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USD: February TIC data

Fri, Apr 17 2009, 07:44 GMT
by Kasper Kirkegaard

Danske Bank A/S


Long-term capital flows into the US again

  • February’s TIC data showed a larger than expected inflow into long-term securities, and capital is thus once again flowing into the US following a large outflow in January. Foreign investors net bought USD 22bn worth of long-term securities in February compared to net selling of USD 36.8bn in the month prior.
  • The latest TIC data shows that the two main causes of the capital outflow in January were reversed in February, as foreign investors stopped selling US agency debt (securities issued by agencies such as Fannie Mae and Freddie Mac) and as US investor demand for foreign securities faded. Foreign investors net bought USD 20.8bn worth of US long term securities, while US investors net sold USD 1.2bn worth of foreign long-term securities.
  • While there was an inflow into longer dated securities, the TIC data still shows that there was a USD 97bn outflow from the US when short-term securities, such as stock swaps, are included. However, this is much smaller than the USD 148.9bn outflow in January.
  • Interestingly February’s TIC shows that foreign demand returned for agency debt for the first time since September last year and also purchases of US Treasuries increased. While the gradual improvement on the financial markets should imply less need for EM central banks to intervene on the FX market, the pick-up in demand for long-term securities in February was mainly driven by private investors.
  • China remains the biggest holder of US Treasuries and increased its holdings by USD 4.6bn to USD 744bn – which, however, is the smallest monthly purchase in a long time. Japan, the second biggest holder, purchased USD 27.1bn worth of Treasuries, while Caribbean based investors (e.g. hedge funds) and Russia each purchased Treasuries worth about USD 10bn.
  • Overall, February’s TIC report was quite positive; if demand remains for US securities, while at the same time the US current account continues to improve, we could soon see capital flows begin to bring medium term support to the dollar once again.

Published on  Fri, Apr 17 2009, 07:44 GMT

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Stock markets and the SEK − some details

Tue, Mar 17 2009, 15:27 GMT
by Stefan Mellin

Danske Bank A/S


Stock market implications for the SEK

-Global equity markets have indeed been a key driver behind the historic depreciation of the SEK as well as its recent rebound. At least two channels can be identified: risk sentiment (primarily foreign investors) and rebalancing flows (primarily Swedish assets managers).

-At this point we are inclined to characterize the rebound in equities as a bear market rally, but either way it will continue to have central implications for foreign exchange, not least the SEK. As a short-term tactical trade we are short EURSEK (see "Buy AUDJPY and sell EURSEK spot", 16 Mar).

- Our calculations suggest that within G10 the SEK, JPY and CHF have been the most susceptible to stock markets over the last few years. While EURJPY has lost some correlation recently, EURSEK is still to a large extent stock market driven (upper chart).

-SEK investors betting on direction in the stock market should be careful which SEK pair to sell or buy. It might be well known that the best strategy historically has been trading SEK vs CHF, with JPY and EUR as 2nd and 3rd choice. Last month's stock market correlation has increased in general and notably USDSEK is better correlated with S&P500 than all other G10 SEK crosses. NOK, GBP and AUD should be avoided

Published on  Tue, Mar 17 2009, 15:27 GMT

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USD: January TIC data − US investors start buying, those elsewhere stop

Tue, Mar 17 2009, 10:20 GMT
by Kasper Kirkegaard, Lars Rasmussen

Danske Bank A/S


Large capital outflow from the US

- January's TIC data surprisingly showed a large capital outflow from the US, as non-US investors sold US agency and corporate debt in particular, while US investors stopped repatriating foreign securities and instead started buying.

- Net foreign sales of long-term securities totalled USD43bn (expected buying of USD45bn) compared with a revised inflow of USD34.8bn in December. Including shortterm securities the outflow was even larger at USD148.9bn.

- Foreign investors continued to sell agency debt (debt issued by companies such as Fannie Mae and Freddie Mac), while US corporate bonds were also sold off - perhaps not that surprisingly, as the US stock market saw its worst recorded January ever. On a positive note, foreign demand for US Treasuries remained intact in January.

