has yet to respond fully to lower risk aversion: VIX has dropped from 30 to 21 over the last week (see chart). The sentiment shift suggests an improved environment for potential EUR/SEK sellers, especially considering the levels. Our preferred short-term multivariate EUR/SEK model indicates fair value has dropped from the 9.45/50 area last week to currently just above 9.40. Moreover, checking with the seasonality chart again, it shows that the SEK tends to appreciate as soon as the summer period has passed. Thus, we are SEK buyers, but on a relative basis (risk-reward) we prefer shorting the GBP (we still expect the next step from BoE is a rate cut and wouldn’t read too much into the dissenter Mr Besley, and therefore the rebound triggered by the Minutes rather offers a better selling opportunity) rather than EUR. Technically, EUR/GBP is finding good support around the 0.7820 area. We recommend selling GBP/SEK at 12.00, target 11.65, stop 12.10

                  Published on  Fri, Jul 25 2008, 12:47 GMT

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                  FX forecast update: To catch a rising tide

                  Fri, Jul 4 2008, 13:34 GMT
                  by Teis Knuthsen, Kasper Kirkegaard, John Hydeskov

                  Danske Bank A/S


                  •

                  Here are our latest thoughts on the G10 currency markets:

                  • Difficult waters to navigate. The best performing currency during the past month has been CZK (up by 4% vs EUR), followed by HUF (2%) and PLN (0.8%). The worst have been ISK, PHP and NZD (down 5-6%). The performance split between ISK and HUF, which can be seen as both belonging to a group of high-yielding currencies backed by fragile fundamentals, clearly illustrates how difficult currency markets have been to navigate in the past month. Overall, European currencies, led by CEE, have performed best, Asian currencies have as a block underperformed, and EUR/NZD (up 5.3%) represents the extreme in terms of G10 performance. Shift in relative rates have been a key driver, at least among major currencies: Outright declines in NZD and JPY rates help explain un-derperformance of these currencies relative to countries such as Norway, the United Kingdom and Euroland, where rates have risen the most. However, the pattern is not entirely consistent, as the 3% rise in GBP/CAD during the past month despite a near identical +40 basis point rise in two-year swap rates illustrates. Carry performance has been essentially flat whether it is measured against G10 currencies or a global universe.

                  • Inflation is now the main threat. If the relative movements have been difficult to pin down, there is little confusion in our view when it comes to the absolute outlook. Since last autumn, we have warned about the dual shock of financial crisis and economic slowdown. There is still nothing to in-dicate that the financial crisis is over, and cyclical threats to overextended consumers on both sides of the Atlantic should be enough to temper economic optimism. If the two waves of bank and consumer balance sheet repair collide, which now appears to be happening, the consequences could become ugly. On top of this, we have to deal with rapidly rising inflation. Higher inflation caused by rising energy and food prices equals a decline in disposable income, just as monetary tightening coming in the wake of inflation can be expected to tighten the liquidity cycle further. But the real issue is whether we are witnessing a secular shift from a low-inflation era to a period where price pressures are becoming more entrenched. The jury is still out on that, but inflation should now be seen as the predominant risk to both the economic outlook as well as to financial markets. Conventional wisdom largely seems to be that the global inflation problem will be resolved without a sharp decline in economic activity. We are not so sure. We continue to believe that we are headed for a period of financial deleveraging against a backdrop of slower activity. There is a distinct possibility that oil prices, and thereby inflation, could rise further in the coming months. There is also an obvious risk to the economic outlook presented by the latest collapse in global consumer confidence. And third, pushed up against the wall, there is very little that central banks can do other than to slay the inflation beast in the old-fashioned way. This is particularly so in Asia-excluding Japan, where underlying inflation is rising sharply.

                  Published on  Fri, Jul 4 2008, 13:34 GMT

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                  EUR: Flow of funds outbound in April

                  Mon, Jun 30 2008, 15:19 GMT
                  by Kasper Kirkegaard, John Hydeskov

                  Danske Bank A/S


                  •

                  Euroland flow of funds disappointed in April, posting a deficit on the broad basic balance of EUR 24bn. While the current account is roughly in balance, net outflows from direct investment and equity trading easily outweighed a net bond inflow. In annual terms, the past months have seen a clear deterioration in EUR capital flows. Though flow-of-funds have yet to turn negative for the euro, neither are they outright positive, as was the case in 2007.

                  • • The current account posted a deficit of EUR 0.3bn, down from a surplus of 2.1bn a year earlier. In annual terms, the current account was close to balance in April (EUR 0.1bn), down from a surplus of 10.3bn in April 2007.
                  • • Foreign direct investment posted a net outflow of EUR 24.2bn, the fifth consecutive outflow. In annual terms, the net outflow reached EUR 166bn, the highest since June 2007.
                  • • Net portfolio flows were close to balance with a net inflow of EUR 0.5bn. Net equity flows saw an outflow of 21bn, whereas net bond flows resulted in an inflow of 21bn. In annual, the net bond inflow has all but dried up, falling from an inflow of as much 186.7bn a year ago to just 7.0bn in April 2008. In contrast, net equity flows continue to see large inflows on an annual basis, most recently at 168.3bn (down from 213bn last year). This leaves net annual portfolio inflows (174bn) at less than half of last year’s record highs (416bn in September 2007).
                  • • Taken together, the basic balance (current account, net FDI and net equity flows) posted a deficit of EUR 45.5bn in April, the highest since April 2005. Seen over the past year, the basic balance is close to neutral with a surplus of just EUR 2.5bn. Including bond flows, the broad basic balance posted a deficit of EUR 24bn, the second in a row. In annual terms, the surplus on the broad basic balance has fallen from a high of EUR 291bn in August last year to just 8.1bn.

                  Published on  Mon, Jun 30 2008, 15:19 GMT

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                  What’'s floating? Milk or oil? Sell NZD/NOK

                  Mon, Jun 16 2008, 13:34 GMT
                  by Kasper Kirkegaard, John Hydeskov

                  Danske Bank A/S


                  •

                  • •We recommend selling NZD/NOK spot at 3.91 for a move to 3.75 and with a stop at 4.00.

                  • The technical outlook is for range trading –important levels to watch are 3.84 and 4.05

                  • .•Both NZD and NOK are among the high-yielders in the G10 currency universe

                  • .•Recently, the relative rate spread has diminished sharply meaning that the positive NZD carry has almost disappeared.

                  • •The trade is our ultimate relative value bet at the moment.

                  • •Investors who find the pair (NZD/NOK) tricky and prefer only one of the legs can either sell NZD/USD or sell GBP/NOKNZD

                  Published on  Mon, Jun 16 2008, 13:34 GMT

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                  The week ahead in FX (16−20 June 2008)

                  Fri, Jun 13 2008, 16:04 GMT
                  by John Hydeskov

                  Danske Bank A/S


                  •

                  G7 finance ministers will meet in Osaka over the weekend without central bank governors. Without the power to set interest rates the meeting is without the usual edge and will probably not move markets much. In our view, coordinated intervention in the currency market is currently unlikely; the US is still mostly worried about the downside risks to the economy, the ECB has adopted a quite hawkish stance and the BoJ is left in the middle without any clear bias. Consequently, we can sit back and await conditions in monetary policies to change before the environment is ready for FX reserves to come into play.

                  Data out of the US can broadly be divided into three categories; sentiment indicators (empire manufacturing on Monday, ABC consumer confidence on Tuesday and Philly Fed and leading indicators, both on Thursday), housing data (NAHB on Monday and housing starts and building permits, both on Tuesday) and others (TICs on Monday, C/A balance on Tuesday). The sentiment indicators are generally expected to improve modestly, but these have limited market impact currently and are not set to dominate unless surprising heavily on the upside. The housing data is still terrible and we do not expect any significant improvement in the short-term. The TICS data have always had the potential to move the dollar; last month’s reading was horrible and did not report enough inflow to cover the trade deficit While a high TICs reading is dollar positive, a low – or even negative – number is bad for the USD. We believe it is pre-mature to expect an immediate dollar strengthen-ing. Accordingly, we still anticipate EUR/USD to be on range – with an upward bias.

                  Surging inflation combined with deteriorating growth prospects is the reason why many central bankers have difficulties sleeping these days. Since BoE’s governor King on Tuesday has to explain to Chancellor Darling why inflation has risen from 3.0% in April to the forecasted 3.2% in May, he has probably already written the letter and bought the stamps. And while the letter written in March 2007 proved out to be an arrogant one-off affair, King can keep the ink within reach as price control is lost for the rest of the year and at least one more letter is expected to be written. We expect the minutes from the last meeting on monetary policy due Wednesday will balance between inflation fears and growth scares and post an 8-1 voting result for keeping the base rate unchanged at 5% (with super-dove Blanchflower voting for a 25bp cut). Although EUR/GBP has drifted lower in the past week, we still believe the direction is upwards and that the pound should be under pressure as the UK faces both severe economic and financial headwinds.

                  Other data releases worth mentioning are: The German ZEW indicator is expected to decline further on Tuesday, expectedly rising producer prices are revealed in the Germany Friday, UK retail sales for May are expected to slow on Thursday while the Japanese Tankan report will be released on Thursday night. All in all, we prefer NOK, CHF, EUR and AUD relative to GBP, NZD and CAD. The JPY and USD are a bit tricky as there are drivers moving in opposite directions. EUR/USD is technically moving downwards but we do not expect a major fall. As data calendars are extremely thin in Scandinavia, SEK and NOK will primarily be driven by movements in other markets.

                  Published on  Fri, Jun 13 2008, 16:04 GMT

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                  FX forecast update: Shoulder to shoulder with inflation fears and growth scares

                  Mon, Jun 2 2008, 10:46 GMT
                  by Kasper Kirkegaard, John Hydeskov

                  Danske Bank A/S


                  •

                  Here are our latest thoughts on the G10 currency markets:

                  • • Closer to stabilisation. The four best-performing currencies during the past month have been SKK, TRY, HUF and BRL (up by 4-6% vs EUR), followed by CAD and AUD from the G10 group. SKK benefitted from the Slovakian 15% revaluation prior to the euro adoption at the beginning of 2009; TRY and HUF gained on speculation on higher interest rates due to surging inflation; and BRL advanced on the back of S&P’s upgrade to ‘investment grade’. The worst-performing currencies were the lowyielders CHF and JPY (down 0-1% vs. EUR) due to a higher degree of risk appetite, while KRW lost some 2% against euro and the South Korean central bank had to intervene to keep the currency above water. Generally, the exchange rate movements were limited over the month and volatility declined gradually. Volatility levels are now broadly down to levels from the start of the year. Yearto- date, the best performing currencies have been SKK, PLN and CZK while ISK, ZAR and KRW have lost the most. 

                  • • Blurred picture. The one-month performance of our forecasts has been mixed over the month. We traded around our EUR/USD forecast of 1.56 during most of the month while our USD/JPY forecast of 102 proved to be on the low side. Our EUR/GBP forecast of 0.80 was actually reached on 21 May but the pair’s rise was short-lived and it fell back to around 0.7850 at the end of the month. EUR/CHF traded somewhat higher than our forecast of 1.60 during the month while our forecasts on Scandinavian currencies were closer to the actual developments. We predicted EUR/SEK to end the month at 9.30 and EUR/NOK to decline to 7.85. The pairs traded around these levels during most of the month but ended a little higher.

                  • • Direction lost. The credit crisis has not been kind to the USD. The combination of a US-imposed financial distress and a collapse in the US housing market made forecasting relatively easy; USD was a declining asset set to earn a lower rate of interest. We forecasted that EUR/USD would reach a target of 1.60, which actually occurred during mid-April. As the credit crisis draws to an end, things are not crystal clear anymore. EUR/USD has stopped its continued upward drift and market participants have started to discuss whether we are beginning to see a turning point in the pair. It is evident that EUR/USD cannot drift higher eternally. The euro is historically overvalued to the dollar and a permanent misalignment is simply not an option. A deviation from ‘fair value’ can, however, last some time. That happened in 2000-01, where the EUR/USD traded in range, after touching a low of 0.83. We discussed the similarity between the 2000-01 experience and the current situation in EUR/USD: Will history repeat itself?.

                  • • The sky’s the limit. Food and energy prices have recently sky-rocketed. This generates an upward price pressure and inflation is either on the rise or set to rise in most economies. While economists are busy discussing whether this represents a speculative bubble or if fundamentals (such as increased demand from emerging markets) offer a sufficient explanation, we are left with the risk that this marks the beginning of a prolonged or even permanent period of elevated commodity prices. The important issue for the FX markets is, however, not the rise in commodity prices in themselves but rather; which currencies are set to benefit and which are expected not to benifit due to higher food and energy prices. In G10: FX implications of rising food and energy prices we found that EUR/USD and perhaps CHF/JPY is likely to head higher in the near term, while CAD/NOK is expected to turn lower if energy and food price inflation remains high. EUR/USD and AUD/NZD are both expected to rise on the longer term on higher energy prices.


                  Published on  Mon, Jun 2 2008, 10:46 GMT

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                  1

                  EUR/SEK: Riding the right range

                  Fri, May 23 2008, 10:31 GMT
                  by Stefan Mellin

                  Danske Bank A/S


                  •

                  We see potential for EUR/SEK heading lower in the coming months, based on relative fundamentals, a hawkish Riksbank, a more constructive technical picture, and a rise in risk appetite. As long as markets are less singlemindedly focused on risk aversion, EUR/SEK will be more susceptible to macroeconomic developments and relative yields. That said, we must take into account that EUR/SEK has already made significant losses from the winter highs and that the summer season is nearing, with the normal risk for spikes in the pair – perhaps this time around coupled with unwelcome developments in the Baltic region. Moreover, it cannot be ruled out that the recent aggressive rise in energy prices will take its toll on equities and therefore present a threat to the downtrend in EUR/SEK. While EUR/SEK has been edging lower primarily on rising risk appetite (see chart 1), it has been consistent with our short-term models, suggesting fair value at around 9.32 and an implied range of 9.24 to 9.40. The model offers sell and buy signals on a frequent basis and therefore we have favoured selling – not buying – EUR/SEK at the upper end of the implied trading range and believe it to be the superior strategy (see chart 2). With market expectations intact of the ECB and the Riksbank staying on hold, EUR/SEK is likely to remain within the implied range.

                  We expect the Riksbank to stay on hold for the rest of the year (and cut in 2009). However, in the near term the risk is rather that the Riksbank will be more hawkish – not dovish – at the July Monetary Policy Meeting and possibly express this by raising the repo rate forecast due to: 1) the recent aggressive rise in energy prices, which leads to inflation staying above the Riksbank forecast in the coming months, 2) still-strong labour market with employment growth year to date also coming in stronger than forecast, and 3) the first quarter GDP forecast at 3% y/y (Riksbank 2.8%. Market pricing (OIS) is suggesting that the Riksbank will stay on hold throughout the year and we agree, but as mentioned, the risk is rather on the upside. The probability for a rate cut from the ECB has clearly diminished but if it delivers (in line with DB forecast) we should see a downshift in the spread-implied trading range.

                  Privatisation flows are a latent theme. Vasakronan, worth some SEK 40bn, is in the midst of a due diligence process and thus is probably first in line. The general view is that it will be a pure domestic affair. If that is correct it would leave no imprint on SEK of course. But if acquired by a foreign name it might support SEK given the fact that currency debt is already down to its long-term target (15%) after the selling of Vin & Sprit even though some of the revenues would probably be used to repay maturing currency debt. The usual caveat is that these kinds of crossborder acquisitions are often financed in local currencies and if so the impact on SEK would be zero. The government ’s SEK 90bn share in Telia Sonera, SEK 40bn share in Nordea and some SEK 6bn share in SBAB could potentially support SEK but are probably due later.

                  Hence, we continue to see potential for lower EUR/SEK; the risk is that a wave of risk aversion will push the other way. We therefore recommend scaling down some of the short exposure. As long as market expectations of the ECB and the Riksbank staying on hold throughout the year are intact, we prefer strategies that benefit from EUR/SEK staying within the implied range. We recommend a leveraged EUR/SEK Pivot with range 9.22 / 9.42 and the pivot at 9.32, hence buy weekly at 9.22 when below 9.32 and sell weekly at 9.42 if above 9.32.

                  Published on  Fri, May 23 2008, 10:31 GMT

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                  DKK: Interest rate increase

                  Fri, May 16 2008, 12:13 GMT
                  by John Hydeskov

                  Danske Bank A/S


                  •

                  • • Danmarks Nationalbank (DN) has with effect from 16 May decided to raise the lending rate and the interest rate for certificates of deposits to 4.35% from 4.25%. The discount rate and the interest rate on banks' current accounts with DN remain unchanged at 4.0 per cent.

                  • • This interest hike comes as a surprise to the market. As we wrote on 6 May: "We expect DN to tolerate continued intervention in the coming months before resolving to unilateral rate hikes". We believe that this has been the common perception in the market. As far as we know, no one had explicitly expected the DN hike.

                  • • Last time DN raised interest rates was in February 2006 – also by 10bp – following the TDC sale. At that point, the cumulated intervention amounted to around DKK 34bn.

                  • • The DKK has recently been under moderate stress and drifted slightly weaker against the EUR. The current pressure on DKK reflects a misalignment in the Danish and euro-area money markets, resulting in positive carry on EUR/DKK. In addition, the Carlsberg purchase of Scottish & Newcastle may have had some negative effect on the DKK, although it is unclear how much of the acquisition has had an immediate DKK effect.

                  • • The market reaction has so far been relatively muted, with EUR/DKK trading slightly downwards from around 7.4628 to 7.4610, ie, still lingering above the central parity of 7.46038.

                  • • DN net bought DKK 7.8bn in April to keep EUR/DKK stable. The amount was larger than widely expected. April's intervention was the first to buy DKK since December 2007 (DKK 11.9bn). DN sold DKK worth DKK 8.0bn in Q1. We believe that DN also has intervened in May to support the DKK. EUR/DKK suddenly stopped climbing around the 7.4630-mark while positive carry on EUR/DKK remained. It is, however, still too early to say how large this support has been.

