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EMEA: Buy EUR/TRY

Wed, Jul 2 2008, 10:40 GMT
by Lars Christensen, Lars Rasmussen

Danske Bank A/S

We recommend being short in TRY against EUR, as we see a significant risk that the sell-off in the Turkish markets will escalate in the coming days and weeks for the following reasons:

• • Tensions are rising in the midst of what could turn into the country’s worst political crisis since 2001 – for a more in-depth analysis see Flash Comment - Turkey: It's just getting worse and worse,, July 1, 2008
  
• • Global financial sentiment continues to worsen as risk appetite fades and international equity markets suffer further.
  
• • No good news on the data front either. Rising oil prices weigh negatively on the Turkish trade deficit, which continues to worsen. May data released earlier today show that the 12-month accumulated trade deficit amounts to USD 69.7bn – or almost 8% of GDP.
  
• • The TCMB’s resolve to fight inflation and act decisively to defend the lira is open to question given the recent upward revision of the bank’s inflation target – see Flash Comment - Turkey: TCMB raises inflation target ...huge blow to credibility, June 5, 2008.
  
• • The technical picture points towards further upside in EUR/TRY. We are looking towards the old peak in EUR/TRY from mid-April of around EUR/TRY 2.11-2.12.

• Download full EM Strategy with charts

Published on  Wed, Jul 2 2008, 10:40 GMT

CEE/CIS: We are still long PLN/CZK, but more cautiously

Wed, Apr 23 2008, 13:08 GMT
by Lars Christensen, Lars Rasmussen

Danske Bank A/S

Buy PLN/CZK

We have moved into the money with our long position in PLN/CZK as CZK has weakened somewhat against EUR after the sharp rise in CZK last Monday morning. Meanwhile PLN has stayed fairly flat- EM Strategy - CEE: Buy PLN/CZK, 14 April.

Long in PLN/CZK

We decided to lift our stop from 7.20 to 7.30 to limit the downside. Going forward we think that the strong momentum we have seen in PLN over the last month will fade a bit:

• • Recent data for industrial production and retail sales have come out weaker than expected, suggesting that the slowing of the Polish economy is now underway, - Flash Comment - Poland: First signs of a slowdown?, 22 April.
  

• • The polish central bank (NBP) has, as a consequence, softened its rhetoric in the last couple of days, and this has reduced the chances of another hike (to 6.0%) at next week’s Monetary Policy Council (RPP) meeting. We are still expecting a hike next week, but comments yesterday from Jan Czekaj – indicate that we are getting close to the end of the tightening cycle. Key to the outcome of next week’s RPP meeting will, however, also be the decision of governor Skrzypek.
  

• • Going forward, we will most certainly remove our second rate hike from our forecast following the rate decision next week.
  

• • Even though we are getting closer to the end of the Polish tightening cycle, it should be noted that the Czech tightening cycle already seems to have come to an end and the rate spread between Poland and the Czech Republic is therefore likely to remain positive. This should support our long position in PLN/CZK.
  

Long in RUB against basket

• • Earlier today, we published a presentation on the need for tighter monetary policies in Russia. We expect to see a strong rouble against its dual currency basket (55% USD and 45% EUR) over the coming month(s) –- see Presentation - Russia: Monetary tightening is just around the corner

• Download full EM Strategy with charts

Published on  Wed, Apr 23 2008, 13:08 GMT

CEE: Buy PLN/CZK

Mon, Apr 14 2008, 13:00 GMT
by Lars Christensen, Lars Rasmussen

Danske Bank A/S

We recommend being long in PLN against CZK for the following reasons:

PLN

• • The Polish central bank (NBP) has resolutely reacted to the recent rise in inflation by tightening monetary policy and recent comments from NBP officials signal that we will get yet another rate hike at the next Monetary Policy Council meeting by the end of the month.
  
• • Furthermore we expect a final hike to be delivered around May/June, bringing NBP’s leading rate to 6.25%. Observing FRA rates there is only priced in another 15-20bp of tightening over the coming months, which in our view leaves plenty of upside potential on FRA rates and further downside po-tential on EUR/PLN.
  

• • Furthermore we must admit that we have underestimated the strength of the Polish economy, which in the CEE-region stands out as one of the most balanced economies. See editorial in New Europe Weekly, week 16, published on 11 April.
  