- Meanwhile, US investors stopped repatriating foreign investments and instead bought USD24.2bn net worth of foreign long-term securities - the first net buying seen since June last year. Capital flows generally supported the dollar in the autumn, but this was clearly not the case in January - even so, the effective dollar index strengthened by 3% in January.

Published on  Tue, Mar 17 2009, 10:20 GMT

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An overview of G10 equity betas

Wed, Mar 11 2009, 15:57 GMT
by Kasper Kirkegaard, Lars Rasmussen

Danske Bank A/S


EUR/USD equity beta at multi-year high

- Yesterday saw the biggest stock market rally this year, led by a strong performance in financials. This naturally spilled over to the FX market where we still see a very high correlation with equity markets. Given the high volatility in equities it is worth taking a look at the current FX betas (table below):

- AUD & NZD: Both AUD/USD and NZD/USD remain the main G10 currency pairs with highest sensitivity to equity markets - and betas have risen in recent months. This partly explains why AUD is sometimes referred to as a "fast" EUR.

- CHF & JPY: Both the defensive currencies have had their safe-haven status questioned in recent months - for CHF most likely due to an aggressive SNB and for JPY most likely due to poor domestic economic data. The equity beta has fallen for JPY and correlations have fallen for both in recent months. While CHF weakened yesterday, JPY was more resilient, emphasising its current decoupling with risk.

- EUR/USD: Both the EUR/USD beta and correlation stand close to a multi-year high. The high beta is not self-explanatory though and if driven largely by deleveraging flows (as we suspect), then the beta should fall markedly in an upwards trending equity market. That is, expect smaller co-movements during "good times".

- Scandies: Betas have risen strongly, suggesting that while currency specific themes remain key, market risk sentiment has become an increasingly important driver.

Published on  Wed, Mar 11 2009, 15:57 GMT

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EUR/USD: Reserve balancing by Russia likely to add downside pressure on EUR/USD

Thu, Feb 5 2009, 11:35 GMT
by Kasper Kirkegaard, Lars Rasmussen

Danske Bank A/S


Yet another source of euro weakness 

- EUR/USD has fallen by about 10% from its Christmas high as a result of, among other things, high risk aversion, a narrowing of the EUR/USD interest rate spread, and EMU member credit downgrades. Going forward we expect EUR/USD to fall further and see reserve balancing by the Russian central bank as an important additional source of euro weakness, as: 


  • The rouble is likely to come under renewed pressures in the coming days/weeks due to the current account deficit and capital outflows in the midst of negative rating actions and increased fears over external liabilities among Russian corporates. 

  • The Russian central bank (CBR) will try to hold the rouble within the trading band - i.e. at basket/RUB41, at least for a couple of weeks. Hence, further intervention is likely. 

  • Russian FX reserves have fallen rapidly over the past six months, from USD597bn in August 2008 to USD386bn as of the end of week 3. Our projections indicate that reserves could fall below USD370bn as of week five (corporate foreign currency debt is above USD500bn). 

  • About USD50bn of the drop in reserves can be explained by the lower euro and sterling against the US dollar. 

  • The remaining USD175bn has been sold to limit the depreciation of the rouble - that corresponds to USD7bn a week since August 2008. 

  • If the CBR has to intervene massively in the coming weeks - USD 5-10bn a week - then it will have to sell EUR/USD worth almost half the amount to balance its reserves. Hence the CBR is likely to sell EUR/USD worth up to USD5bn a week in the coming weeks.

Published on  Thu, Feb 5 2009, 11:35 GMT

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NZD: Another large interest rate cut expected from the RBNZ

Wed, Jan 28 2009, 11:13 GMT
by Kasper Kirkegaard

Danske Bank A/S


Consider selling AUD/NZD on a rally

- Tonight at 21:00 CET the Reserve Bank of New Zealand (RBNZ) is due to announce the outcome of the January meeting. We expect, in line with consensus, that the RBNZ will reduce the cash rate by 100bp to 4% (the lowest level since the RBNZ moved to the OCR regime in March 1999). However, the market is pricing an expected 125bp cut and risks are definitely for a large reduction with 100-150bp as the most likely outcomes.