                  • • We regard the step taken by DN to be pre-emptive. But until money markets normalise, upward pressure on EUR/DKK is likely to be sustained, and today's relatively small hike might be insufficient. We think the DN will be ready to raise rates further if the pressure on DKK remains. Accordingly, vigilance on the DN around Friday 10.00CET is advised.

                  Published on  Fri, May 16 2008, 12:13 GMT

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                  G10 currency markets: Struggling between greed and fear

                  Mon, May 5 2008, 10:29 GMT
                  by Teis Knuthsen, Kasper Kirkegaard, John Hydeskov

                  Danske Bank A/S


                  •

                  The last few weeks have seen solid gains in equity markets and considerable increases in interest rates. In the currency markets, low yielders such as CHF and JPY have lost out to higher-yielding or commoditybased currencies such as AUD, CAD and ZAR.

                  We think it’s time to fade this trend, mainly on the view that the worst of the economic downturn remains ahead of us and that the process of financial deleveraging will continue for a while longer. To benefit from this view, we recommend selling EUR/CHF and USD/JPY spot.

                  In EUR/CHF, we target a move to 1.5650 with a stop just above the February high at 1.6235. Alternatively, buy CHF/DKK.

                  In USD/JPY, we aim for a move to 100 with a stop just above the recent high at 105.

                  The biggest risk to both recommendations is a continued rally in stock markets.

                  Published on  Mon, May 5 2008, 10:29 GMT

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                  Sell EUR/CHF, USD/JPY

                  Mon, Apr 21 2008, 14:39 GMT
                  by Teis Knuthsen

                  Danske Bank A/S


                  •

                  The last few weeks have seen solid gains in equity markets and considerable increases in interest rates. In the currency markets, low yielders such as CHF and JPY have lost out to higher-yielding or commoditybased currencies such as AUD, CAD and ZAR.

                  We think it’s time to fade this trend, mainly on the view that the worst of the economic downturn remains ahead of us and that the process of financial deleveraging will continue for a while longer. To benefit from this view, we recommend selling EUR/CHF and USD/JPY spot.

                  In EUR/CHF, we target a move to 1.5650 with a stop just above the February high at 1.6235. Alternatively, buy CHF/DKK.

                  In USD/JPY, we aim for a move to 100 with a stop just above the recent high at 105.

                  The biggest risk to both recommendations is a continued rally in stock markets.

                  Published on  Mon, Apr 21 2008, 14:39 GMT

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                  G7: Statement changes, policy doesn't

                  Mon, Apr 14 2008, 13:24 GMT
                  by Teis Knuthsen

                  Danske Bank A/S


                  •

                  The easiest way to understand what the G7 body did this time is to focus on what it didn't do: The G7 did not call for intervention in money, credit or FX markets. It did raise its voice on exchange rates, for the first time since Boca Raton in 2004, but relative to the general tightening of the statement, the change in tone on FX looks like par for the course. The main conclusion is therefore that no accord has come out of this. Con-certed intervention still looks somewhat unlikely, though the risk of such action has admittedly gone up. China's currency was again singled out, but reflecting the drop in USD/CNY since the February meeting, G7 now encourage further CNY gains rather than stress the need for a stronger CNY. What the G7 did do was to turn more negative on both the economic outlook as well as financial markets. The negative outlook for the US economy was singled out and although emerging markets were seen as doing better, US Treas-ury Secretary Paulson also made it clear that "nobody believes in decoupling".

                  EUR/USD fell from Friday's close at 1.5815 to a low of 1.5672 this morning. We recommended buying EUR/USD spot at the break of 1.5760 today, targeting 1.60 and with a tight stop at 1.5670. We were short USD/JPY going into the meeting from 102.4 and with a target of 98.

                  Below are three central paragraphs from the G7 statement:

                  "The global economy continues to face a difficult period. We remain positive about the long-term resilience of our economies, but near-term global economic prospects have weakened. While economic conditions dif-fer in our countries, downside risks to the outlook persist in view of the ongoing weakness in U.S. residential housing markets, stressed global financial market conditions, the international impact of high oil and com-modity prices, and consequent inflation pressures. The performance of emerging markets has been a bright spot, but these countries as well are not immune from global forces. "

                  "The turmoil in global financial markets remains challenging and more protracted than we had anticipated. In the context of a weaker economic outlook, financial markets confront the interrelated issues of: re-pricing of risk and significant de-leveraging; managing counterparty risks; accommodating balance sheet adjustments; raising capital; improving the liquidity and functioning of key markets. We welcome efforts by many financial institutions to improve disclosure of exposures to structured products and related risks, and raise significant new capital."

                  "We reaffirm our shared interest in a strong and stable international financial system. Since our last meet-ing, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate. We welcome China's decision to increase its flexibility of its cur-rency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate. "

                  Published on  Mon, Apr 14 2008, 13:24 GMT

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                  G7: Can FX markets be stabilised over the weekend?

                  Mon, Apr 7 2008, 14:28 GMT
                  by John Hydeskov

                  Danske Bank A/S


                  •

                    G7.s finance ministers and central bank governors will gather at the International Monetary Fund / World Bank Spring meeting on 12-13 April, only two months after they gathered in Tokyo. That meeting.s conclu-sion was that despite the ongoing market turmoil, the outlook for the global economy was robust. Regard-ing the currency markets, the central message was that China had to do more to increase the flexibility of CNY and to allow for a further appreciation of its currency. Attention is now centred on the recent sharp exchange rate movements that are regarded as undesirable for economic growth. Can the G7 finance min-isters and central bank governors stabilise FX markets and what are the most likely outcomes of the forthcoming meeting? We present our views below:

                    • Since the last meeting, the USD has dropped 7.5% vis-à-vis EUR while the JPY has depreciated 3.7%. The CNY has lost 5% against EUR and has . in other words . only appreciated versus the USD. Historical and implied volatility has remained at elevated levels. This clearly represents a challenge for the G7.

                    • The G7 countries can decide to intervene in foreign exchange markets. If the exchange rate lev-els do not reflect economic fundamentals or if recent market movements have been so extreme that they have to be dampened, the G7 countries may take concerted action, implying that they will actively intervene in foreign exchange markets to support/weaken one or several currencies. The last time this happened was in 2000 to aid a very weak EUR. In 1985, 1987 and 1995 G7 countries also joined forces.

                    • However, the G7 countries do not always have to intervene physically. Verbal intervention can also be quite useful. The countries can express their views individually, but it has a stronger effect when the G7 backs a joint statement. After the meeting, a statement is presented and a single paragraph normally deals with exchange rates. The rhetoric of recent years' comments has not been particularly sharp or harsh, and focus has primarily been on China's reluctance to allow the CNY to appreciate fast enough.

                    • Our FX Crossroads from 19 March discussed the risk of intervention. The conclusion was that no central bank is currently interested in intervening, although several of the major currencies do not exactly reflect economic fundamentals. Basically, we therefore do not expect any unilateral or concerted intervention from the G7 group at current levels. This is also confirmed by surveys, according to which only 10% expect the G7 to signal an intention to intervene. In relative terms, however, unilateral intervention by a single central bank, eg, the Bank of Japan, is more likely than concerted intervention by the G7.

                    We believe that the verbal intervention will centre on the increased volatility, which is regarded as unwelcome and detrimental to economic growth. The French finance minister, Christine La-garde, put it very clearly when asked about her view on the foreign exchange markets on 4 April: .No volatility.. Her wish for more limited fluctuations in the foreign exchange markets is probably widely shared, but the question is whether the G7 can add stability to the markets? The simple answer is: .No, not immediately.. The volatility characterising foreign exchange markets at first stemmed from the credit markets and most recently from the equity markets. Foreign exchange markets are not per se the source of volatility, and therefore stability cannot be restored through intervention. Volatility will subside when the credit markets recover and nervousness in the equity market is reduced. Therefore, it will be enough for the G7 finance ministers and central bankers to just frown at the upcoming meeting, but they need not pull the trigger.
                     
                    G7 statement on exchange rates (9 February, 2008): .We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely, and cooperate as appropriate. We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate.

                      Published on  Mon, Apr 7 2008, 14:28 GMT

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                      EUR/USD: Where next?

                      Fri, Feb 22 2008, 13:06 GMT
                      by Teis Knuthsen

                      Danske Bank A/S


                      •

                        • The latest asymmetric response in EUR/USD to economic data releases has hinted at a certain fa-tigue with regard to poor US news and raised the question of whether a secular turn in EUR/USD has arrived.

                        • In this note we show that conventional wisdom as well as market positioning has turned in favour of USD. We also show, however, that while the arguments against the euro are stacking up it still seems pre-mature to become bullish on the dollar. Neither relative rates nor commodity prices are currently supporting a move lower in EUR/USD, although the 10% drop in stock markets this year is weighing on the euro. As for economic developments, key indicators on both sides of the Atlantic are deterio-rating, the main difference being that the US slowdown is more advanced.

                        • Our conclusion is that we continue to consider it premature to turn fundamentally bullish on the dol-lar, but also that a downturn in the euro is steadily approaching. An asymmetric bias probably pre-vails, where the USD may benefit more from good news and suffer less from bad news than the euro.

                        • Our forecast remains one of a move to 1.52 within 3 months and 1.40 before year-end, though in-creasingly a move above 1.50 may become difficult to achieve. Technically, the uptrend remains in place until 1.4310 breaks.

                        Published on  Fri, Feb 22 2008, 13:06 GMT

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                        Sell GBP/NOK, target 10.40

                        Thu, Feb 7 2008, 10:53 GMT
                        by John Hydeskov

                        Danske Bank A/S


                        •

                          We recommend selling GBP/NOK spot (10.69) for a move to 10.40 and with a stop at 10.85. We foresee serious challenges for the UK economy and expect the Bank of England (BoE) to be forced to cut rates more than currently anticipated in the markets on the back of deteriorating domestic conditions and despite inflationary pressures. We remain relatively bullish on the Norwegian economy and the solid wage growth, high underlying inflation and rising rents make us believe that the Norges Bank (NB) will move to raise rates again during the spring.

                          Major events to watch for from Norway are January’s underlying CPI released on 11 February, expected to rise to 2.1%-2.2% from 1.8% in December, and the annual address from Governor Svein Gjedrem on 14 February at the meeting of the Supervisory Council of NB. We expect both events will provide support to NOK, as the strong inflation figures will give the NB basis for a rate hike to 5.50% in the short term and the Governor in his speech can rule out any rate cuts later in the year. In the UK, we expect the BoE to lower the base rate by 25bp at the meeting on 7 February. This is almost a ‘done deal’ in the market. However, we expect the central bank to deliver a dovish statement and open the window wide for more cuts. UK CPI figures, to be released on 12 February, should not rise too much and thereby shift focus from growth to price stability. House price figures and the effect of the credit tightening will be key for UK monetary policy in the coming months.

                          Our S/T model suggests that GBP/NOK fair value is currently around 10.50. However, our combined 3- 6M forecasts convince us that the pair could go much lower, possibly towards 10.00, which is also supported by the technical trend. GBP/NOK has recently been highly correlated with in particular, performance of the UK financial companies and the OBX index (cf charts).

                          We also sold GBP/NOK in late December 2007 at 10.90 and took profit at 10.40 (+4.81%).

                          Published on  Thu, Feb 7 2008, 10:53 GMT

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                          FX forecast update

                          Mon, Jan 7 2008, 15:31 GMT
                          by Teis Knuthsen

                          Danske Bank A/S


                          •

                          • • Our opinions on currency markets have not changed materially over the turn of the year. We continue to expect that USD weakness has further to run, we are increasingly confident in our call for a stronger yen and we still believe that the overall economic and financial environment argues for higher volatility and lower risk-seeking relative to the previous years. What is new is that we now expect the global economic slowdown to advance to a stage where European central banks beyond the Bank of England (BoE) will begin to cut rates in the second half of the year. Our macro team has now pencilled in two rate cuts from both the ECB and the Swedish Riksbank and one from the SNB. In terms of EUR/USD, this makes us more comfortable with our call for a reversal in the year-long uptrend toward the middle of the year.

                          • • Dollar downturn not over... The global economic cycle is likely to slow sharply in the coming months, led by the US. We do not currently forecast a US recession, but the risk of such an outcome can not be easily dismissed. We expect the American economy to slow to a standstill in Q1 and while we continue to forecast a recovery toward trend growth in the second half of the year, we are observant of the fact that a housing-induced slowdown may take a long time to unwind. Despite inflationary pressures, we think the Fed will waste little time in cutting rates further and we now expect the central bank to ease at each of its next four meetings, taking the Fed funds rate down to 3.25%. While money markets currently imply rates below that level, interest rates across the curve are likely to fall further in the coming months. Until the economic outlook improves, the dollar bear trend should remain in place.

                          • • ...but euro peak approaching. The euro area has performed well in recent years and the strength of the labour market is testimony to an economic cycle that has yet to slow signifi-cantly. If not for the financial unrest in the second half of 2007, the ECB would probably have raised rates in both September and December. ECB President Trichet retains a hawkish stance, but we believe the rate cycle has peaked and that a substantial deterioration of the in-dustrial cycle will persuade the bank to cut rates twice this year; inflationary pressures not-withstanding. While the timing of this call is uncertain, the call for rate cuts may be loudest just at the time when the US cycle is beginning to improve. As the European tide goes out, the euro should begin to descend from its overvalued level. We have previously included a rever-sal of EUR/USD in our forecasts, but are now bringing the peak forward just as we lower our 12-month forecast from 1.45 to 1.40. In the coming months, we continue to expect a rise to 1.52, and quite likely beyond.

                          • • Our call for a rise in the value of the yen rests on three arguments: First, the Japanese yen is the only G10 currency that is undervalued relative to USD and it is substantially mispriced relative to EUR. As BoJ stays put while other central banks ease, relative rates will continue to benefit the yen. Second, the turn in the global liquidity cycle should continue to be a blessing as rising volatility and reduced risk-taking cuts down the appeal of carry trades. Third, we believe that Asian currencies in general, but CNY in particular, will rise on a trend basis this year. We are not changing our forecast for a drop in USD/JPY to 100 in the coming months, but we have lowered our forecast for EUR/JPY to 150 within six months.

                          • • We believe the trend rise in EUR/CHF during 2006–07 is over and we do not expect the Octo-ber high just below 1.69 to be surpassed. A drop in global stock markets – which is now being anticipated by our equity strategy team – will benefit in particularly CHF and JPY. Further, EUR/CHF is exceptionally overvalued relative to its history and we do not consider it likely that the factors that created the mispricing in the first place will be repeated in 2008. The Swiss economy continues to perform well, but also here a slowdown is in the offing and we expect the SNB to cut rates toward the end of the year.

                          • • The sell-off in GBP has been exceptionally sharp in recent weeks, and even more than we out-lined in our December forecast update. Last month, we wrote that “the pound has been strug-gling since summer on a hostile cocktail of a domestic bank run and a turn in the monetary policy cycle. [...] We continue to forecast a weaker pound in the coming months, based on the perhaps simple view that GBP is an overvalued, high-yielding currency backed by a substantial current account deficit and with a rate cycle that is turning lower. [….] Eventually we expect a rise in EUR/GBP above the previous high of 0.7247 from 2003.” We continue to believe that the risks are biased towards further depreciation. The British economy is more exposed to both a housing slowdown as well as financial unrest than its European peers and we expect the BoE to cut rates aggressively in the coming months. So far, the rise in EUR/GBP has gone hand in hand with a shift in relative rates and until markets begin to price in ECB rate cuts, the path of least resistance is for a further rise. We now target a rise to 0.7550 in the coming month before a more two-way market is established.

                          • • NOK has started the year on a strong note and we continue to predict a further rise. While even the Norwegian economy appears to be turning lower, strong domestic growth, solid household consumption and a buoyant labour market suggest that Norges Bank will continue to lean toward rate hikes. Further, the rally in oil prices provides – as always – a good base for NOK and EUR/NOK looks overvalued on our short-term models.

                          • • We are less bullish on SEK but do see a chance for a further drop in EUR/SEK toward 9.30. We expect the Swedish economy to slow in line with the euro area and now expect the Riks-bank to cut rates twice in the second half of the year. SEK may benefit from previously an-nounced privatisation flows, but elevated – or rising – global risk aversion and a general slow-ing in activity will provide headwinds to the Swedish currency.

                          • • Local rate cycles as well as buoyant commodity prices have supported AUD and NZD in re-cent months. However, the outlook is not particularly bright. Negative carry should weigh on both currencies relative to JPY, CHF and EUR in the fist half of the year, while a deteriorating local business cycle could see them fall sharply in the second half. A final hike from the RBA during the spring is possible, and we may underestimate the impact of Asian growth, but both currencies have in the past been highly vulnerable to a global slowdown.

                          Published on  Mon, Jan 7 2008, 15:31 GMT

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                          Investors turn net short GBP

                          Mon, Jan 7 2008, 15:23 GMT
                          by John Hydeskov

                          Danske Bank A/S


                          •

                          • Speculative GBP positions turned to negative from positive in the week from 24 December to 31 December, down to -2.8 (USD -0.3bn) from 9.1K (USD 1.1bn). GBP has recently enjoyed little support from hard data and the outlook from the BoE.
                          • Net short dollar positions were again reduced, this time by USD 1.4bn to USD -10.9bn.
                          • Net long EUR positions saw a small increase from USD 5.5bn to USD 6.7bn while net short CHF positions were reduced by USD 0.7bn.
                          • Net longs in CAD, AUD and NZD were all increased.
                          • Speculative long positions in JPY were almost eliminated by falling from USD 0.4bn to USD 0.1bn.
                          • Investors extended their net long oil positions heavily to 87.0Kfrom 52.8K- an increase of 65%. Net long gold, silver and copper positions werealso increased.
                          • US 10-year net longs fell 17.6K, while 2-year net longs fell by 12.4K.