CZK

• • EUR/CZK moved from 25.025 (Friday’s ECB fixing) to as low as 23.00 overnight in a thin market and currently trades around 24.80 (roughly 1% stronger than Friday’s fixing). We recommend util-ising the strength in CZK to shorten the currency.
  

• • The Czech central bank (CNB) is very concerned about the levels in CZK, and it has recently to-gether with the Ministry of Finance discussed several measures to stop the ongoing strengthening of CZK.
  

PLN/CZK

• • The trade currently offers 2% carry p.a. We see further potential for a widening of this carry, as NBP is still in a tightening cycle, while CNB will not hike further unless CZK weakens dramatically.
  

• • This trade offers no real dependence towards movements in G3 currencies.

• Download full report with charts

Published on  Mon, Apr 14 2008, 13:00 GMT

CEE: Buy CHF/HUF, buy CHF/RON

Wed, Mar 19 2008, 14:43 GMT
by Kasper Kirkegaard, Lars Rasmussen

Danske Bank A/S

We recommend buying CHF against HUF or RON, as we continue to see fundamental support for CHF and weakness for HUF and RON. This trade is furthermore a play on increasing risk aversion. We believe that the timing is right for this trade, as the rebound in the markets since Tuesday morning can be utilised to en-ter this position.

HUF and RON look vulnerable:

• • The newsflow over the last few weeks has not been supportive for the imbalanced Emerging Mar-kets (EM) FX markets. We have long been bearish, especially on the outlook for most EMEA cur-rencies, and we do not see any reason for turning bullish yet. Our previous FX targets have now been reached and our new FX forecasts for a number of EMEA currencies have been revised in a more bearish direction – see Flash Comment - Credit conditions worsen - new FX forecasts.
  

• • Most Emerging Markets currencies were holding up very well during the global credit crisis, but it has recently become clear that this has only been a temporary situation, and a number of EM cur-rencies are now caving under the pressure. It is particularly the countries with large funding needs, like Hungary and Romania, which will continue to be under pressure. We recommend using the im-proved sentiment since Tuesday morning to enter short positions in HUF and RON.
  

CHF set to strengthen further

• • The Swiss franc has been the best-performing G10 currency against both EUR and USD so far this year. Strong growth, relatively subdued price pressures, and a resurrection as a safe-haven cur-rency have brought strong support, and we expect this to continue. In the past days, we have seen a breach of our old three-month forecast in EUR/CHF of 1.56. We now expect EUR/CHF to reach 1.54 in three months – our old 12-month forecast.
  

• • Although the Swiss economy is expected to slow to (or just below) trend growth this year, it re-mains strong on a relative scale. Fourth quarter GDP surprised on the upside, and while the leading indicator KOF is pointing to a slowdown, the labour market bears witness to underlying strength. The Swiss National Bank (SNB) has been on hold since the December meeting, and released a neu-tral policy assessment at its latest meeting. We expect the SNB to remain on hold, before lowering its policy rate by 25bp in Q4, when the economy has lost momentum, and the ECB has begun lower-ing rates over the summer. We thus expect movements in relative interest rates to favour CHF. More importantly, we also expect that a continued stressed global financial market, slowing global growth and high risk aversion will continue to support CHF in the months to come.

• Download full EM Strategy with charts

Published on  Wed, Mar 19 2008, 14:43 GMT

CEE: Buy EUR/HUF

Mon, Feb 18 2008, 13:44 GMT
by Lars Christensen, Lars Rasmussen

Danske Bank A/S

We recommend buying EUR/HUF for the following reasons:

• • The Hungarian government is planning to loosen fiscal policy as a response to the very low growth in the Hungarian economy. Even though tax cuts in general should be welcomed, it is problematic that the planned tax cuts are unlikely to be financed by similar cuts in public finances. Therefore any loosening of fiscal policy is likely to lead to a weakening of the forint and higher yields and rates. Furthermore, a loosening of fiscal policy could very easily lead to a downgrade of Hungary from one or more of the credit rating agencies.
• • In addition, we recently received more evidence that the Hungarian economy is sliding into stagflation – high inflation and very low growth – see Flash Comment - Hungary: Stagflation – dilemma for MNB, 14 February. Such a scenario is not likely to benefit the Hungarian forint.
  