- A larger than expected rate cut should see the NZD come under pressure - also against the AUD. That said, we believe that the current market pricing of the expected bottom in the cash rate (OCR below 3% by mid-2009) is justified by economic data. We therefore see little potential for the NZD to move much lower on further easing of monetary policy.

- We believe that there is potential for the NZD to weaken further on the still deepening global recession and the resulting weak short-term outlook for commodity prices. We currently look for NZD/USD to fall toward 0.50 during H1.

- While we have long argued for a rise in AUD/NZD, the recent jump above 1.26 could prove short-lived. With the RBA meeting less than a week away, we would consider selling AUD/NZD on a spike following tonight's meeting for a potential correction to 1.24.

Published on  Wed, Jan 28 2009, 11:13 GMT

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BoE, ECB and Riksbank rate cuts

Fri, Dec 5 2008, 10:28 GMT
by Kasper Kirkegaard

Danske Bank A/S


Global policy rates are coming down

At today's monetary policy meetings, the Bank of England (BoE) and the European Central Bank (ECB) have announced significant rate cuts: BoE by 100bp and ECB by 75bp. Also, the Swedish central bank, Riksbanken, took markets by surprise by cutting rates by an unprecedented 175bp.

Earlier this week, the Reserve Bank of Australia (RBA) lowered rates by 100bp and the Reserve Bank of New Zealand followed yesterday with a 150bp rate cut.

Below are our initial thoughts:

- Today's interest rate announcements have not made us change our general view on the G10 currencies. We expect EUR, SEK, and GBP to see sustained pressure in the short term - not least against USD, CHF, and JPY.

- Today's central bank action does, however, show a willingness from the world's central banks to address a very difficult economic outlook. This should, in combination with the numerous rescue packages, help lead a recovery in risk sentiment and eventually a recovery in SEK and GBP against EUR.

- Those currencies that are backed by a central bank that has been "behind the curve" in terms of easing monetary policy enough (e.g. SEK, EUR, NZD, and to some extent GBP) have generally weakened against currencies backed by more pre-emptive central banks (e.g. USD and AUD). We expect this pattern to continue (ceteris paribus) thereby weighing on EUR.

Published on  Fri, Dec 5 2008, 10:28 GMT

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PPM and EUR/SEK: Buy on "rumour" sell on fact

Thu, Nov 20 2008, 16:17 GMT
by Stefan Mellin

Danske Bank A/S


EUR/SEK: Buy on "rumour" sell on fact

- On 9 December this year's PPM money will be allocated to the savers' funds in the pension system. Total amount is SEK 27bn, in line with last year.

- The PPM payment has been part of the flows that tend to be blamed for the seasonal depreciation of the SEK around year end together with financial institutions' allocations flows and thin liquidity

- Part of the sum is placed in domestic assets, part in foreign dittos, partly currency hedged and partly not

- According to our estimates and assumptions the total SEK transaction (selling) will be ca SEK10bn

- Counter to what might be commonly anticipated we find that, on average, EUR/SEK rises prior to the PPM date, is roughly flat directly after and then falls. Three weeks (15 trading days) after PPM EUR/SEK is back at the same level as three weeks prior to the PPM date

- Hence, the historical pattern supports a strategy where you are long prior, not after, the PPM date

- We wrote last week ("EUR/SEK update, 13 Nov") that short-term (before year end) EUR/SEK is likely to move higher on weak macro data, risk aversion and forced flows due to rebalancing needs. Until market fear eases the SEK is likely to remain under pressure.

Published on  Thu, Nov 20 2008, 16:17 GMT

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USD: September TIC data

Tue, Nov 18 2008, 16:19 GMT
by Kasper Kirkegaard

Danske Bank A/S


China overtakes Japan as the largest holder

Clear signs of repatriation flows

- September TIC data confirm that the high level of uncertainty in September resulted in further strong investor preference for safer assets (e.g. US Treasuries), and that repatriation flows into the US were significant - which supported the dollar.