                          Published on  Mon, Jan 7 2008, 15:23 GMT

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                          GBP: Inside the heads of the Monetary Policy

                          Thu, Jan 3 2008, 16:41 GMT
                          by John Hydeskov

                          Danske Bank A/S


                          • On 6 December 2007, the Bank of England (BoE) lowered the policy rate to 5.50% from 5.75%. The Monetary Policy Committee (MPC) voted unanimously for the proposition to ease monetary policy. The decision was based on the worsening financial turmoil and the consequent tightening of credit conditions as well as apparent signs of slowing growth in the industrial world.
                          • In this note we take a closer look at the factors impacting monetary policy in the UK going forward, including 1) Conditions in financial markets; 2) The international economy; 3) Money, credit, demand and output; and 4) Costs and prices. We will update our expectations for the UK policy rate in 2008 by using 1-4) and furthermore will use the lessons learned from previous policy decisions combined with our knowledge of the composition of the MPC. Finally, we will summarise the inputs on the forthcoming decisions on UK monetary policy in a revision of our GBP forecasts.
                          • We find that 1)-3) will weigh heavily on the rate-setting behaviour in the UK in 2008. The credit crisis is still not put to rest and will be the reason for the BoE to deliver a rate cut of 25bp in January and another rate cut of 25bp in February. Based on the outlook of conditions in credit markets, the global economy and some parts of the UK economy, we expect the BoE to lower rates by an additional 50bp over the year, taking the policy rate to 4.50% by the end of 2008. A continuation of the rise in energy and food prices will keep inflation above the BoE’s target in most of 2008 but will fall short of preventing further rate cuts.
                          • On the currency side, we expect GBP to weaken against EUR in the short term. Here we are more bearish on GBP than implied by forward rates. On the longer term we expect GBP to strengthen against EUR. Here we are more bullish on GBP than implied by forward rates. Our EUR/GBP three months forecast is 0.7550 while we see the pair around 0.7200 in twelve months time.

                          Published on  Thu, Jan 3 2008, 16:41 GMT

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                          IMM positioning. Reduction in net short USD positions

                          Thu, Jan 3 2008, 10:23 GMT
                          by Kasper Kirkegaard

                          Danske Bank A/S


                          • Net short dollar positions were reduced by USD 2.2bn in the weekfrom 17 December to 24 December, down to USD 9.6bn from USD 11.8bn.•
                          • Net long EUR positions were unchanged.
                          • •The week also saw a small increase in non-commercial carry positioning, as there was a net sale of JPY and CHF, and a net buying of AUD and NZD. •
                          • Net long JPY positions were reduced by USD 1bn to USD 0.4bn, andnet short CHF positions were increased by USD 0.5bn to USD 1.3bn.•
                          • Net long AUD positions were increased by USD 0.2bn to USD 1.2bn,and net long NZD positions were increased by USD 0.2bn to USD 0.9bn. Meanwhile, net long CAD positions were reduced by USD 0.9bn to USD 1.5bn. •
                          • US 10-year net longs fell 44.6K, while 2-year net longs fell 11.7K.•
                          • All speculative commodity positions were increased, with the exception of net short copper positions, which were reduced by 1K.

                          Published on  Thu, Jan 3 2008, 10:23 GMT

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                          South Africa: Buy USD/ZAR

                          Mon, Nov 12 2007, 11:39 GMT
                          by Lars Christensen

                          Danske Bank A/S


                          We recommend buying USD/ZAR as a short-term speculative trade on the back of the re-emergence of global risk aversion.

                          • The rand is extremely sensitive to increased risk aversion and given the recent rise in risk aversion there should be potential for further weakness in the rand.
                          • Even though USD/ZAR has moved up somewhat over the last couple of days it is still lower than the range we have seen during most of the year (6.80-7.40).
                          • Technically the picture is clearly for more rand weakness. Our technical analysts see a move towards a first target on USD/ZAR of 6.82.
                          • Even though the Reserve Bank of South Africa is expected to hike rates further this is already priced into the market and hence - at least in the short run - the rand is likely to get little support from higher rates.
                          • With the recent rise in JPY (and CHF) volatility the carry/risk on the “traditional” EM carry trades (like rand and lira) has dropped further.

                          In conclusion, we recommend entering speculative positions in USD/ZAR spot for a move back into the “old” range with a target of 7.10.

                          Published on  Mon, Nov 12 2007, 11:39 GMT

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                          New yield forecasts

                          Fri, Nov 2 2007, 16:00 GMT
                          by Allan von Mehren, Peter Lildholdt

                          Danske Bank A/S


                          Interest rates continue to be driven by the financial crisis, which continues to reappear even in times when markets seem to have settled down. Weaker housing data and business confidence from the US also pushed interest rates down. After bad news from US banks, risk appetite is waning again, even though the FOMC eased monetary policy by 25bp.

                          Our profile of declining 2Y USD rates reflects a scenario where further Fed easing is priced in. Our main scenario is for the FOMC to be on hold at 4.5% over the coming 12 months; the risk scenario is one of further Fed cuts: In the current environment of declining business confidence and bad housing data, it seems reasonable to price in some probability of a US recession next year. In other words, we do not disagree with the market pricing in some Fed easing even though our main scenario is for the Fed to be on hold.

                          We forecast higher 2Y EUR government rates out to the 6M horizon. We maintain our view that the ECB is going to hike the refi rate by 25bp at the March and June meetings. With growth above trend, a strong labour market, stable business confidence, and inflation heading for 3%, we expect the ECB to resume the hiking mode in March next year once we are out of the shadows of the current crisis. Beyond the 6M horizon, short 2Y EUR government rates edge lower due to lower ECB expectations on the back of a less optimistic growth outlook. The yield curve is expected to flatten as ECB hikes rates. With higher Euro yields and continued low US yields we also look for continued outperformance of US versus Euroland. Compared with the forecast from last month, the projection of long rates at the 6M horizon and beyond have been marked down by 20-30bp. This change primarily reflects a weaker US outlook.

                          Our one-month forecast of lower 2Y US government rates from last month proved correct. However, 10Y US government yields fell on the month, in contrast to our expectation of roughly unchanged levels. In Euroland, 2Y German government rates were roughly unchanged and 10Y rates dropped a bit. These movements were not captured by our forecast from last month, as we expected declining 2Y yields and unchanged 10Y yields.

                          Published on  Fri, Nov 2 2007, 16:00 GMT

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                          EMU: Buy PLN/SKK

                          Mon, Oct 22 2007, 14:57 GMT
                          by Lars Christensen

                          Danske Bank A/S


                          On the back of yesterday’s landslide victory to the liberal and reformist Civic Platform (PO) we have turned more bullish on the Polish zloty (PLN). Therefore, we recommend buying PLN. We choose to go long in PLN against the Slovak koruna (SKK) to hedge against potential regional risks and a potential worsening of the Emerging Markets sentiment on the back of rising global risk aversion.

                          Why do we like the election result and why is it positive for PLN?

                          • PO is likely to form a government - mostly likely with the Peasant Party (PSL). Such a government is likely to be significantly more reformist than the outgoing Law and Justice (PiS) government.
                          • A PO government is likely to be more fiscally conservative and in favour of pro-business tax reforms (flat tax).
                          • The rhetoric of a PO government will be significantly more pro-foreign investment than the outgoing government.
                          • The EU is likely to welcome a PO government with open arms as the new government will be decisively more pro-EU than the outgoing government.
                          • PO will be able to master a super majority (60% + 1 seat) in the Polish parliament with PSL and the social democratic LiD - this means that the president will not be able to veto legislation that the three parties (PO, PSL and LiD) agree on.

                          Of course it is not all happy days and there still exist some risks:

                          • PSL and LiD is significantly less reformist than PO so the two parties are unlikely to support aggressive pro-market reforms.
                          • A PO victory was already expected - so the results might already be priced into the markets.

                          Why we are relatively bearish on SKK among others? Because of the following factors:

                          • The outlook for Slovakia’s euro adoption has worsened recently due to rising inflationary pressures and Eurostat’s revision of the Slovak budget deficit in a negative direction.
                          • The Slovak government continues to roll back reforms and Prime Minister Fico stepped up his interventionist rhetoric recently.

                          Published on  Mon, Oct 22 2007, 14:57 GMT

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                          New yield forecasts

                          Tue, Oct 2 2007, 06:54 GMT
                          by Allan von Mehren, Peter Lildholdt

                          Danske Bank A/S


                          Our one-month forecast of lower 2Y US government rates from last month proved correct. As expected, 2Y German government rates were roughly unchanged, but our forecast of declining 10Y rates did not materialise. In the US, the 10Y government bond yield increased by 4bp, and 2Y yields declined by 17bp, leading to a strong steepening of the US yield curve. In Euroland, the government yield curve also steepened, but the primary driver here was a 9bp increase in the 10Y bond yield. At first glance, it is puzzling that long interest rates rose during a period where the FOMC surprised the markets with a 50bp cut. However, it makes sense in light of the inflation risks acknowledged in the FOMC statement; see “Reading the markets, Euroland: Risk appetite returns” for further details.

                          Interest rates continue to be driven by the financial crisis, which is now showing signs of stabilisation. For example, money markets and covered bond spreads have now stabilised, although at wider spreads. Risk appetite seems to have returned to the markets, perhaps triggered by FOMC’s 50bp cut.

                          We expect the FOMC to deliver a 25bp cut at the October 31 meeting. The market is likely to extrapolate from two rate cuts to price in further FOMC cuts. With moderate economic growth, and core inflation moving sideways, the FOMC is likely to disappoint these expectations and to go on hold after the October meeting. In our forecast profile, US 2Y rates are therefore heading down before going up again. We maintain our view that the ECB is going to hike the refi rate by 25bp at the March and June meetings. With growth above trend, a strong labour market, strong credit and money overhang, we expect the ECB to resume the hiking mode in March next year once we are out of the shadows of the current crisis. However, ECB expectations might well edge lower in the near term due to recent Euro strength and declines in business confidence indicators. That is the background to our forecast of lower 2Y EUR government rates at the 1-3M horizon, and rising rates thereafter. The forecast of roughly unchanged 10Y rates and lower 2Y rates imply steeper curves 1-3 months ahead.

                          Published on  Tue, Oct 2 2007, 06:54 GMT

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                          South Africa: Buy USD/ZAR

                          Fri, Sep 28 2007, 10:47 GMT
                          by Stanislava Pravdova, Lars Christensen, Lars Rasmussen

                          Danske Bank A/S


                          We recommend buying USD/ZAR as a short-term speculative trade. We feel that the likelihood of a correction of the rand within the next days and weeks is significant due to the following:

                          • • Since the Fed delivered its aggressive rate cut of 50bp on September 18, the South African rand (ZAR) has rebounded very sharply against USD, driven by renewed risk appetite. We believe that it has now become too strong.
                          • • South Africa runs a substantial current account deficit and fairly large foreign debt and therefore has large funding needs. This makes the currency more vulnerable to changes in risk appetite.
                          • • Our technical analysts also see a heightened risk of an upside correction in USD/ZAR within the coming days with a target at 7.15 (some resistance at USD/ZAR 7.00).

                          Published on  Fri, Sep 28 2007, 10:47 GMT

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                          South Africa: Buy USD/ZAR

                          Mon, Aug 20 2007, 11:34 GMT
                          by Stanislava Pravdova, Lars Christensen, Lars Rasmussen

                          Danske Bank A/S


                          We recommend buying USD/ZAR as a short-term speculative trade. The likelihood of a correction of the rand within the next few weeks is significant due to the following:

                          • Over the last couple of weeks the volatility on the global markets has been very high. The unhealthy cocktail of sub-prime worries and credit concerns sent risk aversion sky high weighing negatively on the high-yielding currencies including the rand.
                          • However, most Emerging Markets’ currencies strengthened dramatically on the Fed lowering the discount rate on Friday. The Fed is clearly lending a helping hand to the markets, which helps to ease the fears of a wider global liquidity squeeze. That said, it is also a confirmation of the seriousness of the situation and it is not a given that this is enough to change the negative sentiment in Emerging Markets. The strengthening of the Emerging Markets’ currencies in our view must mostly be seen as short-term opportunistic buying as one can certainly not say that this is the beginning of a new EM rally. Hence, the risk of further unrest in Emerging Markets remains significant. Here the rand could be a main “victim”.
                          • South Africa runs a substantial current account deficit and fairly large foreign debt and therefore has large funding needs. The nervousness in the markets is obvious and the rand remains very sensitive to bad news concerning the global credit conditions.

                          In conclusion, we recommend entering speculative positions in USD/ZAR. Technically, we could see a move in USD/ZAR towards 7.94 if we break 7.6, and we might lift our target if that happens.

                          Published on  Mon, Aug 20 2007, 11:34 GMT

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                          New yield forecasts

                          Thu, Aug 2 2007, 06:30 GMT
                          by Peter Lildholdt

                          Danske Bank A/S


                          Our one-month forecast of lower interest rates from the beginning of July turned out to be right. We were surprised by the magnitude of the fall in interest rates, though. 2Y government bonds declined by 35bp in the US and by 15 bp in Euroland. At longer maturities, 10Y government bonds fell by 20bp in the US and by 20bp in Euroland. Consequently, the 2Y/10Y segment of the yield curves flattened in Euroland and steepened in the US. The decline in interest rates during July was probably due to a combination of lower policy rate expectations and a “flight-to-quality” in the wake of a broad-based re-pricing of credit risk. Government bond yields fell more than swap rates, pushing swap spreads wider due to stronger demand for safe assets like government bonds.

                          We do not see any signs that the current bond bullish sentiment is about to disappear. Swap spreads and credit spreads remain wide, and market volatility remains elevated. Markets are nervous in the sense that interest rates react strongly to news. That is the background to our forecast of falling interest rates at the 1M horizon.

                          In our view, the long term macro picture has not changed much since last month. Above potential growth and tighter resource utilisation will force the Fed to hike the Federal Funds target to 5.50 next year. In Euroland, we maintain our ECB call of three 25bp hikes in September 2007, December 2007 and March 2008, respectively. Elevated oil prices, capacity utilisation pressures, and positive industrial indicators will keep the ECB in hiking mode. Hence, interest rates are rising at the 3M horizon and beyond in the forecast.

                          We maintain our central case that we are not going to get any deep macroeconomic ramifications from the subprime issue via either a severe tightening of credit or via housing activity. However, we would like to stress the risk that a prolonged housing downturn and/or feedback effects from the current market turmoil might hurt the real economy. Consequently, the balance of risks around our rate forecast is clearly skewed to the downside.

                          Published on  Thu, Aug 2 2007, 06:30 GMT

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                          South Africa: Buy USD/ZAR

                          Tue, Jun 26 2007, 14:37 GMT
                          by Stanislava Pravdova, Lars Christensen, Lars Rasmussen

                          Danske Bank A/S


                          We recommend re-opening the short-term speculative trade recommendation to buy USD/ZAR, as the likelihood of another correction of the rand within the coming days is on the rise. This is for the following reasons:

                          • Due to an improved mood in the Emerging Markets, which lowers the risk aversion against the highyield currencies such as the rand, the rand has rebounded somewhat since the last sell-off in the middle of June. Nonetheless, we see an increase of risk aversion going forward, which will of course weigh negatively on the rand in the coming days. Also from a purely technical perspective, we could see a correction.
                          • A negative impulse might come from the equity market in the US, which is currently lower due to the growing concern about the sub-prime mortgage loans and the hedge funds losing money on the back of that.
                          • We are approaching the second half of the trading year and the possibility that the investors will close their positions and take the profit is very likely. Furthermore, some of the investors have had higher-than recommended exposure in high-yield currencies such as the rand and they will most likely reduce their positions. This indeed means a weaker rand.
                          • Furthermore, the continued rise of oil prices represents one of the major risks for the South African economy as it reflects negatively in the high current account deficit. The first quarter current account deficit came out worse-than expected and remained at a very high level of 7% GDP.

                          Published on  Tue, Jun 26 2007, 14:37 GMT

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                          Sweden: Recommendations after the Riksbank Monetary Report

                          Wed, Jun 20 2007, 14:26 GMT
                          by Marcus Söderberg, Stefan Mellin

                          Danske Bank A/S


                          When we produced our yield forecast a month ago we expected yields to rise slightly in May. In the absence of any decisive changes in the outlook for especially the US economy we anticipated a stable development. In hindsight we can ascertain that we were correct in assuming a trend of rising yields, but we certainly underestimated the force of the bearishness. The entire US yield curve from 2yr onwards shifted upwards by some 22bp and the Euro curve rose by 25bp. There has been no change in curve structure, though. Normally, one would have expected a flatter curve in such a bearish environment, but this has not been the case.

                          Interestingly, we are still a bit at loss for a good explanation for the surge in yields. Admittedly, the ISM indicator turned out a very strong reading well above market expectations, but this piece of data was revealed already on the first day of the month and we saw no reaction at all back then. Rather, the market has sent yields higher in spite of a series of somewhat bullish US macro data in the latter half of the month. This fact has led us to the conclusion that risk-reward in the near term has improved in favour of lower yields.

                          At the same time we have decided to step up our already hawkish view on the ECB. A hike in June and September has been our case for some time, but we now also expect the ECB to hike in December as well. We also see the surge in ISM as an important turning point in the US economy and a precursor for higher yields. In the longer term we therefore expect yields to rise considerably from the levels we see today, and our forecast for yields 9-12 months into the future is well above what is discounted in the market right now. ooking at the curve structure we maintain our view that we are likely to see a general trend of bearish flattener, but that the Euro curve will flatten more relative the US curve.

                          As far as the Scandinavian markets are concerned we maintain the same themes as before. Relative Euro yields Norwegian yields are likely to underperform and Swedish yields are likely to outperform.

                          Published on  Wed, Jun 20 2007, 14:26 GMT

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                          New yield forecasts

                          Fri, Jun 1 2007, 15:20 GMT
                          by Pär Magnusson, Peter Lildholdt

                          Danske Bank A/S


                          When we produced our yield forecast a month ago we expected yields to rise slightly in May. In the absence of any decisive changes in the outlook for especially the US economy we anticipated a stable development. In hindsight we can ascertain that we were correct in assuming a trend of rising yields, but we certainly underestimated the force of the bearishness. The entire US yield curve from 2yr onwards shifted upwards by some 22bp and the Euro curve rose by 25bp. There has been no change in curve structure, though. Normally, one would have expected a flatter curve in such a bearish environment, but this has not been the case.