• • Since the outbreak of the global credit crunch in August 2007, most currencies in most of the EMEA countries with large current account deficits and / or large foreign debt have been under significant selling pressures. Most notable have been the weakening of the Romanian leu, the Icelandic kronur and the South African rand, which have all weakened around 15% since the beginning of July. While we clearly see a risk that these currencies can weaken significantly more, there is also a risk that this weakening will spread to other EMEA economies with similar problems. In particular, the Hungarian forint stands out – see Flash Comment - Hungary: Time to watch the forint, 12 February.

• Download full report with charts

Published on  Mon, Feb 18 2008, 13:44 GMT

CIS: Buy RUB against its currency basket

Wed, Jan 30 2008, 08:13 GMT
by Lars Rasmussen

Danske Bank A/S

We recommend buying RUB against its dual currency basket consisting of 55% USD and 45% EUR. Our arguments for the trade are as follows:

• • We believe that RUB will appreciate by 2%-2.5% against the EUR-USD basket in 2008 compared with the average Q4 level, as the Russian central bank (CBR) will, in the coming months, have to address rising inflationary problems. As it looks now, its primary measure for bringing down inflation is to allow for further rouble appreciation.
• • The inflationary outlook has lately become more bleak, driven by buoyant consumer spending, very easy monetary conditions, as well as rising food and commodity prices. Combining this with a sharp increase in regulatory prices, we expect inflation to accelerate further in the coming four to five months before it peaks at inflation rates as high as 15%-16% y/y – more than double the official target for year-end 2008.
• • We thus recommend utilising the recent weakness in the rouble to enter a long position in the currency against a basket of EUR and USD where the weights reflect the currency basket composition. Last week, large capital outflows caused some depreciation in the rouble against its dual basket as the central bank decided not to bring strong support to the rouble in the FX market.
• • In general, we can expect larger day-to-day volatility in the rouble against its currency basket, but the trend for a stronger rouble in 2008 remains.
• • The trade offers a small carry.
• • Note: documentation is needed for settlement.

• Download full report with charts

Published on  Wed, Jan 30 2008, 08:13 GMT

EM update: 'Usual suspects' are under pressure

Wed, Jan 9 2008, 12:29 GMT
by Lars Christensen, Lars Rasmussen

Danske Bank A/S

Risk aversion has risen today after US equities and bond yields plummeted last night. Although the bulk of the Emerging Markets’ currencies remain fairly stable today, we are also seeing several currencies under heavy selling pressure – most notably in the Romanian and Icelandic FX markets. In the credit markets we in general see CDS and yield spreads widening in Romanian, Bulgarian, Kazakh, and Icelandic markets. It is significant that there is no pressure in the Baltic markets, which normally have been trading in line with the other “suspects”.

We suspect nervousness and continued concerns about funding are the drivers behind the weakness among the group of “usual suspects”. In relation to our open trading suggestions we therefore recommend to stay put with the positions:

• • PLN/SKK has been fairly stable over the last couple of days, we are still expecting a move toward PLN/SKK 9.32, and we might lift our targets if this level is hit.
• • EUR/RON has moved roughly 1.4% higher this morning, as it hit 3.64. It is now flirting with EUR/RON 3.63, and we feel investors might want to try to test December highs, where EUR/RON came close to 3.70, before the local central bank intervened to support the Romanian leu. We have lifted our stop loss from 3.53 to 3.60, and we still take profit if 3.70-level is reached.
  
• • EUR/ISK has moved 1.4% higher today from pre-opening levels around EUR/ISK 91.3 to the current level around 92.6 on concerns about funding needs.
  
• • USD/ZAR has been fairly stable today, as higher interest rates and a record-high gold price level underpins the South African rand.