- Net foreign purchases of long-term securities amounted to USD 66.3bn in September. This was significantly higher than the revised USD 21bn inflow in August and much higher than the consensus expectation of USD 27.2bn.

- Net inflows are now back to healthier levels but remain largely driven by a significant selling of foreign securities by US residents - repatriation flows.

- Private foreign investors net bought USD 35.7bn worth of long-term US securities, while foreign official institutions net sold USD 4.8bn.

- Meanwhile, US residents net sold USD 35.4bn of long-term foreign securities, especially bonds. This is even higher than the August USD 22.7bn net sale and indicates that repatriation flows by US investors have been significant - and are likely to have been an important driver of the USD rally.

Published on  Tue, Nov 18 2008, 16:19 GMT

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EUR/SEK update

Thu, Nov 13 2008, 17:32 GMT
by Stefan Mellin

Danske Bank A/S


EUR/SEK still risk on the upside

- Fear, solid risk aversion and continued deleveraging keep weighing on the SEK while EUR/SEK remains extremely volatile with 1M implied above 16% and intraday highs/lows over the last month often exceeding 20 figs.

- Reflecting the uncertainty it's also notable that normal SEK drivers currently exhibit extreme correlations; 3M rolling correlations with equities, risk sentiment proxies, Baltic freight, yield spread, USD are all close to 0.9 where direction-wise all of them back the recent increase in EUR/SEK. Relative equities however has supported the downside but correlation here has not been as strong lately.

- Overall, a lot of bad news is already priced in current EUR/SEK levels as our short-term financial model (STFM), while higher in the last few days, indicates fair value at around 9.85.

- From a long-term perspective EURSEK is now one of the most overvalued currency pairs in the G10 universe, but the near-term outlook suggests that substantial misaligment will not be adjusted any time soon.

- Our 1M target (forecast) at 10.10 has been met and while we forecast a SEK rebound in 2009 (6M forecast at 9.60) a turn around is not likely before risk sentiment improves markedly, stock markets find some ground (still very challenging times) and not least volatility comes down. The short-term risk in EUR/SEK therefore appears biased to the upside. The potential shock from a meltdown (devaluation?) in the Baltic region is another burden for the SEK. EUR/SEK might be seen as a proxy trade for the Baltic currencies as these markets do not function properly.

- Domestically, macro data will continue to deteriorate over the coming months; risk for a negative third quarter GDP, further weakness in the labour market but also expect frontloaded rate cuts by the Riksbank; 50bp in December while market is pricing in almost 100bp.

- Last week's week close at 10.06 was the first ever above 10.00. A week close above 10.06 would confirm the uptrend and a test of 10.17 (21 Oct high, "neckline") would be underway. A close below 10.00 would be SEK supportive.

Published on  Thu, Nov 13 2008, 17:32 GMT

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Riksbank U−turn completed

Fri, Oct 24 2008, 13:54 GMT
by Stefan Mellin

Danske Bank A/S


A step in the right direction

  • The Riksbank (RB) cuts 50bp and indicates a further 50bp within the coming six months. We had expected 25bp but welcome warmly the bold decision to go for 50. In our view this is not panic but rather a prestige-less shift in assessment of the economy resulting in a more frontloaded monetary policy forecast. 

  •  The U-turn completed. After hiking 3 Sep the RB has now cut 100bp 1 ½ month later. The risk that RB will be left (un)safely behind the curve has diminished. 

  • Credibility: An unpredictable RB where the public has difficulties understanding its thinking, and thus policy actions, has added a risk premium on the SEK. RB is now taking a step in the right direction which is good for confidence and could reduce the risk premium. 

  • Initial reaction was knee jerk; lower yields on relative basis and weaker SEK. Over time though we think that it is a better medicine for the SEK with a proactive and credible policy than it being stubbornly tight. 

  • The economic outlook has deteriorated sharply recently. We forecast zero GDP growth 2009 and a substantial rise in unemployment. The RB is close to zero for GDP but still too optimistic on unemployment (6.9% 2009 vs DB 7.8% on avg). RB revises its inflation forecast sharply lower and now is very close to our until mid 2009, H2 our forecast is lower. 