                          Interestingly, we are still a bit at loss for a good explanation for the surge in yields. Admittedly, the ISM indicator turned out a very strong reading well above market expectations, but this piece of data was revealed already on the first day of the month and we saw no reaction at all back then. Rather, the market has sent yields higher in spite of a series of somewhat bullish US macro data in the latter half of the month. This fact has led us to the conclusion that risk-reward in the near term has improved in favour of lower yields.

                          At the same time we have decided to step up our already hawkish view on the ECB. A hike in June and September has been our case for some time, but we now also expect the ECB to hike in December as well. We also see the surge in ISM as an important turning point in the US economy and a precursor for higher yields. In the longer term we therefore expect yields to rise considerably from the levels we see today, and our forecast for yields 9-12 months into the future is well above what is discounted in the market right now. ooking at the curve structure we maintain our view that we are likely to see a general trend of bearish flattener, but that the Euro curve will flatten more relative the US curve.

                          As far as the Scandinavian markets are concerned we maintain the same themes as before. Relative Euro yields Norwegian yields are likely to underperform and Swedish yields are likely to outperform.

                          Published on  Fri, Jun 1 2007, 15:20 GMT

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                          Sweden: GDP, market rates and the Riksbank

                          Tue, May 29 2007, 14:38 GMT
                          by Michael Boström

                          Danske Bank A/S


                          • Take profit in a possible 2Y spread position Sweden - Euroland
                          • Receive in a 9m STINA swap
                          • Buy Swedish 5Y - against 2Y risk in a box against Euroland

                          Published on  Tue, May 29 2007, 14:38 GMT

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                          South Africa: Buy USD/ZAR

                          Tue, May 22 2007, 14:22 GMT
                          by Stanislava Pravdova, Lars Christensen, Lars Rasmussen

                          Danske Bank A/S


                          We recommend taking a long position in USD/ZAR as the likelihood of significant correction of the rand within 1 - 3 months is on the rise. This is for the following reasons:

                          • The rand is at quite strong levels and even though we would not argue that the rand is significantly overvalued, it is definitely at strong levels relative to what we have seen over the last couple of months. Furthermore, technically we have probably moved into oversold levels on dollar rand, hence purely from a technical perspective, we could soon see a correction.
                          • The recent global financial environment has been quite supportive for the rand, however, over the last month, global bond yields have begun to rise as the market is pricing out the chance of rate cuts in the US, while at the same time pricing in rate hikes in Euroland. Global liquidity will also be tightened by the fact that the emerging market’s central banks continue to step up their efforts to curb liquidity growth - most notably in Russia and China. Hence, tighter global liquidity normally tends to weaken the rand.
                          • However, the risks coming from the domestic developments in South Africa have been rather ignored as the global factors have dominated, although it is a matter of time before politics, especially, comes into the spotlight. In particular, the political crisis in Turkey will continue and as we previously stated, this could lead to a significant sell-off in the Turkish lira. Normally, weakening of the Turkish lira tends to weaken the South African rand. Recently the rand, in fact, seems to have been more sensitive to bad news from Turkey than the Turkish lira.
                          • Furthermore, rising oil prices continue to represent one of the major risks for the South African economy as they negatively weigh on the high current account deficit. In conclusion, we recommend entering speculative positions in US dollar/South African rand. Technically, we could see a move in USD/ZAR towards 7.27 if we break 7.09.

                          Published on  Tue, May 22 2007, 14:22 GMT

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                          SEK weakness is not over yet

                          Wed, May 9 2007, 16:57 GMT
                          by Stefan Mellin

                          Danske Bank A/S


                          We are pleased to see that our short SEK position vs the GBP has performed nicely since we initiated the trade last Thursday at 13.39 (see “Enter short position ahead of Riksbank”, 3 May). The position is now 1.1% in the money including carry and we choose to raise the stop to 13.44 thereby locking in profit. The target is still 13.60 but we will consider taking profit ahead of the rate decision from Bank of England on Thursday even if the target is not reached due to the event risk. The interest rate differential suggests fair value at 13.60. While a hike should be a done deal, further gains will crucially depend on the accompanied statement.

                          EUR/SEK has performed as expected following the on hold decision from the Riksbank last week and the fact that contrary to widespread speculations of a more hawkish stance in the statement the Riksbank gave no signals whatsoever that it has abandoned its basic, inflation-friendly analysis from February. The message was that the rate path will be raised in line with the so called high-wage scenario but that is already priced in. Though we consider the Riksbank to be fairly priced for the coming months, several other central banks are not. In particular, we expect more aggressive hikes from the ECB. Following the June hike, we expect another hike in September and the risk if anything is for more not less compared to this base scenario. In addition, the market is marginally more dovish than we are on the Bank of England and Norges Bank (see chart below).

                          From a medium-term valuation perspective the SEK appears cheap. However barring a significant rise in EUR/USD and the latent support further privatisations which might pull EUR/SEK lower we can’t identify the catalyst that would generate a major positive trend for the SEK over the coming weeks or even over the summer.

                          On the contrary we see at least three reasons for the SEK to continue to trade on a weak note: First, a relatively non-hawkish stance from the Riksbank which we expect to prevail as long as inflation remains low (see above). Secondly, we expect GDP growth to be considerably lower than what is currently market consensus. Our estimate is close to 3% y-o-y for 2007 (Consensus Forecast 3.7% and the Riksbank 3.5%). Moreover, near term, we think first quarter GDP will be a negative surprise, we expect 3.0-3.5% y-o-y whereas the Riksbank’s forecast is 4.2%. First quarter GDP is released on 30 May. Third, the summer period is normally negative for the SEK.

                          Hence, we remain negative on the SEK. EUR/SEK is already trading close to our 1- and 3-months forecast at 9.20 and if anything we see the risk to these forecasts being on the upside. Trading-wise we keep track on our GBP/SEK position and will consider entering a long position in NOK/SEK based on primarily the relative monetary policy outlook

                          Published on  Wed, May 9 2007, 16:57 GMT

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                          EUR/USD outlook − upside risks remain

                          Wed, May 9 2007, 16:23 GMT
                          by Teis Knuthsen

                          Danske Bank A/S


                          How weak is the dollar?

                          • The real effective USD has fallen by 16% since 2003. It is now 3% below its long term average, i.e., not far from neutral
                          • EUR/USD has risen by 64% since 2000 to a new post-EMU high
                          • Pre-EMU highs of 1.44 from 1980 and 1992 are not that far away
                          • But the dollar decline is really an old story
                          • most of the damage was done between 2002 and 2004
                          • EUR/USD has risen only 3% in 2007 - the smallest YTD change since 2002
                          • USD weakness is not universal. EUR/USD is 15% overvalued, USD/JPY is 24% overvalued

                          Why is the dollar weak?

                          • The USD cycle is closely aligned with the relative US business cycle
                          • The primary rise in EUR/USD during 2002 - 2004 coincided with a decline in US interest rates relative to its peers
                          • The current rise is occurring at a time where the FED is on hold (and priced for cuts) and most other CB’s are in a tightening mode

                          Dollar weakness is cyclical, not structural

                          • The USD appears to trade like any other G10 currency
                          • It rose in 2005 together with a widening of interest rate differentials and has fallen during 2006/07 as rates have fallen
                          • There is nothing to suggest that dollar weakness is driven (alone) by structural factors

                          Stagflation - when rising rates don’t support USD

                          • EUR/USD is closely aligned with rate differentials
                          • When this isn’t the case, we find that USD weakness is explained by a rise in US inflation expectations
                          • EUR/USD weakness in 2007 can be explained by adverse rate trends as well as rising B/E inflation
                          • When the FED pursues a contractionary policy at a time of slowing growth, the USD is at risk
                          • The nature of changes in US interest rates matters

                          USD and the US current account

                          • There is no visible relationship between USD and the US current account
                          • So far, the 16% drop since 2002 has left no mark on the current account
                          • Since 2002, 50% of the deterioration in the C/A can be explained by rising oil prices. A weaker USD won’t help here
                          • A C/A deficit tells little about currency direction, but it can add leverage when the business cycle turns

                          USA - some good news, some bad

                          • The US economy is unlikely to fall into a recession and there is a potential for positive surprises as manufacturing reaccelerates and the drag from housing fades
                          • But US consumer spending is facing headwinds from high gasoline prices in Q2 that could subtract as much as 0.75% from GDP growth
                          • The housing market is still in the doldrums. Housing should remain a drag on growth until year-end
                          • Core inflation likely to be stable, but above FED’s comfort zone
                          • The room to grow at or above trend is limited before rate hikes will be needed to prevent a rise in inflation

                          Protectionism bearish for USD

                          • US politics is increasingly focussing on protectionism. The issue is only likely to heat up as the next presidential election draws closer
                          • The House will vote on foreign exchange legislation in the coming months. Increased trade tensions between China-US likely. Legislation targeting the yen has also been put forward.
                          • Rising Asian currency reserves is also a form of protectionism: by intervening in their FX markets local central banks are preventing a rise in the currency. A change towards a slower pace of reserve accumulation could imply a reduction in reserve flows into USD
                          • Increased (US) focus on protectionism, be it in trade or in FX, is bearish for USD as it signals a desire to devalue the currency

                          Euroland - no end to recovery in sight

                          EUR capital flows very positive

                          Technical analysis point to higher EUR/USD

                          EUR/USD outlook

                          Published on  Wed, May 9 2007, 16:23 GMT

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                          New yield forecasts

                          Wed, May 2 2007, 09:13 GMT
                          by Pär Magnusson, Peter Lildholdt

                          Danske Bank A/S


                          Our one-month forecast of roughly unchanged USD rates turned out to be correct, as the USD yield curve was close to unchanged over the course of April. On the other hand, our forecast of rising EUR rates at the three month horizon materialised earlier than expected. EUR rates rose in April whereas we had anticipated stable interest rates.

                          We probably overestimated the negative impact of the VAT impact on the German economy. According to the latest Ifo indicator, current optimism among German corporates has not been curbed by this event and the German economy seems to gain momentum. Roughly speaking, the significant rise in EUR rates at the three month horizon from our previous forecast has materialised. Consequently, the new forecast implies a more modest rise in EUR rates three months ahead. Looking forward to the second half of the year, we expect the Euroland economy to continue at a high speed. In particular, business confidence in Euroland should hold up surprisingly well. The forecasts for 10yr EUR rates at the six month horizon and beyond have been increased by 10bp to 4.5%.

                          In the US, we expect the soft patch of growth data to continue in H1 2007. Headwinds from high gasoline prices and the slowdown in the housing market are important factors behind this scenario. Growth is likely to return to trend in H2, though, as consumers absorb the gasoline price shock and employment/wage growth remains supportive. We expect core CPI inflation to remain elevated compared with Fed preferences. Tightness in the labour market, elevated unit labor costs, and commodity-induced price pressures at the factory level are going to leave very little room for a decline in underlying US inflation. In our interest rate forecast, the scenario of a re-bound in the US economy is reflected by rising interest rates at the six month horizon. Our US interest rate forecast is little changed from last month.

                          Our central bank calls for ECB and the Fed are above current market pricing. We expect the Fed to be on holdover the next 12 months, whereas markets anticipate at least one Fed cut. Our ECB forecast implies two hikes over the next 12 months, markets expect only about one and a half hike. Hence, our yield forecast is for higher rates across the yield spectrum as a reaction to tighter-than-expected policy rates.

                          Published on  Wed, May 2 2007, 09:13 GMT

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                          EMU: Buy PLN−HUF basket against SKK−CZK

                          Wed, May 2 2007, 09:04 GMT
                          by Stanislava Pravdova, Lars Christensen, Lars Rasmussen

                          Danske Bank A/S


                          We recommend taking a long position in an equal weighted basket of PLN and HUF against an equal weighted basket of SKK and CZK. Our arguments for the trade are:

                          • Poland: Growth is strong and accelerating. The macro balances are strong. Inflation remains surprisingly low, but is now moving upward and has reached the Polish central bank’s (NBP) target of 2.5%. In response to this NBP has recently hiked rates by 25bp, and we are likely to get at least two rate hikes of 25bp each more, over the coming six months. This will be supportive for the currency.
                          • Hungary: Growth is likely to slow significantly on the back of the substantial fiscal and monetary tightening. A slow down in growth will improve the current account situation significantly. This will be supportive for the forint. At the same time the investor gets an attractive yield at 8%.
                          • Slovakia: The economy continues to boom, and the consumer spending remains very strong. The cur-rent account is still a key risk, and the inflation risks continue to exist mainly due to strong consumer spending. In spite of this the Slovak central bank has cut its leading interest rate twice this year in an attempt to weaken the currency. The risks are therefore for a weaker currency and yields are now low enough to consider going short in SKK against PLN and HUF.
                          • Czech Republic: Domestic demand continues to accelerate and has clearly surprised on the upside. The current account situation is likely to worsen on the back of strong domestic demand. The CZK interest rates are the lowest in CEE and lower than in Euroland. We therefore consider CZK as a good funding currency. But this bet is not as clear as some months ago as the strong growth in domestic demand could “convince” the CNB to move in a more hawkish direction.
                          • This trade offers some carry and a very limited sensitivity against movements in EUR/USD. Further-more, should the jitters from the Turkish elections spread to the general EM sentiment; it will in general weigh equally negative on all four currencies, as they have almost the same risk sensitivity. Hence this trade is relatively hedged against a general worsening of the EM sentiment.
                          Product Sell EUR/PLN Product Sell EUR/HUF
                          Maturity 3 months Maturity 3 months
                          Spot / forward: 3.7975 / 3.7998 Spot / forward: 249.10 / 251.34
                          FX-forecast HUF/SKK 3M: 3.75 FX-forecast PLN/CZK 3M: 250
                          Hist. volatility. ann. 6.8% Hist. volatility . ann. 8.9%
                          Product Buy EUR/CZK Product Buy EUR/SKK
                          Maturity 3 months Maturity 3 months
                          Spot / forward: 28.20 / 28.11 Spot / forward: 33.83 / 33.82
                          FX-forecast HUF/SKK 3M: 28.20 FX-forecast PLN/CZK 3M: 34.00
                          Hist. volatility. ann. 3.9% Hist. volatility . ann. 6.3%

                          Product - Zero cost basket . Buy PLN & HUF against CZK & SKK in equal weights to make a zero cost portfolio.

                          Alternatively one can create an equal weighted portfolio of HUF/SKK and PLN/CZK.

                          Maturity - 3 months

                          Historical volatility (ann.) - 5.8%

                          Stop loss / take profit - Stop out when basket has lost 1.5% and take profit when basket has made 3%

                          Published on  Wed, May 2 2007, 09:04 GMT

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                          Short USD/SEK: Target Reached

                          Mon, Apr 23 2007, 14:36 GMT
                          by Stefan Mellin

                          Danske Bank A/S


                          We recommended selling USD/SEK at 6.98 on 23 March (see “Sell USD/SEK, target 6.75”). Since our 6.75 target was reached on Friday we closed the position with a profit of 3.25% including carry (3.41% excluding cost of carry).

                          The trade was based on two pillars beside the confirmation that 7.10 had once again offered strong and solid resistance. First a recovery in the SEK being materialised through a decline in EUR/SEK, which at the time traded at the upper end of the long held range just above 9.30. Notably, EUR/SEK had risen above what could be justified by relative yields while the fundamental backdrop remained favourable for the SEK. Second, we argued that Fed's more neutral bias in combination with weak data from the US were likely to put the USD under pressure. We conclude now that both legs have performed more or less in line with expectations in the recent weeks.

                          By closing the position we are not saying that we see the end of USD weakness/SEK strength. In fact we think both EUR/USD and USD/SEK have further to run. We discussed the prospects for the USD in last week’s issue of FX Crossroads and will cover the SEK in this week’s issue. That said, several of the USD crosses currently seem a bit stretched and a short-term correction would not surprise.

                          Technically, USD/SEK should meet strong resistance at the 6.75 area, whereas EUR/USD naturally hesitates before 1.3660. Any EUR/USD correction would given the strong correlation suggest a significant rise in USD/SEK (see chart). We consider these corrections to be of temporary nature though and eventually we look for a break above 1.3660 and simultaneously a further slide in USD/SEK. A challenge of the December 2005 low at around 6.57 looks feasible to start with and after that a key technical target should be the 1995 low at 6.4250.

                          We choose to stay on the sideline for now and consider re-entering a short USD/SEK position either when the correction has run its course or following a break below 6.72.

                          Published on  Mon, Apr 23 2007, 14:36 GMT

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                          CAD: The next big decoupling

                          Tue, Apr 17 2007, 16:35 GMT
                          by Tobias Thygesen

                          Danske Bank A/S


                          ...could the BoC hike while the market toys with FED cuts?

                          Canadian strength despite US weakness

                          Much has been made of the fact that the euro area is currently performing strongly while the US is struggling - and that the ECB may be hiking while the FED is cutting rates (or at least that is what the market speculates - our FED forecast remains flat for the next 12 months). While this decoupling of Europe (and much of the rest of the world for that matter) from the US is notable in itself, one would still expect that the 51st state of the US - as Canada is sometimes teasingly referred - would be un-able to disconnect from its big neighbour to the south.

                          After all, more than 80% of Canada's exports go to the US (and 90% of all Canadians live within 200km of the US border). US and Canadian GDP are thus highly correlated, and while the BoC on one occasion hiked when the FED was cutting (2002-03, see charts below) this looks more like a policy mistake than anything else in hindsight, as rates were soon cut again before both central banks embarked on a sustained path of policy firming from mid-2004 onwards (FED policy during 2002-2003 may also have been flawed, but that is another story).

                          We have argued for some time that the pricing of rate cutes from the BoC was to some extent 'unfair' given the strong state of the commodity-powered Canadian economy. Unemployment remains at a 30-year low, employment growth continues to surprise on the upside (and the labour force keeps expanding), inflation remains at the high-end of the BoC comfort zone, leading indicators point up-wards, and trade and budget balances remain in solid surplus. In addition, the housing market in Canada, while slowing down, is experiencing nothing of the weakness seen south of the border.

