EUR/DKK after the recent decline below 7.45

Market movers today

• Focus will be on the US ISM report. Last month’s report came out very strong, reaching a three-year high level of 57.1. Comments were decent, although a weak European market and the geopolitical tension present some risk. On the other hand, a very high order-inventory balance suggests that the ISM index could maintain its high level. Overall, we expect the ISM to adjust slightly downward to 56.7, which is still a very high level.

• Danmarks Nationalbank (DN) is set to publish August currency reserve figures, which will be particularly interesting given the recent decline in EUR/DKK below 7.45 - a level where we expect DN to start to react in order to curb krone appreciation. For more on Scandi markets see page 2.

• Otherwise we have a thin calendar and markets could be in a wait-and-see mode ahead of the ECB meeting on Thursday and the US labour market report on Friday.

Selected market news

It has been a quiet session overnight with the US markets closed due to Labor Day. In Asia risk sentiment has improved and most regional stock indices trade in positive territory supported by an unexpected big increase in Japanese wages. Average monthly earnings increased 2.6% from a year earlier - the most since 1997 and much more than the consensus estimate of 0.9% y/y.

On the geopolitical stage, the situation in Ukraine seems to have escalated further as rebels are succeeding to advance in eastern Ukraine. Yesterday, Ukraine’s army abandoned its defence of Lugansk airport against what it said was a Russian tank battalion in the east of the country and Ukraine’s government also seems to have conducted a change in its communication, shifting focus away from an offensive against rebels and now signalling that the situation is de facto war with Moscow. According to an article on FT.com, Ukraine’s president, Petro Poroshenko, yesterday accused Moscow of conducting ‘direct and undisguised aggression’ against the country. With more signs of Russian direct intervention, there is an increasing risk of another round of sanctions. Last night German Chancellor Angela Merkel said the EU will press ahead with tougher sanctions against Russia, if evidence mounts that Russia is behind ‘attacks’ on Ukraine.

As widely expected, the Reserve Bank of Australia announced this morning that it kept its overnight cash rate target unchanged at 2.5%. The AUD declined nearly 0.5% against the USD during the overnight session ahead of the interest rate meeting and it has remained low after the announcement.

In FX Edge, published this morning, we focus on EUR/DKK after the recent decline below 7.45. We have revised our EUR/DKK forecast and now expect DN to cut the rate on certificates of deposits unilaterally by 10bp in three months’ time to minus 0.05% in order to curb DKK appreciation and expect it to stay on hold thereafter.