  • Hence, we stick to the view that the RB cuts the repo rate to 3.25% by Q2 which is line with their own forecast. Thereafter we see an additional 50bp in H2 taking the repo rate down to 2.75%. Market pricing indicates 2.75% by mid 2009. This is too aggressive relative to our forecast .

  • A recession-like economy is likely to weigh further on the SEK. That said, EUR/SEK at current levels above 10.00 are not justified by fundamentals but reflect heightened risk aversion, rebalancing needs, NOK contagion (?) and poor liquidity - S/T fair value ca 9.70. Near term more of forced SEK selling could arise though as global stock markets still head lower.

Published on  Fri, Oct 24 2008, 13:54 GMT

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G10: Coordinated rate cuts

Wed, Oct 8 2008, 16:03 GMT
by Kasper Kirkegaard, John Hydeskov

Danske Bank A/S


  • - Today, the central banks of the US (Fed), the UK (BoE), Canada (BoC), the euro zone (ECB), Sweden (RB) and Switzerland (SNB) announced a coordinated 50bp rate cut. 

  • - Below are our initial thoughts: 

  • - The coordinated action is a strong signal that the central banks are now working together to fight the financial crisis and support the global economy. We expect further rate cuts from all participating central banks over the coming year as they work to fight the economic downturn. 

  • - Should the crisis continue we could see further coordinated action, as the global authorities are committed to fighting the crisis by all available means. 

  • - Reduces the risk of "Scenario 1": Prolonged financial crisis, global recession and no improvement on credit and money market (see FX Crossroads: Financial crisis - Three scenarios for global markets). 

  • - Reduces the probability of coordinated actions at the upcoming G7 meeting.

Published on  Wed, Oct 8 2008, 16:03 GMT

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Key week for the SEK

Mon, Oct 6 2008, 12:47 GMT
by Stefan Mellin

Danske Bank A/S


SEK gets another hit as market turmoil spreads to Europe

  • • Interbank risk premia remain elevated as credit markets are still under severe stress and European stock markets fall heavily amid rising concerns about European problems and lack of policy action over the weekend. 

  • • Swedish stock market is not faring well (down >5%!), not even on a relative basis, so it's not surprising to see the SEK trading weaker. 

  • • Measures announced by Swedish authorities this morning are welcome and should be seen as a response to global contagion and a means to restore confidence. But is it enough? 

  • • We are sure that investors will be occupied primarily with financial turmoil. Fundamentals should not be ignored though and for the SEK the week offers a few very interesting macro events with which we consider in this note and follow up with some conclusions about monetary policy - in fact the correlation with relative yields has risen recently.

Published on  Mon, Oct 6 2008, 12:47 GMT

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Sell AUD/USD spot

Tue, Sep 23 2008, 15:32 GMT
by Kasper Kirkegaard

Danske Bank A/S


AUD/USD heading south

  • •Relative to most of the anchors we consider when determining the near-term outlook for AUD/USD, we find that the AUD currently looks expensive. 

  • •The AUD has gained more than 7% against the USD after AUD/USD reached a low of 0.78 on 17 September, and is now trading above 0.84 on a rise in commodity prices.

  • •In our latest FX forecast update from 15 September we set our one-month AUD/USD forecast at 0.83, well above spot, looking for a short-term correction. We have now seen this correction, but given recent market developments, we believe that the recent rise in AUD/USD has been excessive. 

  • •Our short-term financial model, which uses the relative slope of the yield curve, stock markets, energy and a carry-to-risk measure as inputs, currently has a predicted value of 0.81. The current spot rate is close to 2 standard deviations away from the model estimate.

  • •Finally, we consider the global macro outlook as consistent with a continued decline in the AUD, particularly our expectations about a further slowing of the global economy, persistent high volatility and continued deleveraging.

  • •We recommend selling AUD/USD spot at 0.8417 with a target of 0.81 and a stop at 0.859.

Published on  Tue, Sep 23 2008, 15:32 GMT


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