                          The question thus remains whether the Canadian economy is strong enough - and resilient enough against a US slowdown - to allow the BoC to hike in 2007. On the face of it, recent data has indeed been strong enough - and the BoC's quarterly business survey released yesterday also painted a rosy picture. Of all respondents, 41% expected faster sales growth in the coming 12 months compared to the previous 12 months, up from 34% in the previous quarter. Half said they have some or significant difficulties responding to unforeseen orders, of which 18 percentage points were in the significant difficulty camp. 41% reported that shortages of labour meant that hiring was difficult. The BoC concludes that “Pressures on production capacity re-main at comparatively high levels”. On the other hand, 88% of respondents expected inflation to remain within the BoC 1-3% target band for the next two years, so inflation expectations seem well contained for now.

                          Hence, while the economy is doing fine and the BoC should still consider it to be operating “at, or just above, its production capacity”, we will probably still need to see inflation failing to come down in the months ahead for further BoC tightening to come in to play for real - and the US slowdown will also mean that the BoC will have to be more than convinced of the need for further tightening before it acts. But it should be obvious that cuts in 2007 look rather unlikely, and should the BoC move in 2007, we would certainly be looking for a hike. It appears that the market agrees with us - in tandem with markets pricing out (most of the) FED easing in 2007, the same has happened in Canada and markets are currently pricing an unchanged BoC through 2007 (in December 2006, more 50bp of cuts were priced).

                          The next key release is Thursday's inflation data, where the market is looking for the BoC core rate to edge down to 2.2% y/y from 2.4%. Any upside surprises could bring a hike into play again and further reduce the US-Canada short rate spread - and should make the 24 April Bank of Canada rate set-ting meeting rather interesting.

                          USD/CAD heading south - and more to come

                          As regards the Loonie, USD/CAD has trended down in recent months as the CAD has benefited from support on several fronts:

                          • The strength of the domestic economy and the resulting reduction in rate-spread vis-a-vis the US
                          • The rebound of the oil price in particular and commodity prices in general - and the positive outlook for global growth
                          • The resulting renewed M&A inflows
                          • A return to risk-seeking markets (the CAD is somewhat vulnerable to increases in risk aversion - despite its solid external and internal balances - perhaps as a result of be-ing a small currency highly dependant on the world economic outlook)
                          • Widespread dollar weakness which obviously also benefits the CAD - although probably to a lesser extent than other currencies due to the negative rub-off effect

                          We see no reason for these drivers to recede any time soon, and continue to look for USD/CAD to move lower, c.f. also the chart below which shows our USD/CAD model based on relative interest rates, energy and non-energy commodity indexes and a measure of risk aversion. If anything, the model (which has an R2 of 97%) suggests that cur-rent levels are slightly above what could be considered “fair”. Technically, it appears that we may be facing a correction, but with 1.14 or 1.145 the tar-gets. After that, the down-trend should resume, targeting first 1.12 and then even lower. The long run technical picture actually points to parity - that is, USD/CAD at (or even below) 1. We will thus await a correction higher before we establish USD/CAD shorts.

                          The main risk continues to be the possible negative rub-off from the US and the fact that portfolio flows have been outbound lately. The latest instalment in this series is due for release tomorrow, where markets are looking for a considerable slowing of the outflow.

                          As regards the CAD's ability to perform on the crosses, we probably still need to see a return to dollar strength for the CAD to gain meaningfully on the ever-stronger EUR - and lower levels for EUR/CAD may thus not be imminent.

                          Published on  Tue, Apr 17 2007, 16:35 GMT

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                          G7 update: All is well, sell JPY

                          Mon, Apr 16 2007, 15:28 GMT
                          by Teis Knuthsen

                          Danske Bank A/S


                          The G7 group of central bankers and finance ministers met on Friday (April 13) in Washington. It did not change its statement on exchange rates, nor did it comment specifically on the Japanese yen or on carry trades. We expect this outcome to result in a further weakening of the JPY. This note considers the G7 statement, as well as the outcome of the weekend’s IMF meeting.

                          To begin with the G7, the statement began on an optimistic note by pointing to the strength of the global economy. It repeated the comment also used at the last meeting in February that Japan’s recovery was on track and that it was assumed that financial markets would recognise this development. This is the closest we get to an official line on the weakness of the yen. In our view, it is unlikely to impress the currency markets.

                          Second, the core paragraph on exchange rates was unchanged from February, and it is noticeable mainly be-cause of its specific reference to the Chinese currency. Hank Paulson, US Treasury Secretary and host to the meeting elaborated on the issue of China in his own press conference after the meeting by saying that “greater exchange rate flexibility and stronger domestic demand in China are critical parts of rebalancing, and it is crucial that China move now with greater urgency.” We agree with the line taken in the sense that we find an appreciation of the CNY to be appropriate. The reality, however, is that China has slowed the rise in CNY against the USD in recent months and EUR/CNY has risen.

                          Third, the link between global imbalances and exchange rates was also highlighted by the G7. As decided a year ago, the G7 has called for the IMF to take a more active role in terms of exchange rate surveillance. That view was further supported by the call for an update of IMF’s 30-year old surveillance policy.

                          Turning to the IMF, it is clear that the Fund’s thinking on global imbalances has evolved during the past year. Imbalances were generally seen as diminishing and the strength of the current upswing has allowed for a more relaxed stance on the issue. The Fund is optimistic that imbalances can be reduced through increased savings in the US, continued reforms aimed at increasing demand in Europe and Japan, a rise in both consumption and ex-change rates in Asia - particularly China - and a rise in investment in the oil-exporting countries. But it is equally clear that the IMF is increasingly being called on to overlook exchange rates, hence the proposal to revise the 1977 policy on currency surveillance. Just how this will work in practice is not obvious, and the proposal is being opposed from several quarters, including Japan and the G24 group that includes India and Brazil.

                          To conclude, nothing emerged from Washington this weekend to prevent a further slide in the yen or a continued rise in EUR/USD. While addressed, the issue of global imbalances did not result in actions that will impact on currency markets immediately. We can expect to see more work from the IMF on exchange rates, but it is still unclear how its mandate will be expressed. China was once again singled out because of its interference in the CNY, and it seems policy makers are losing patience with China on this issue.

                          Selected quotes:

                          G7 Statement

                          “We, Finance Ministers and Central Bank Governors, met today to evaluate the global economic outlook. Al-though risks remain, the global economy is having its strongest sustained expansion in more than 30 years and is becoming more balanced. In our economies, US economic activity remains solid even as domestic demand moderates to a more sustainable growth path. The euro area is experiencing a healthy upswing. UK growth re-mains robust and Canadian growth is accelerating. Japan's recovery is on track and expected to continue. We remain confident that the implications of these developments will be recognised by market participants and will be incorporated in their assessments of risks.

                          Further strengthening and rebalancing of domestic demand is desirable to help ensure the global economic expansion remains robust. We continue to be committed to maintaining price stability as the best contribution that monetary policy can make to sustained global growth. We will do more to increase trend economic growth rates, especially through structural reforms such as improving labor markets and long-term fiscal sustainability. We are confident that the continuation of our policies will support economic growth and contribute to reduce international imbalances. We will continue to work together to support the global adjustment process and urge others to do likewise.

                          We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely, and cooperate as appropriate. In emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur.

                          We welcome the Managing Director's proposals to update the 1977 Decision on Surveillance over Exchange Rate Policies and to develop a surveillance remit. We look forward to finalising these proposals rapidly after the Spring Meetings.”

                          Statement, US Treasury Secretary Hank Paulson

                          “.[...] we remain aware of risks to the world economy. Fuel prices remain high and volatile. Protectionist pressures are rising. Global financial markets are vulnerable to reversals, as we saw earlier this year, though the system has proved to be resilient and adjustments orderly. My colleagues and I discussed the initial progress made to-wards implementing policies to help reduce global imbalances, including some rebalancing of global demand. However, more needs to be done. We need global demand to be underpinned by strong domestic demand in major economies such as Japan and Europe, and the cyclical upswings need to be translated into lasting improvements in potential growth. Greater exchange rate flexibility and stronger domestic demand in China are critical parts of rebalancing, and it is crucial that China move now with greater urgency. Oil exporters also need to under-take measures to increase investment and consumption. Tonight I will have a working dinner with my G-7 and Chinese colleagues. We will be joined by our counterparts from Russia, Saudi Arabia, and the United Arab Emirates to discuss investment flows from oil exporters to gain a sharper understanding of this increasingly important issue.

                          As major shareholders of the IMF, the G-7 have a strong interest in safeguarding the legitimacy and effective-ness of that institution. To do so, we must make the IMF look more like the world economy in which it operates. The rise of emerging markets needs to be reflected in the IMF's governance structure. That is why it is essential, first and foremost, that we be bold and follow through with fundamental reform of IMF quotas. I think there is a path forward that could achieve this objective, but doing so will require a rededication by many countries to the understanding that a strong IMF benefits us all. A more representative IMF, however, will mean little without significant improvements in the institution's surveillance over exchange rate policies. For this reason, the G-7 reaffirmed our strong support for quick action to update the IMF's 30-year-old principles and procedures for ex-change rate surveillance.”

                          IMFC statement, US Treasury Secretary Hank Paulson

                          “Over the last several months, the United States has been a participant in the IMF-sponsored Multilateral Consultations on global imbalances. While these consultations were never intended to produce joint policy commitments, they have still contributed importantly to improved understanding about the participants' shared responsibilities for promoting adjustment of imbalances. Indeed, there has been some re-balancing of global demand over the last year, but it is important to ensure that the cyclical upturn now underway in many countries is translated into lasting improvements in underlying potential growth. Looking forward, we hope for faster sustained demand growth from Europe and Japan, more demand growth from major surplus countries, and greater ex-change rate flexibility in Asian emerging economies, especially China. The counterpart to a falling US trade deficit, by definition, is falling trade surpluses in other economies.

                          IMF statement, Managing Director de Rato

                          “To help ensure a smooth unwinding of global imbalances. Important elements of the agreed approach-as discussed in the context of the Multilateral Consultations- include efforts to raise saving in the United States, including through continued fiscal consolidation and steps to reduce disincentives to private savings; advancing growth enhancing reforms in the euro area and Japan; measures to boost consumption and increase upward ex-change rate flexibility in emerging Asia, especially China; and continuing efforts to boost investment by oil exporters, especially in the Middle East, consistent with absorptive capacity constraints. “

                          Various comments

                          “A strong euro is in the interest of Europe,” Dutch Central Bank Governor Nout Wellink said in an interview in Washington today. “Domestic demand in Europe is strong. We don't have a problem at this moment with the euro.”

                          “We are optimistic” about European exports and growth prospects, Belgian Finance Minister Didier Reynders told reporters today on the sidelines of the spring International Monetary Fund and World Bank meetings in Washington. “Europe's capacity to resist external shocks is also due to a strong euro.”

                          “Fixing imbalances through changes in exchange rates could be counter-productive. Adverse effects, including a sharp deterioration in macro-economic conditions would far exceed any limited benefit.” Koji Omi, Minister of Finance, Japan.

                          Published on  Mon, Apr 16 2007, 15:28 GMT

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                          New yield forecasts

                          Mon, Apr 2 2007, 16:38 GMT
                          by Pär Magnusson, Peter Lildholdt

                          Danske Bank A/S


                          During March, our EUR yield forecast for the one month horizon was close to spot on. The 2 and 10yr yield levels ended the month within a +/- 1bp band of our forecast, and the bearish flattener realized in the 2-10yr segment. On the other side of the Atlantic, our forecast for higher 10yr yields turned out to be correct, too. However, we did not anticipate the decline in 2yr USD rates during March.

                          Our central bank calls for the Fed and the ECB have been revised. There are only feeble signs that the VAT hike in Germany has had any effect on underlying dynamics, and we have been surprised that business confidence and hiring are holding up following the plunge in German retails sales at the beginning of the year. Consequently, we expect the ECB to hike the refi rate to 4.25% at the September meeting - in addition to the June hike to 4% which was also our central expectation last month. Read more about the revised ECB forecast in “ECB: Strict policy would better fit ECB view”, April 2, 2007.

                          Turning to the Fed forecast, we now expect the Federal funds target rate to remain constant at 5.25% over the next 12 months. Our view on inflation has not changed, but growth risks have increased in recent months. The background is increasing gasoline prices, the impact of recent weak new home sales data, and the extension of weakness in durable goods orders into February. The revision to our Fed forecast is described further in “USA: Unfriendly news flow”, April 2, 2007.

                          Our central bank calls for ECB and the Fed are well above current market pricing. We expect the Fed to be on hold over the following 12 months, whereas markets anticipate at least two Fed cuts. Our ECB forecast implies two hikes over the next 12 months, markets expect a single hike. Hence, our yield forecast is for higher rates across the yield spectrum as a reaction to tighter-than-expected policy rates. In particular, monetary policy expectations in the market are going to be revised upwards, so short rates are going to increase more than long rates. Such a “bearish flattener” is a key feature of this yield forecast.

                          Published on  Mon, Apr 2 2007, 16:38 GMT

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                          FX forecast update: Running in circles

                          Mon, Apr 2 2007, 15:57 GMT
                          by Teis Knuthsen

                          Danske Bank A/S


                          Here are our latest thoughts on the G10 currency markets:

                          • The past month has been dominated by two key themes: the “carry crisis” at the beginning of the month and the weakness of the US economy. Volatility has been more pronounced than direction and the performance of low yielder vs. high yielder and G10 vs EM is well spread: ZAR, SEK and GBP have been the worst performers (down by roughly 1% vs. EUR), whereas HUF, BRL and AUD have gained the most (up 2-3%). While some relationship with interest rate movements can be found, it is patchy at best. Over the first quarter of the year performance was equally mixed: again ZAR (-4.6%) and SEK (-3.3%), together with MXN (-2.8%) were the weakest currencies and again HUF (+1.5%), AUD (+1.5%) and BRL (+3.5%) were the strongest - only surpassed by the star performer to date, ISK (up 6.6%). So far in 2007, a clear pattern to currency performance has yet to emerge.
                          • Running in circles. The feeling that currency markets are treading water should not be ignored, as this could herald the beginning of the end of well established trends. During the past 5-6 months, EUR/USD has traded within 1.28 - 1.34, USD/JPY has held within 115 - 122, and EUR/SEK has stayed inside 9.0 - 9.35. While the lack of direction is not exceptional by historical standards, such periods are never permanent.
                          • Carry comeback. We wrote last month that we expected the unwinding of carry positions to be a “technical rather than a fundamental correction.” Short of an obvious driver such as rising interest rates or inflation expectations, or a cyclical rotation in favour of the lower yielding currencies, the global environment is expected to remain conducive to risk seeking. The solid comeback by the higher yielding currencies in the second half of March would seem to justify our view. However, valuation is becoming increasingly stretched between CHF and JPY on the one hand and AUD, GBP and NZD on the other. The cyclical patterns are likely to allow for further underperformance by the low-yielders, but the turning point is slowly approaching as Australia, New Zealand and the UK could be nearing policy rate peaks in the coming months.
                          • Dollar fundamentals have deteriorated for the second consecutive month. The shift higher in EUR/USD during the past month has been well supported by economic fundamentals as well as geopolitical risks. Though a lot of bad news is now priced into the US (witness the two rate cuts expected before year-end), the near-term outlook continues to favour the EUR. The US economy could well surprise on the upside in the coming month, but a further deterioration is perhaps equally likely. Our US economists have responded to the latest deterioration in the US economy by removing expectations of a rate hike by year-end, leaving our rate profile flat for the coming year. A rise in relative USD rates will favour the USD only if accompanied by an improvement in the economic outlook, particularly with regard to housing and orders. Should higher interest rates come as a result of a rise in inflation expectations, which is what the Federal Reserve continues to worry about, this could well be negative for the dollar, as was the case in May/June 2006. The tug-of-war between the Federal Reserve and money markets as well as implied inflation expectations should be watched closely.
                          • Capital flows favour EUR. We are fairly confident that the ECB will opt to raise interest rates again in June by 25bp. We also consider it increasingly likely that the central bank will tighten once more during the autumn to 4.25%. Even if some doubts remain as to the durability of the Euroland economic upswing, the ECB should find sufficient support for its hawkish stance in the present cyclical conditions to see the rise in money market rates cause upward pressure on the currency. Further, the euro area is currently the net recipient of a substantial capital inflow, particularly in the form of net equity investment, with the net annual portfolio inflow of EUR 326bn being the highest ever since the launch of the euro area. Accordingly, we have lifted our forecasts for EUR/USD to 1.36 in 3 to 6 months and to 1.28 in a year, from 1.34 and 1.25, respectively.
                          • The Japanese yen is likely to weaken as the new fiscal year gets underway. The seasonal bias is normally negative in early April, and the return of deflation in February should leave the Bank of Japan on hold for the next 6 months or so. Finally, the improvement in capital flows that played a significant part in the rise of the yen in Q1 is likely to be reversed in Q2, as indicated by the latest weekly portfolio flows. The G7/IMF meetings in April could present a risk to our negative view on the yen. However, we do not foresee any material changes to the G7 take on currency markets - and the JPY is therefore unlikely to be mentioned specifically in the G7 statement - just as we think policymakers will act with caution on the issue of carry trades after the latest correction. That said, at least the Europeans are likely to continue to comment on the level of EUR/JPY. Despite the pressure on USD, we continue to see USD/JPY rising above 120 during spring, and in line with our forecast upgrade on EUR/USD, we now look for EUR/JPY to rise towards 166 in the coming months.
                          • The near-term outlook for GBP is favourable, but will likely become more uncertain as the year progresses. An early rate hike by the Bank of England during spring will highlight the strength of the British economy and drive EUR/GBP lower. However, unless the BoE finds itself in a position where further rate hikes are called for, a cyclical rotation in favour of EUR could emerge during the summer. Capital flows have become more mixed, and despite the focus on M&A-related flows into the UK, the overall balance of capital flows is not particularly supportive of GBP. In a nutshell, sterling is an overvalued currency that requires continued support from the economy to maintain altitude. So far, we are only forecasting one more rate hike in this cycle - hence our reservation as regards the medium-term outlook. In Switzerland, the monetary policy cycle will continue to lag the ECB and we foresee only one more rate hike from the SNB, in June. Reflecting our more upbeat view on the ECB, we have lifted our 3-month forecast on EUR/CHF to 1.63.
                          • NOK/SEK rising further. The Norwegian economy continues to operate at high rates of capacity utilisation and the central bank will continue to respond to the situation by tightening monetary conditions. We expect the bank to raise rates three more times this year alone, positioning it as the most aggressive central bank in the G10 universe. However, since a good deal of this is already priced in by money markets, unlike our forecast on the ECB, relative rates may not offer as much support as generally expected. Oil prices continue to show close correlation with the currency and the latest oil-price rally is contributing to NOK strength. However, even if we have a fundamentally constructive view on energy prices, a good deal of political risk is currently part of the market price and swings in the oil price may well inject two-way volatility into the NOK in the coming months. In Sweden, our more aggressive stance on the ECB throws the spotlight onto the more dovish line taken by the Riksbank, which risks leaving SEK further behind EUR, as has been the case during the first quarter of the year. With the Swedish dividend season beginning in earnest during April, and with it a likely net capital outflow as dividends paid to foreign equity owners are repatriated into home currencies, risks would seem to suggest a cautious line on SEK despite the strength of the economy.
                          • In both Australia and New Zealand, the local business cycles continue to offer support to AUD and NZD. With global markets likely to favour carry positions, commodity prices rising and both the RBA and RBNZ offering the prospect of further rate hikes, currency strength appears to be called for. However, as with the UK, a turn in the policy cycle should emerge during 2007, which will leave both currencies vulnerable to a considerable correction and therefore we caution against chasing what we see as the final leg of a rally. In Canada, the economy continues to perform well and we do not consider rate cuts likely this year. We continue to have a positive view on the currency, even if CAD may be held back by a more downbeat outlook for USD.