Published on  Wed, Jan 9 2008, 12:29 GMT

EM: Sell Emerging Markets FX−risk “basket”

Wed, Dec 5 2007, 12:22 GMT
by Stanislava Pravdova, Lars Christensen, Lars Rasmussen

Danske Bank A/S

For risk-seeking investors we recommend making a short-term speculative trade on more weakness in cer-tain Emerging Markets’ currencies ahead of the New Year. We recommend entering one or several of the following positions – buy USD/ZAR, buy EUR/RON, and buy EUR/ISK, for the following factors, which will hit all three currencies:

• • The changes in the financial sentiment have sent risk aversion higher over the last couple of days, as investors have scaled down their risky positions in favour of US treasuries.
• • Going forward we expect this tendency to continue ahead of the New Year. In general liquidity in fi-nancial markets will be relatively thin, meaning that the EM-currencies will be very sensitive towards changes in the risk sentiment.
• • The macro outlook seems less bright in the coming months, with the US economy bottoming out in Q4 and Q1 next year. This could also weigh negatively on the global risk sentiment.
• • Our FX research-team expects that JPY will rise significantly in the coming months, which should add to carry-trade underperformance.
• • For country-specific arguments, see the links below.

Links to specific FX trade recommendations:
EM Strategy - South Africa: Buy USD/ZAR
EM Strategy - Romania: Buy EUR/RON
EM Strategy - Iceland: Buy EUR/ISK

In conclusion, we recommend entering one or more of the above mentioned speculative trades.

Published on  Wed, Dec 5 2007, 12:22 GMT

South Africa: Buy USD/ZAR

Wed, Dec 5 2007, 12:16 GMT
by Stanislava Pravdova, 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 as written in the Sell EM risk “basket”.

• • 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 this currency.
• • Even though USD/ZAR have move up somewhat over the last couple of days, USD/ZAR is still in the lower end of the range we have seen during most of the year (6.80-7.40).
• • 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 “tradition” EM carry trades have been under pressure.
• • The technical picture indicates some resistance around USD/ZAR 6.8576, which if broken opens for a move towards 7.11.

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.

• Download full South Africa report with charts

Published on  Wed, Dec 5 2007, 12:16 GMT

Romania: Buy EUR/RON

Wed, Dec 5 2007, 12:09 GMT
by Lars Christensen, Lars Rasmussen

Danske Bank A/S

Volatility in the Romanian leu (RON) has risen sharply since the beginning of July and the currency has been under heavy pressure. It has rebounded somewhat in the last days, and we now look at reasonable levels to re-enter a long EUR/RON position. We therefore recommend Buying EUR/RON spot:

• • The Romanian economy is among the most imbalanced in the Emerging Markets universe, with overheating asset markets, excessive credit growth and a large current account deficit. We place Romania in the same “group” of countries in CEE as the Baltic states and Bulgaria in terms of heightened risk of a hard landing in the economy and financial distress. However, while there are currency pegs in the Baltic states and Bulgaria, there is a floating exchange rate in Romania, which makes the leu the easiest FX to trade if one wants to trade the case of overheating in CEE.
• • Fiscal policy is strongly pro-cyclical and hence contributes to increasing imbalances in the economy. The political situation remains uncertain.
• • After the recent rise in FX volatilities the key policy rate in Romania of 7.5% does not give any real protection in terms of carry-to-risk.
• • The large Romanian funding needs – due to the high external imbalances – make the Romanian markets and economy sensitive to a global credit crunch.
• • Romanian households to a large extent have funded real estate investments in foreign currency (mostly EUR and CHF) and that makes them very exposed to currency risk.
• • The leu is the most overvalued currency in our entire Emerging Markets universe. Some of our models indicate that RON could be overvalued by more than 20% on a fundamental basis – even when taking the latest weakness into consideration.
• • Technically, we have broken the nearly three-year downtrend in EUR/RON and a new uptrend has been established.

• Download full report Romania with charts

Published on  Wed, Dec 5 2007, 12:09 GMT

Iceland: Buy EUR/ISK

Wed, Dec 5 2007, 11:24 GMT
by Lars Christensen, Lars Rasmussen

Danske Bank A/S

We recommend buying EUR/ISK.

We give the following reasons for more ISK weakness:

• • The Icelandic kronur is normally very sensitive to rising global risk aversion – as we are seeing at the moment
• • The development in the Icelandic economy is still unsustainable with rising inflationary pressures and a large current account deficit
• • In January, a large share of Icelandic bonds will mature (around ISK 70bn)
• • There are increasing signs of strains in the Icelandic financial sector and funding cost has risen significantly recently on the back of the global credit crunch.

• Download full report Iceland with charts

Published on  Wed, Dec 5 2007, 11:24 GMT

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