                          Published on  Mon, Apr 2 2007, 15:57 GMT

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                          EUR flow of funds: Underpinning a strong EUR

                          Thu, Mar 29 2007, 15:17 GMT
                          by Rene Kallestrup

                          Danske Bank A/S


                          Euroland flow of funds showed a substantial surplus on the broad basic balance (current account, FDI and net portfolio flows) in January, equivalent to around two percentage points of GDP. The strong equity inflows and lower FDI outflows contributed to a surplus on the broad basic balance of EUR 36.7bn. The details are as follows:

                          Euroland’s seasonally-adjusted current account posted a surplus of EUR 2.7bn in January - the fifth consecutive surplus. The aggregate deficit over the last year amounts to EUR 12.8bn (approximately 0.2% of GDP).

                          Foreign direct investment recorded a minor net outflow of EUR 5bn, continuing a trend of net outflows from Euroland. Interestingly, net outflows are now below the three month moving average.

                          Portfolio investments posted an inflow of EUR 39bn. Net bond inflows were 4.6bn, and equities posted a net inflow of 34.4bn (the largest since July 2005). On a 12-month basis, portfolio investments have seen inflow of EUR 326.6bn, the largest surplus since the launch of the EUR.

                          Taken together, the euro area posted a surplus on its broad basic balance of EUR 36.7bn in January. On an annual basis, the broad basic balance recorded the largest surplus in several years, thereby unpinning a strong EUR.

                          Published on  Thu, Mar 29 2007, 15:17 GMT

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                          Dividend season − issue for the SEK?

                          Thu, Mar 29 2007, 07:47 GMT
                          by Sara Lindahl,, Stefan Mellin

                          Danske Bank A/S


                          This note takes a currency perspective on the approaching Swedish dividend season. The purpose is to present timing, amounts, foreign participation and thus potential impact on the SEK. From mid April to mid May the major-ity of this year’s record amount of dividends will be paid out to the shareholders (estimated more than SEK 200bn). The table below (overleaf) covers most of the Swedish large cap companies that use SEK as accounting currency. The total payout is SEK 158bn where 100bn is concentrated to the period 16 April to 11 May. On average the for-eign ownership is 36%, which taken company by company translates to 58bn in foreign earnings on Swedish eq-uity investments, where most goes to Euroland residents followed by the US and UK residents. The payout this year is 80% higher than last year’s 32bn (left-hand chart).

                          Whether these payouts will result in physical currency outflows depends on how foreigners choose to use their earnings. There is no unified behaviour; for example corporations, traditional funds and hedge funds might reason and act in different ways. Based on experience we assume that some of the payouts will be repatriated (realised, reallocated to foreign markets etc) but that the majority is reinvested (in the company or at least in Sweden). The EUR and the USD are the main beneficiaries from any repatriation. While the Swedish dividend season is concen-trated to the second quarter the foreign ditto is spread out more or less evenly across the year.

                          The historical trading pattern does not support the view that the SEK is particularly vulnerable during the dividend season. In fact April tends to be among the friendliest months for the SEK where EUR/SEK has lost 0.27% (see right-hand chart) and USD/SEK 0.25% on average in the last 10 years. In conclusion, we don’t see the dividend season as a major threat but recommend keeping an eye on dates with large payouts to foreign accounts around which the risk to the SEK should be highest.

                          Published on  Thu, Mar 29 2007, 07:47 GMT

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                          Some SEK remarks

                          Thu, Mar 15 2007, 10:17 GMT
                          by Stefan Mellin

                          Danske Bank A/S


                          While the many unknowns out there not least regarding the subprime mortgage risk warrant cautiousness and a humble attitude towards markets, this note offers a few remarks and observations on the SEK developments.

                          Since re-pricing of the Riksbank sent EUR/SEK to current levels not much has happened. The pair has remained range-bound (basically 9.25-32) despite the global turbulence and re-pricing of risk (see chart). The general perception is that the SEK should suffer in the current market environment. So far however the marked shift from risk-seeking to risk-avoiding behavior among investors has had only limited impact. Instead the EUR/SEK dynamics in the last week(s) are explained by its normal drivers; the ups and downs in rate differentials and macro surprises, the EUR/USD, while we also observe some indications of a negative correlation with the Swedish stock market (OMX) recently.

                          It is not unlikely that continued unease in financial markets and further sell off in the stock market would hamper the SEK, prompting a break above 9.3250 which is the nearest key resistance level and challenge the double top at 9.3650 (see chart). Our equity strategists still expect OMX to rise in the course of the year, but short-term the market will be sensitive to negative news and the correction so far is still shallow compared to the May 2006 correction. That said, correlation between currency and equities is not unambiguous due to re-balancing effects.

                          Secondly, should carry unwinding be followed by further USD weakness, e.g., on the back of risks related to the US housing market it would probably have the opposite effect, supporting lower levels in EUR/SEK. Our base scenario is for a stable EUR/USD in the near term, which should be neutral for EUR/SEK.

                          Thirdly, regarding relative monetary policy we observe that fair value is trading around 9.20, suggesting that the current spot rate is too high. At the same time we expect fair value to climb higher as the market adapts to our scenario of a 25bp hike from the ECB in June which is not priced in yet (15bp). We hold a market-neutral view on the Riksbank, expecting another 25bp at the June meeting. Domestically the outcome of the first part of the wage round (expected this week) is a key potential market mover. The negotiations have turned out more sluggish than expected and we do acknowledge the upside risks to inflation rates and the SEK but basically we don’t think that the outcome will generate a need for a more aggressive monetary. In the medium term (timing is uncertain) the main event risk for the SEK is, beside possible global turmoil, the privatisation of state-owned companies which is expected to prompt a strengthening of the SEK.

                          Published on  Thu, Mar 15 2007, 10:17 GMT

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                          New yield forecasts

                          Fri, Mar 2 2007, 12:52 GMT
                          by Peter Lildholdt

                          Danske Bank A/S


                          During February, yields declined across the curves in the US and Euroland. In contrast, our forecast was for higher yield curves in February. Looking back at data released over the month, we see a balanced picture of data releases with positive and negative surprises. To us, data releases do not explain February’s decline in yields.

                          Rather, a bullish market sentiment has dominated global bond markets since Bernanke’s testimony to Congress on February 14. More recently, the market turmoil and the associated flight-to-quality has extended the decline in interest rates.

                          We expect the current bullish sentiment and the flight-to-quality to be short-lived. On the macro front, we maintain our case for a strong US and a sidelined Euroland. Consequently, we have not made significant changes to our yield forecast compared to last month.

                          Regarding monetary policy in euro land, we think the short end of the curve is close to fairly priced. Trichet has pre-announced a hike in March. Thereafter, ECB delivers another hike in June due to concerns about wage growth and rapid money supply growth. Our central case is that ECB then goes on hold in the second half of 2007. This view of ECB’s monetary policy is not far from current market pricing.

                          However, our view on US monetary policy differs from that of the market. During 2007, US growth is likely to hover around 3% and inflationary pressures are unlikely to abate. Consequently, we expect the Fed to increase the Federal Funds rate by 25bp in Q4. This view stands in contrast to the market which expects the next move by the Fed to be down. We disagree with the market’s perception that a peak in the Federal Funds rate has been reached.

                          Published on  Fri, Mar 2 2007, 12:52 GMT

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                          EMU: Buy HUF/SKK

                          Mon, Feb 26 2007, 14:27 GMT
                          by Lars Christensen, Lars Rasmussen

                          Danske Bank A/S


                          We recommend taking a long position in HUF/SKK as a speculative buy on monetary meetings in both Hungary and Slovakia this week and as a short-term carry trade. Our arguments for the trade are:

                          • Hungary: The Hungarian economy is beginning to look more balanced than it did six months ago. However, we still think that inflation is a bit on the high side, and we thus believe that the Hungarian central bank (MNB) has not yet ended its tightening cycle. We see only a limited chance for a hike at today’s monetary meeting but, nevertheless, the chances are greater than what is currently priced into Hungarian money market rates. Thus, we think that the short end of the money market yield curve will move up, which in turn could strengthen the HUF. The newly appointed central bank governor, Mr Simor, who will be in charge of the next monetary meeting, has today delivered some rather hawkish statements concerning price stability and the approaching adoption of the euro.
                          • Slovakia: Domestic demand continues to be very strong in Slovakia, and this is clearly putting upward pressure on wages and prices. Furthermore, the strong growth in domestic demand is contributing to the already large C/A deficit. Hence there are solid reasons for monetary tightening in Slovakia. Nev ertheless, the Slovak central bank (NBS) does not seem overly concerned about inflation, as the Slovak koruna (SKK) has strengthened somewhat in the last six months. All in all, we think the NBS will stay on hold at this week’s monetary meeting, and will continue to be fairly dovish. We therefore expect the SKK to lose some momentum going forward.
                          • In general we view the Hungarian economy as more balanced than the Slovakian economy (see Research - New Europe: A warning not to be ignoredTH, February 23, 2007), and therefore we could see some longer-term value in this trade. This view is also supported by our fair value FX models, which indicate that SKK is around 10-15% overvalued, whereas the HUF is closer to its fair value.

                          Product Long       HUF/SKK

                          Maturity                         1 month

                          Spot / forward:               13.63 / 13.599

                          FX-forecast (1M)           HUF/SKK 13.75

                          Stop loss/take profit        13.75 / 13.50

                          Hist. vol.(ann.)                 7.65%

                          Calendar

                          February 26:

                          Hungarian rate decision - unchanged at 8.00%, but hawkish

                          February 27:

                          Slovakian rate decision - unchanged at 4.75%, but dovish

                          March 2:

                          Hungarian PPI - 5.6% y/y January

                          Published on  Mon, Feb 26 2007, 14:27 GMT

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                          G7: Europe capitulates, yen weakens

                          Mon, Feb 12 2007, 08:18 GMT
                          by Thomas Harr, Teis Knuthsen

                          Danske Bank A/S


                          Despite playing hosts to the weekend’s G7 meeting of finance ministers and central bankers, Europe did not succeed in making yen weakness a common issue. The final statement did not stray far from well-known comments on the desire for exchange rates to be based on economic fundamentals and free from disorderly movements. Importantly, Japan’s exchange rate was not specifically mentioned. China was again commented on, but the message was similar in tone to what have been seen in the past. As was to be expected, hedge funds were included in the statement, though from a currency perspective this is mostly irrelevant.

                          The G7 only in a vague sense warned about the weakness of the yen and yen carry trade. It said that “...Japan’s recovery is on track and is expected to continue. We are confident that the implications of these developments will be recognized by market participants and will be incorporated in their assessment of risks”. After the statement one top G7 official after the other, including Japan’s finance minister Omi, said that they wanted the market to be aware of the risk of one way bets, in particular on the foreign exchange market with a clear reference to yen-carry trades.

                          In our view the outcome of the meeting naturally reflects the dilemma of the world policymakers: 1) It is mainly Europe who has a problem with the weak yen. 2) The yen is, unlikely the Chinese currency, market driven as the Japanese authorities are not intervening in the market 3) There is a fundamental reason behind the weak yen: Ultra easy monetary policy on the back of a Japanese economy which is still flirting with deflation. In our view world policymakers cannot really demand that Bank of Japan shall raise interest rates forcefully to strengthen the yen with the Japanese consumer still looking fragile and core CPI running at 0.1 % y/y. Off course, Japan could intervene in the fx markets to support the yen but we expect that this is still some way off.

                          We respect to the Chinese currency system there was a slight shift of wording in the G7 statement from “...greater exchange rate flexibility is desirable...” to “... it is desirable that their effective exchange rate move....” The change reflects that the G7 would like to see not just increased strengthening of the yuan against the dollar but also against other currencies.

                          Though the price of the yen fell towards the end of last week as expectations to the outcome of the weekend’s meeting changed, we fell there is more to come. Trading may be off to a slow start due to a Japanese holiday Monday, but a reduction in the risk premium on the yen should allow for further weakness in the beginning of the week. We continue to have a negative outlook on the Japanese yen based on relative economics, interest rates and capital flows. Further, comments from both Japanese and US officials during the weekend suggest that official intervention is a distant threat only. However, the payment of coupons on US treasury bonds on Thursday 15 February could well result in a temporary dip in USD/JPY. Our 3m targets on USD/JPY and EUR/JPY are 125 and 160 respectively.

                          Selected paragraphs from the G7 statement:

                          “We, Finance Ministers and Central Bank Governors, met today to evaluate the global economic outlook. Global growth is more balanced. In our economies, performance remains favourable. The US economy is experiencing solid activity, while adjusting to a more sustainable growth path. Canada and the UK remain on a strong and balanced growth path. The euro area is experiencing an increasingly broad-based upswing. Japan's recovery is on track and is expected to continue. We are confident that the implications of these developments will be recognized by market participants and will be incorporated in their assessments of risks. “

                          “ Amid lower energy prices and moderating inflationary pressures risks have abated, but we will remain vigilant. We will continue to pursue sound policies to foster sustained and balanced growth and support the orderly adjustment of global imbalances. In this respect, we welcome China's commitment to rebalance growth. “

                          “We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely, and cooperate as appropriate. In emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur.”

                          Published on  Mon, Feb 12 2007, 08:18 GMT

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                          CIS: Go long RUB basket

                          Fri, Feb 9 2007, 17:12 GMT
                          by Lars Rasmussen

                          Danske Bank A/S


                          We recommend buying RUB against its operational currency basket consisting of 55% USD and 45% EUR (latest update on the currency basket: Flash Comment - Russia: USD weighed and found wanting, February 8, 2007). Our arguments for the trade are:

                          • The rouble is undervalued by around 10-15%.
                          • Inflationary pressures will pick up in the coming months due to seasonal trends, and the Russian central bank (CBR) will continue to let the RUB appreciate against its basket (see Flash Comment - Russia: RUB strengthens against basket, February 8, 2007) to dampen the pressure. (Note that the CBR is fighting inflation via nominal appreciation, as the money market still is very under-developed).
                          • Strong external balances will continue to be supported by the oil price. We believe that risks look to be on the upside on energy prices.
                          • The RUB was made convertible on July 1, 2006 (see Research - Russia: Investments vital to sus-tain growth, November 29, 2006). Although the full range of market instruments is not yet avail-able, capital markets in Russia are becoming more liberalised - this trend is likely to continue.
                          • We recommend buying the RUB basket to make a pure bet on RUB and hence avoid fluctuations in EUR/USD.
                          • The trade offers no carry and is hence a pure FX play.
                          • Note: documentation is needed for settlement.

                          We expect that most of the appreciation in the RUB will come during Q1 and Q2, as inflation normally picks up in the beginning of the year, therefore we recommend taking a 3-month position while retaining the op-tion of extending the maturity.

                          Published on  Fri, Feb 9 2007, 17:12 GMT

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                          New yield forecasts

                          Fri, Feb 2 2007, 13:59 GMT
                          by Pär Magnusson

                          Danske Bank A/S


                          Our prediction for January turned out to be right in the sense that interest rates rose across the curves. However, we were surprised by the size of rate increases. Ten-year bond rates in the US rose by almost 20bp and 10yr German bonds rose by around 15bp. In some sense these very bearish developments in January are surprising in the light of the strong rate increases observed in December last year. Have interest rates reacted too strongly to January’s strong data? Are markets due for a correction in February?

                          We believe the answer to both questions is NO. Recent market movements have been large, but we feel they are in line with fundamentals. In the short term, a technical correction to the interest rate increases in Dec/Jan is certainly a risk factor. But our main scenario at the one month horizon is increasing rates. In contrast, we predict a mild setback in rates at the three month horizon as a reaction to past interest rate increases.

                          Regarding monetary policy in euro land, we think the short end of the curve is close to fairly priced. Trichet has almost pre-announced a hike in March. Thereafter, ECB goes on hold due the VAT increase in Germany and low oil prices. ECB’s refi rate is then increased again, probably in Q4, due to a pick-up in the world economy. This view is not far from expectations implied by the market.

                          However, our view on US monetary policy differs from that of the market. During 2007, US growth is likely to hover around 3% and inflationary pressures are unlikely to abate. Consequently, we expect the Fed to increase the Federal Funds rate by 25bp later this year in Q4. This view stands in contrast to the market which expects the next move by the Fed to be down. We disagree with the market’s perception that a peak in the Federal Funds rate has been reached.

                          Published on  Fri, Feb 2 2007, 13:59 GMT

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                          MEA: Short−term speculative buy. TRY/ZAR

                          Tue, Jan 9 2007, 15:51 GMT
                          by Stanislava Pravdova, Lars Christensen

                          Danske Bank A/S


                          Due to technical reasons, the report summaries will be unavailable for a short time. They will be restored as soon as possible. The reports themselves are still complete and can be downloaded in PDF format. We apologize for any inconvenience.

                          Published on  Tue, Jan 9 2007, 15:51 GMT

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                          Switzerland: SNB keeps to its courseSwitzerland

                          Thu, Jan 4 2007, 16:12 GMT
                          by Pär Magnusson

                          Danske Bank A/S


                          First we should acknowledge the fact that we were wrong in our forecast for the month of December. We anticipated close to unchanged yields, but as it turned out December was the most bearish month of the entire year. The benchmark German 10yr yield rose by almost 30bp. In some ways the bearish sentiment on the bond market last month is quite surprising. We readily admit that the market’s expectations for early Fed cuts were overdone at the beginning of December, but we also must say that the set of data we received out of the US and Euroland in itself hardly would motivate such a bearish reaction. It seems the market had just gone a step too far, and it was time to correct expectations.

                          Now that the market indeed has aligned itself to an outlook more in line with our call for a Fed on hold and a continuously hawkish ECB, there seems to be less room for large corrections in the near term. We still expect the ECB to hike at least twice more. The market has still not discounted a whole hike during Q1 and a second hike is not completely priced into the European money market curve either. We therefore see a continued risk for higher money market rates in Euroland, as the risk is skewed towards more and earlier hikes than what the market expects. Our call for an unchanged Fed funds rate for the next three quarters is a revision compared to our old forecast. In the next few months we expect to see a continued tug of war between the risks for on the one hand too high inflation, and on the other hand a weak housing market. As long as the US risk picture remains unclear in this respect the Federal Reserve will stay on hold. Thus, we feel that the US money market is close to fairly priced in the front end, but with a risk decidedly on the upside further out the money market curve.

                          With the short end of the yield curve rather stable going forward the steepness of the yield curve is most likely going to be decided primarily in the long end of the curve. Over the past couple of years we have seen the socalled “bond yield conundrum” at work depressing long yields. Part of the explanation is most likely to be found in what we call structural demand for long yields. This state of affairs is not likely to be discontinued any time soon. Rather, we expect demand for long duration to be held up and the downward pressure on long yields will remain. The curve flattener thus continues.

                          Published on  Thu, Jan 4 2007, 16:12 GMT

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                          Switzerland: SNB keeps to its courseSwitzerland

                          Tue, Dec 12 2006, 11:42 GMT
                          by Christian Hilligsøe Heinig, Tobias Thygesen

                          Danske Bank A/S


                          We have updated our macroeconomic forecast on Switzerland - it indicates that high growth with low inflation will continue.

                          The Swiss central bank (SNB) is expected to keep to its course at the monetary policy meeting on 14December: +25bp and at least one more rate hike in the pipeline.

                          Given our expectations on the ECB after last week’s meeting, we do not expect to see the CHF strengthening in the short term.

                          However, we still expect that the SNB’s monetary policy rate will reach 2.50 % by the end of 2007 - and that the CHF will strengthen moderately later in 2007.

                          SNB still not finished tightening

                          Switzerland’s National Bank (SNB) has been busy for some time now. Since December 2005, it has been gradually normalising monetary policy by 25bp a quarter from a particularly expansive 0.75% to the current 1.75%.

                          The gradual normalising of monetary policy has gone hand in hand with an economic upswing that has been gathering pace and is expected to peak this year at around 2.8% - the highest rate of growth since 2000 and substantially above the 1.5% average of the past 25 years. The benign economic developments in Switzerland are due to a cocktail of high global growth and households’ increased propensity to spend. The latter should be seen in the light of the improved labour market - unemployment has been cut by almost 25,000 in the past year.

                          That economic growth appears to have topped is due to the outlook for a more muted pace of global growth that will mean less demand for Swiss exports and hence a reduced contribution to growth from net exports in the coming years. The trend towards a lower pace of growth is also confirmed by the usually reliable KOF indicator, which has fallen somewhat, albeit from a high level, in recent months.

                          While growth appears to have topped, this is not synonymous with the upswing evaporating. We expect that the global economy will manage to retain some momentum, while domestic demand will continue to develop favourably. Household disposable incomes will grow as a result of what is happening on the labour market and the prospects of real wages rising. Meanwhile, the high capacity utilisation will support corporate investment activity.

                          Both 2007 and 2008 hold the prospects of abovetrend growth and thus continuing pressure on the labour market, which is already running at close to full employment. The key question – for the SNB too - is how much the tight labour market will impact wage growth and, ultimately, inflation. According to the textbooks, the basic supply and demand mechanisms will lead to wage growth ticking up. However, this inter-relationship appears to have weakened compared to earlier times. In recent years, many countries have experienced low wage growth in spite of a tight labour market.

                          The impact of the tight labour market on wage growth and subsequently consumer prices will, in any case, take some time. In other words, in the short term at least, there is not much likelihood of the SNB’s inflation target coming under pressure. Tumbling energy prices since the SNB’s latest monetary policy meeting in September most likely mean that the central bank’s upcoming inflation forecast will be revised sharply down - especially for 2007. Our own forecast suggests inflation below 1% in 2007 and just 1.2% in 2008.

                          The SNB actually looks further than 2008. In September, it believed that inflation in 2009 could exceed 2% if monetary policy was not tightened further. But with the falling energy prices and the weak data on, for instance, the US economy in mind, it will be interesting to see to what extent this remains the case, especially after rates have again been hiked by 25bp.

                          SNB keeps to its course

                          There is no doubt that the SNB will hike rates by 25bp to 2.0% at the meeting on December 14 - the message has remained that the gradual tightening of monetary policy will continue – and with inflationary pressures being weak and growth slowing, a hike of 50bp can be ruled out.

                          Even if the SNB’s coming inflation forecast does not suggest that the inflation target could be breached in the course of 2009, this does not mean that the central bank will go on hold. If the economy is assessed as being strong enough to absorb further rate hikes, the SNB would prefer that monetary policy rates continue upwards to their “normal” levels of around 2.5-3.0%. Otherwise, an overly accommodative policy risks - eventually - contributing to an overheating of the labour market and the undertaking of socio-economically unprofitable investments.

                          Overall, we expect that the SNB – in addition to the December meeting – will hike by a further 25bp in March. The latest SNB rhetoric also seems to suggest such a path, as it has a number of times emphasised that monetary policy is too easy and that there are several rate hikes in the pipeline. A March hike is also what the market expects.

                          We expect to see one further rate hike after March, though the timing is so far uncertain. The SNB may elect to take a break after the March meeting to digest the effect of the tightening to date and to assess the state of the international economy. In any case, we expect the key monetary rate will be 2.50% by the end of 2007. Note this is not that far from the implicit market expectation on the 3-month Libor rate in December 2007, which currently stands at 2.4%.

                          The risk to our SNB call is most likely to the downside. We are relatively optimistic on the international economy (see our quarterly publication, Global Scenarios). Should this disappoint, it would contribute to pulling the Swiss economy down. Further, the combination of muted inflationary pressure and a slowing growth profile could also make the SNB reluctant to hike again after the March meeting.

                          CHF slightly firmer - we doubt it will hold

                          The Swiss franc has strengthened a little in the past few weeks as the rate spread to the euro has narrowed. After a brief visit above 1.60 in the middle of November, EUR/CHF has fallen below 1.59 again.

                          However, the narrowing of the rate spread is primarily due to moderated expectations on how much the ECB will tighten monetary policy, not speculation that the SNB will be more active.

                          As we had anticipated, Thursday’s ECB meeting put a halt to this narrowing trend, even though Trichet was perhaps not completely clear in his communication at the press conference, and even though euro interest rates pulled Swiss rates a little higher (see figure above). We still reckon on two further rate hikes from the ECB in 2007.

                          There has been a tendency in the past year for the Swiss franc to strengthen in the run-up to a monetary policy meeting - and a rather more clear tendency to weaken after a meeting.

                          Even though expectations on the SNB should be relatively muted this time around, the pattern could well repeat itself. As outlined above, we find it very difficult to imagine that the SNB can do anything other than hike by 25bp and presumably send slightly softer signals. Hence the market will be reminded that there are no prospects of the SNB narrowing the rate gap to the ECB in the coming year, and so we expect that EUR/CHF will again track higher after the rate meeting. We maintain our forecast for EUR/CHF to end the year at 1.60 - roughly CHF/DKK 4.66.

                          We still anticipate a moderate strengthening of the CHF in the longer term (see FX Crossroads, 21 November). But while the CHF is fundamentally undervalued relative to the euro, the timing of a firming is rather uncertain, and will likely be more moderate than we expected earlier. The only possible catalyst appears to be a shift in FX market sentiment from focusing on relative rates to focusing on rising risk aversion, the closing of carry positions and global imbalances. We no longer expect the SNB to tighten monetary policy relatively more than the ECB.

                          SNB and the Swiss franc

                          Previously, there has been considerable focus on the SNB’s stance on the weak Swiss franc and whether it could prompt a more active SNB. Central bank chief Roth has certainly reinforced this perception by repeated verbal interventions warning of the possible consequences of a too weak/strong franc. That said, there has been an increasing tendency for the market to ignore such comments as it has become ever more obvious that a more active SNB is not really on the cards. The end of November witnessed Roth’s hitherto most impassioned tirade against the FX market’s search for profit via the so-called carry trades (borrow in a low yield currency such as the JPY or CHF, and invest in high yield currencies such as the NZD). We do not expect a weaker CHF will have any effect on the SNB’s monetary policy, and we tend more to interpret Roth’s comments as an attempt to make clear that the SNB cannot be held responsible if monetary tightening leads to major losses on carry trades, rather than a hint that the pace of rate hikes could be stepped up.

                          "Currency traders thinking only of short-term profits are borrowing in countries with low interest rates to re-lend in high-yield states without any regard for the exchange risk. These are troubling signs and prudence is called for. It is dangerous to extrapolate trends and imagine that profits can continue to accelerate. We need to be on our guard because it is an illusion to think that past problems have disappeared. A little common sense would not go amiss. The Swiss economy is operating at full employment. It will therefore be necessary to continue raising rates".

                          SNB Governor Roth in an interview with the UK’s Daily Telegraph, 30 November, 2006.

                          Published on  Tue, Dec 12 2006, 11:42 GMT

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                          New yield forecasts − The steepener lurks

                          Wed, Dec 6 2006, 11:29 GMT
                          by Pär Magnusson

                          Danske Bank A/S


                          The past month has seen a significant change of sentiment on the fixed income market. Surprisingly weak macro data have brought a very bullish mood to the market, and monetary policy expectations in the US and Euroland have moderated considerably. (For further elaboration see our article: Reviewing our US forecast). From having been very much in doubt of the Federal Reserves intentions the market has now become sure of a series of rate cuts in 2007 starting in Q1. Dovish expectations indeed. In spite of repeated hawkishness on the part of the ECB, the market has become less sure of further policy tightening in Frankfurt. With one day left until Trichet reveals his thoughts on monetary policy in Euroland the market has sent down the probability for a rate hike in Q1 to around 30%. Hence, the market has adjusted itself to a slowdown scenario of the global economy next year. While we are prone to agree with the notion that the economy is slowing down, we are less sure that one should draw such drastic monetary policy conclusions as the market currently does. We feel there is an upside risk to rates in both Euroland and the US, since we think the most plausible scenario is that Fed stays on hold for Q1 and that the ECB hikes one more time in either February or March.

                          However, we should stress that while we see a short term upside risk to money market rates, we are also keenly aware of the risk for a bullish steepener of the yield curve going forward. That is, a development where we see 2yr yields outperform 10yr yields by declining significantly. The reason for why we see a great risk for a bullish steepener is founded in evidence from previous episodes that bear similarities to what we are witnessing now. Since mid-summer we have found ourselves in a trend of bullish flattening, where 10yr yields have dropped continuously and outperformed 2yr yields. Such a trend is normal in a period of data dependency where the Fed is on hold, and the market is unsure about future policy, but economic data weakens. However, this trend is often followed by a bullish steepener as the market becomes more convinced of ensuing rate cuts. Are we in such a situation now? Well, there is good reason to believe so, but we may also see the Fed set the market straight once again by repeating its concern for too high inflation. Thus, we are cautious to call a bullish steepener just yet, but we are sitting on the fence prepared to make that call any time should we hear softer rhetoric from the Fed and the ECB.

                          Published on  Wed, Dec 6 2006, 11:29 GMT

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                          New yield forecasts − Still going for flatter curves

                          Thu, Nov 2 2006, 10:23 GMT
                          by Pär Magnusson

                          Danske Bank A/S


                          In our last forecast a month ago we predicted that the flattening trend would continue as long as there was no evidence to prove the story about a downturn in the economy wrong. We also forecast a slight drift towards lower yields in the short term. As it turned out we were half right and half wrong. The yield curve has continued to flatten (become more inverse in the US) helped by continuing buying of long duration in Europe due to regulatory demands. But the yields have not drifted lower. Rather we have seen a slight drift upwards in yields.

                          The question about how long the continuous curve flattening still can go on remains, and we think it is worth repeating our mantra from last month: As long as the Fed is on hold and economic data continue to deteriorate. Add to this what seems to be an insatiable demand for long duration among European pension companies and you still have a strong case for flat curves.

                          Thus, we maintain our case for a structural demand for long bonds that will keep a lid on yields further out the curve. In the short end of the curve we believe that the market still is too bullish. As we write the market discounts almost an entire 25bp rate cut by the Federal Reserve in the first half of 2007. The expectations on the ECB are more aligned to our view, but as the ECB keeps up its hawkish tone we believe that the balance of risk is tilted towards higher short yields rather than the opposite.

                          In other words, a slightly bearish flattener is what we are looking for in the near term.

                          In the Scandinavian countries we maintain our view that the Swedish yields will outperform Euroland and that the opposite is true for Norway. The risk in Sweden is that the Riksbank will hike by less than what is discounted in the market and that the Bank of Norway will speed up hiking. In Denmark, we see a risk for underperfomance in short yields in the near term, but that Danish bonds should return to a better performance once we enter the new year.

                          Published on  Thu, Nov 2 2006, 10:23 GMT

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                          Go long Asian high−yielders against euro

                          Tue, Oct 17 2006, 15:32 GMT
                          by Rene Kallestrup, Thomas Harr

                          Danske Bank A/S


                          We recommend going long a basket of high-yielding Asian currencies – INR, PHP and IDR – against the euro. Our main argument is that we see a case for a stronger dollar going forward, supported by our perception of upside risk to the US economy, see FX Crossroads: Is EUR/USD en route to 1.16 before year end?, October 10. Although the IDR and PHP, in particular, have become more free–floating, they still, like other Asian currencies, maintain a strong correlation versus the USD. Hence a strengthening of the dollar against the euro should support the Asian high yielders against the EUR.

                          IDR, INR and PHP contain a significantly lower carry than, for example, the Turkish lira or the Brazilian real. However, if investors want exposure to the current high-risk appetite in the currency markets but, at the same time, want to protect themselves against a new sell-off in emerging markets, the Asian high yielders are an option. Although the IDR, INR and PHP are clearly high-risk emerging market currencies, the volatilities are significantly lower than in, for instance, the BRL, TRY and ZAR.

                          Note that the IDR, INR and PHP would also benefit from a possible strengthening of the JPY and CNY. China is likely to slowly move ahead with its currency reforms, allowing for gradual renminbi appreciation versus the USD. We still do not, however, see any significant strengthening of the JPY in the pipeline. The Bank of Japan is likely to wait until Q1 2007 to raise interest rates, and therefore both absolute and relative interest will play out in favour of the EUR against the JPY. Hence, neither CNY appreciation nor JPY strength are likely to be strong drivers for the Asian high yielders in the short term.

                          We thus recommend going long IND, INR and PHP against the EUR at current levels (equal weights). Note that because the three currencies are traded through the NDF market one has to go through EUR/USD forward outright. We target a gain of 5% with a stop loss at 3%.

                          Published on  Tue, Oct 17 2006, 15:32 GMT

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                          New yield forecasts − Still unalleviated worries

                          Fri, Sep 29 2006, 17:25 GMT
                          by Pär Magnusson

                          Danske Bank A/S


                          As we try to assess the outlook for the bond market our minds inadvertently drift to Pamplona. This fine Spanish city is famous for two things. Sausages and bull runs. And these two things are no doubt closely connected to the art of prediction in the current fixed income market climate. A man of the world once said that “there are two things one should avoid see being made in order to enjoy consuming it - sausages and forecasts”. Quite true. And as far as the bull run goes…well that goes without saying.

                          The past three months have staged the biggest decline in European 10yr yields since June 2005. The yield curve has continued to flatten and has now reached new flatness lows since 1993. Now, the big question is obviously: How long can this go on? Our tentative answer is: As long as the Fed is on hold and economic data continues to deteriorate.

                          The ECB still sounds very hawkish, but we doubt that it can maintain the tough talk going into the new year. The oil price has come down and growth is definitely cooling down. An ECB on hold during H1 is the most likely scenario. Weak data in the next few months might therefore even lead the market to believe in rate cuts as the next ECB move in 2007, which in turn could trigger a bullish steepener of the yield curve.

                          The source of the bond market bullishness it primarily to be found in the US market, though. The fears of a declining housing market has grown as house price data have continued to surprise on the downside, and recent business indicators and inflation data have done nothing to support a story that goes against the bullish sentiment. We still see some positive signs in consumer confidence data as a result of the large decline in petrol prices, but it is unlikely to reverse the bullish trend in the short term.

                          Consequently, in the very near term, i.e. the next month, we expect the yield curve steepness (2-10yr) to remain close to unchanged and yields to continue down at a slower pace. We thus foresee a slight downward shift in the yield curve.

                          The development in the US and Euroland markets will no doubt set the agenda for at least the longer part of the yield curves in the other countries that we monitor. When we look at our core markets in Scandinavia we keep our previous view that the Norwegian yield curve is likely to underperform Euroland. In Sweden we expect the 2yr segment to outperform Euroland, which also entails a relative steepening of the Swedish curve vis-à-vis Euroland. The Bank of Norway will be forced to keep hiking after the ECB pauses in December in order to cool the overheated Norwegian economy. This is probably also true for the Riksbank, but the hiking pace in Sweden will probably be much less aggressive than in Norway.

                          In the Central and Eastern European countries the general trend is wider spreads against Euroland. In the UK and Switzerland we expect yield spreads against Euroland to remain stable.

                          Published on  Fri, Sep 29 2006, 17:25 GMT

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                          Option strategy: EUR/PLN

                          Fri, Sep 29 2006, 16:09 GMT
                          by Lars Christensen, Lars Rasmussen

                          Danske Bank A/S


                          There is a significant risk of a substantial downward correction of Central and Eastern European (CEE) currencies. Political tensions are on the rise, populist policies are in vogue, external deficits are substantial and so are “hot money” inflows. Though the economic backdrop is not directly comparable, we see certain parallels with the Asian crisis in 1997/1998, see “Research - New Europe - Be careful! Risk on the rise”. Therefore we recommend being underweight CEE currencies in the coming months, and suggest expressing this view through an option strategy on PLN because of the liquid and evolved state of the Polish market. Even though PLN enjoys better fundamentals than the region as a whole, we think that Poland may suffer from contagion effects due to its close political and economic similarities with other CEE countries. But Poland is also a case on its own as a result of large and increasing political uncertainties.

                          Positive factors behind the PLN

                          • Strong and accelerating growth. Also strong macro balances.
                          • Inflation is still low, but has recently accelerated above 1½%, and rate hikes are clearly moving closer.

                          Negative factors behind the PLN

                          • The significant increase in political uncertainty raises the risk of a major zloty sell-off.
                          • The Polish government has de facto collapsed, and early elections look very likely.
                          • Political uncertainty will most likely remain high for some time to come.

                          We recommend entering a zero cost 1M risk reversal, buying one EUR/PLN call at 4.03 and selling two EUR/PLN put at 3.90. EUR/PLN spot is 3.97. Our EUR/PLN 1M forecast is 4.10, forward outright is 3.97.

                          Published on  Fri, Sep 29 2006, 16:09 GMT

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                          Excessive spike in EUR/SEK

                          Fri, Sep 8 2006, 07:46 GMT
                          by Stefan Mellin

                          Danske Bank A/S


                          The rally in EUR/SEK in recent days has at least partly been triggered by increased election uncertainty, as the opposition parties’ lead in the polls has been reduced to the point where the result is too close to call. Adding to the rally has been market disappointment with the Riksbank, which failed to signal more aggressive hikes in the autumn, while the ECB was being hawkish on rates. SEK weakening has also gone hand in hand with the general sentiment on low yielding currencies. As a result, the EUR/SEK downtrend that started in November last year, with lower and lower peaks, has been reversed. That said, fundamentals and the outlook for relative yields, i.e. the expected paths for the ECB and the Riksbank, have not justified the spike in SEK sell-offs. We still expect the Riksbank to hike gradually at every meeting to 3.50% (not fully priced), while the ECB will hike by 25bp twice and then go on hold. Hence, repo spread will be eliminated in Q1/Q2 next year. We think the bias is for the market to price in more rather than fewer Riksbank hikes in 2007. The coming period is special though, and we acknowledge that the SEK might swing with the election polls and the eventual outcome, where we believe a regime shift will benefit the SEK. However, looking at the state of the economy and the medium-term valuation, the SEK is too cheap. Moreover, and perhaps more interestingly, 2-year swap spreads (EUR-SEK) have been a good short-term indicator for EUR/SEK. This spread suggests that the spike in EUR/SEK has been excessive, with fair value closer to 9.20. We also find that reversion to the “mean” (currently around 9.20) has normally occurred within a relatively short period of time (see chart). Technically, it's worth noting that EUR/SEK is at relatively overbought levels, with the RSI indicating that the upside in EUR/SEK might be limited. A close below the 200-day moving average would also signal that the pair is ready for a test lower again. In conclusion, we are not sure that EUR/SEK will not go somewhat higher in the coming days due to the election, etc, but we also feel that positioning in the krona should now be more neutral (less short EUR/SEK). We would therefore recommend starting to establish short EUR/SEK positions.

                          Sell EUR/SEK Spot (at 9.31) 3M Target at 9.10 (stop-loss at 9.43). Alternatively, enter an option strategy for the downside.

                          Published on  Fri, Sep 8 2006, 07:46 GMT

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                          Forecast update: In the hands of Bernanke

                          Fri, Jul 28 2006, 12:35 GMT
                          by Teis Knuthsen

                          Danske Bank A/S


                          Here are our latest thoughts on the currency markets:

                          • Some sense of stability returned to currency markets in July. TRY staged a decent comeback, rising almost 8% against the USD. ZAR and ISK came in not far behind, up by approx. 5.5%. Higher yielding currencies such as the NZD, AUD, HUF and PLN gained 3.5 – 4.5% against the USD, whereas lower yielding currencies like the NOK, SEK, EUR, GBP and CZK rose between 1 and 2%. JPY, CNY, KRW and CHF were flat to modestly higher against the USD, and only the CAD underperformed the US dollar during the month, down 1%. Performance partly reflected a relief rally after heavy losses in emerging markets during May and June. But the onset of the summer doldrums also tends to favour carry trades, and so relative rates and currency performance go hand in hand in July. Within the G10 group of currencies, Canadian 2-year swap rates fell the most (30bp), followed by the US (-21bp). At the other end of the spectrum the NZD and AUD rates rose by just over 10bp.
                          • Looking ahead to August, we are tempted to quote baseball legend Yogi Berra “it’s like deja vue all over again”. When the dollar started falling in late April the main driver was a widespread expectation that the Fed was about to end its rate hiking cycle, together with a sense of urgency about addressing global imbalances. Currently, markets are pricing less than a 50/50 chance of an August rate hike, and US senators Graham/Schumer have returned to the stage with a promise to propose economic sanctions against China if its currency fails to appreciate further. Likewise, former Treasury secretaries Summers/Rubin have commented that more should be done to bring undervalued currencies into line with fundamentals. This issue will remain on the agenda and probably reach a peak around the annual IMF meeting in September. On balance, it is bearish for the USD.
                          • On the outlook for the Federal Reserve, we are inclined to believe markets are currently underestimating the risk of an August rate hike. We are also of the view that, due to a resilient economy and persistent inflationary pressures, the Fed will take rates to 6% in the first half of 2007. If we are right in this view, then the expected path of interest rates will have to be shifted upwards, just as consensus expectations on economic activity will be lifted. There can be little doubt that the Fed would like to end its tightening cycle soon, but the inflation outlook will probably deny it that luxury. By implication, the probability of a hard landing in 2007 will rise alongside interest rates, but until the cyclical turning point is reached the dollar will draw strength from positive carry vis-à-vis the EUR and JPY. Further, the safe-haven qualities of the dollar should not be underestimated should geopolitical tensions rise further. To the negative side of the equation, however, one must add a less supportive trend in capital flows (basic balance back in deficit after the HIA-induced spike in H2 2005).
                          • We do not expect events on the European side of EUR/USD to be the cause of any major surprises in the coming month. The ECB is scheduled to raise rates next week in a clearly telegraphed fashion, just as we expect the bank to tighten by another 50bp before year-end. However, this is in line with current pricing and the real issue is whether a slowdown in the industrial cycle will give the ECB reason to pause in early 2007. As we have stated before, European fundamentals do not support a rise in EUR/USD much beyond current levels.
                          • In Japan, the yen’s weakness following the BOJ’s rate hike is remarkable and underlines the structural problems hampering a rise in the JPY before nominal rates have converged with G10 peers. That said, there are reasons to believe that the latest bout of JPY weakness has been driven mainly be speculative flows and, combined with a positive seasonality in August, the JPY could well bounce back. If fundamental analysis has anything to add to currency markets these days, then it must be that the yen is now very cheap, particularly vs. the euro.
                          • Overall, G3 direction may well be range-bound in August too, with 1.2550 – 1.2850 likely to set the stage for EUR/USD. The key issue is the outlook for the Federal Reserve and here our bias is dollar-supportive. In terms of our forecasts we are lowering EUR/USD to 1.28, 1.30 and 1.32 in 3, 6 and 12m from 1.30, 1.34, 1.34, in line with the adjustment we made to USD/JPY last month. On the crosses, we think it’s time for EUR/JPY to move lower after 5 consecutive monthly gains without a correction.
                          • We are not changing our forecasts for the NOK or SEK, expecting both to outperform the EUR during the autumn, Signs that the ECB is approaching a peak in rates should be seen as constructive, just as a shift to a centre-right coalition after the Swedish election on September 17 should provide a lift to SEK.
                          • We continue to expect the GBP to be range-bound vs. EUR and look for a modest correction higher in EUR/GBP. On the positive side of the ledger we count high nominal rates and a recovering economy. On the negative side we find sterling to be somewhat overvalued, flows to be outbound and speculative positioning relatively long. The Swiss franc has been unable to benefit from economic strength; dragged down by a negative rate gap that is unlikely to close anytime soon. Though geopolitical and market risks have been rising, volatility still remains too low to provide safe haven support. EUR/CHF should remain close to 1.56 – 1.57 for now.
                          • The short-term outlook for CAD deteriorated in July, as the BOC went on hold and came across more dovish than expected. Though valuation is looking stretched, we continue to believe the strength of the Canadian economy will motivate a stronger CAD. Both the AUD and NZD were buoyed by a surprisingly high CPI reading in July, causing the projected rate paths to be lifted. We are cautiously bullish on the AUD in the near-term, as the RBA may continue to raise rates this year, with support from bullish commodity markets. Further rate hikes from New Zealand are unlikely, however, even if the beginning of the easing cycle is deferred to the middle of next year. AUD/NZD should continue to head higher.

                          Published on  Fri, Jul 28 2006, 07:35 GMT

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                          Forecast update: Summer rally, autumn blues

                          Fri, Jun 30 2006, 14:34 GMT
                          by Danske Research Team

                          Danske Bank A/S


                          Here are our latest thoughts on the currency markets:

                          •  Currency markets have been defined by two main trends in June: a continued sell-off in emerging markets and a correction in the value of dollar.  ZAR has fallen the most (down 11% vs. USD), followed by HUF (down 9%). Currencies such as NZD, TRY, ISK and PLN have all fallen by 5-6%. Other G10 currencies have generally underperformed the dollar by 3% (JPY, AUD) to 1% (SEK, EUR). The only currencies to beat the dollar during the past month have been a dynamic duo of CNY (0.3%) and BRL (3.3%).

                          •  We got a number of things right in our last forecast update, but also missed a beat or two.  We repeated our warning from May that EM FX would remain under pressure, and continued to stress the implications of a tightening global liquidity cycle, particularly for high-yielding currencies with current account deficits. However, our concern that markets would buy into the theme of a deteriorating global business cycle has been premature. Relatively upbeat economic data combined with a hawkish central bank helped propel the USD to the top of the G10 league this month, followed by the hawks in Sweden, Euroland and Canada. A near standstill in JPY rates and the travails of BoJ Governor Fukui played a significant part in the underperformance of the yen.

                          • Though we remain medium-term bearish on global risk aversion, we see a good chance of a summer relief rally in risky assets. This is due to a number of reasons. While some asset markets have seen substantial underperformance, the sell-offs have remained mostly rational. By this we mean that the currencies backed by the weakest fundamentals have also suffered the most and so far there have been few signs of contagion across assets markets. Further, key economic data have remained strong and have surprised on the upside, reducing fears of an imminent global slowdown. Finally, a last night's slightly softer FOMC stance on interest rates is reducing fears of an imminent liquidity squeeze. However, since we continue to believe that the turning of the liquidity cycle is the key fundamental trend in 2006, we expect a relief rally to be temporary.

                          •  The better than expected performance of the US dollar during June can be explained by a number of factors. Unwinding of EM positions by US investors help explain why a rise in risk aversion has failed to benefit JPY and CHF. Further, the underperformance of stock markets has again highlighted the sensitivity of the euro to risk aversion. Combined with oversold levels F X S T R A T E G Y and massive dollar shorts, a correction was not entirely unexpected. The aforementioned relief rally could easily bring with it a weaker dollar, just as the most recent rise in oil prices normally would be associated with a weaker USD

                          •  However, to this equation one needs to add two more factors. The first is a better tone to US economic data of late. This means that the Fed is currently tightening liquidity from a position of strength, rather than hiking into a slowdown. Our economics team expects a rise in consumer spending in Q3, dispelling fears of a stagflationary scenario this autumn, and have added 50bp to our 12-month fed funds forecast, so it now stands at 6%. Further, the focus on global imbalances and the trend appreciation of the Asian currencies has all but disappeared from the headlines. We expect this theme to return during the autumn, possibly together with a rise in US protectionism should USD/CNY remain around 8.00, but for now we do not see this as a strong currency driver.

                          • The Euroland economy continues to surprise on the upside. We expect the ECB to raise rates by another 50bp this year, but hawkish comments this week point to upside risk to our forecast. However, as we have argued on several occasions, fundamentals do not support a substantial rise in EUR/USD and a stronger EUR must be at least partly premised on dollar weakness. Further, we continue to hold to the view that dollar weakness will be restricted as long as the euro is the main ambassador for the non-dollar group of currencies. The persistent rise in EUR/JPY is in that regard problematic to our medium-term dollar bearish view. Hence, it seems unlikely that the highs from earlier this month can be taken out until dollar weakness returns as a broader theme.

                          •  A shift in relative rates goes a long way in explaining JPY weakness during the past month. Whereas US 2-year swap rates have risen by 36bp and EUR by 28bp, JPY rates are up by just 1bp. Further, pressure on BoJ Governor Fukui to tender his resignation hasn't helped. The result is a 6-figure rise in USD/JPY in June and a new high in EUR/JPY. The BoJ may end its ZIRP as early as July 14, but perhaps a more realistic bet is September. Either way, the BoJ will lag the action of its G3 peers this autumn. A normalisation of monetary policy is bullish for the JPY on a medium-term view but, historically, USD/JPY has only begun a trend depreciation after a much more substantial change to the policy spread than we can imagine in the coming year. This is one reason why our bearish call on USD/JPY requires support from the US and why our forecast revision for US fed funds forces us to revise our USD/JPY path higher. Consequently, we have raised our 3-month forecast for USD/JPY to 112 (110) and the 6-month forecast to 108 (106).

                          •  We are making only modest adjustments to our forecasts for GBP, CHF, CAD, AUD and NZD this month. We expect EUR/GBP and EUR/CHF to be range-bound for now but also look for GBP/CHF to move lower over time. We continue to have a constructive view on CAD and expect NZD to fall further.

                          •  We are revising our forecast for SEK upwards and now look for EUR/SEK to fall to 9.10, 9.0 and 8.9 in 3, 6, and 12 months. SEK is undervalued and supported by a strong economy with twin surpluses and a central bank that will out-hike its peers through the rest of the year. July is known for its negative seasonality, but the tendency has been waning in recent years.  The backdrop to NOK is equally constructive and we continue to expect EUR/NOK to fall to 7.70, thus keeping the NOK/SEK relationship relatively stable.  

                          Published on  Fri, Jun 30 2006, 09:34 GMT

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                          Iceland: ISK trouble set to continue

                          Fri, Jun 16 2006, 09:41 GMT
                          by Rene Kallestrup, Lars Christensen

                          Danske Bank A/S


                          Since we published our report "Iceland: Geyser Crisis" and our latest forecast for the Icelandic kronur (ISK), the Icelandic markets have continued the downturn. In fact the slide in the ISK has been faster than our already- bearish expectations. Hence, we are fast approaching our previous six-month forecast for EUR/ISK of 100. We have therefore revised our forecast for the ISK in line with the faster-than-expected depreciation of the kronur.

                          Since we still see this as the initial stages of a larger crisis, we remain bearish on the ISK. Our bearish view is primarily based on the following conclusions:
                          • The Icelandic economy is overheated. Even disregarding financial and liquidity concerns, the Icelandic economy appears to be heading for a serious recession.
                          •  The external position of the Icelandic economy has continued to deteriorate. The current account deficit topped 20% of GDP in Q4 2005. Gross external debt is running at 300% of GDP and short-term debt is close to 55% of GDP. This situation remains unsustainable.
                          • The Icelandic banks and corporations - and even the Icelandic government - continue to face headwinds in the international markets, where funding costs have probably increased markedly
                          The slide in the ISK therefore seems set to continue. Given the unsustainable position of the Icelandic economy and the clear indications that the situation is turning into a full-blown crisis, one should probably not attach to much importance to long term concepts such as "fair value" for the ISK. Overshooting continues to be the most likely scenario for the currency. However, much will depend on the action of the Icelandic players - including banks and corporations - and on the action of Icelandic policymakers - the government and the central bank.

                          The Icelandic central bank is well aware of the seriousness of the situation and is clearly intent on trying to at least stabilise the situation by tightening monetary policy. Central Bank Governor Oddson has already indicated that the central bank could hike its key policy rate to as much as 16%. In our view, this might not be enough to stabilise the situation, given the present sentiment and the seriousness of the problems facing the Icelandic economy. However, at some point the ISK will eventually have weakened enough - and interest rates may have been hiked enough - to stabilise the situation, and then the ISK will again become attractive. However, that point has not yet been reached, and is not likely to arrive for the first 12 months. Our new forecast for EUR/ISK is 100, 105 and 110 in 3, 6 and 12 months. The forecast is conditional on the central bank continuing the tightening cycle over the next twelve months. If it doesn´t, the ISK will weaken even more.

                          Published on  Fri, Jun 16 2006, 09:44 GMT


                          Archive

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                          This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.


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