Morning Report

23.07.2013

Potential for further krone strengthening

The krone has reversed some of the decline we saw in the aftermath of Norges Bank's monetary policy meeting in June. We expect that the krone will continue to strengthen going forward, albeit moderately.
NOK & 3m NIBOR
8.10 1.90 1.80 1.70 1.60 1.50 23-Jul
3m (rha)

7.90
7.70

7.50 25-Jun

09-Jul

EURNOK

After Norges Bank about a month ago signaled that there's a 50 percent probability of a rate cut later this year, the krone weakened considerably. Even today, after the krone has strengthened gradually throughout all of July, EURNOK is about 2 percent higher than it was before Norges Bank's June meeting. The central bank took the market by a surprise, and the krone weakened by almost 5 to 6 percent against the dollar and the euro. The magnitude of the krone weakening is rare, and last time the krone depreciated by the same amount over such a short time period was in May 2010. At that time, however, the krone weakened due to turmoil in the euro zone rather than Norges Bank surprising the markets. The two occasions share some similarities though : both occasions are good evidence of how volatile the krone can be, which by itself can limit demand for kroner. After the large movement in the krone we meant that at least some of the shift was due to an overreaction. Admittedly, lower interest rate expectations are likely to explain some of the movement. But other fundamentals are still rather good. Where the euro zone continues to find itself in a recession, the Norwegian economy is progressing forward in a quite healthy pace. There are, of course, clear signs of the economy slowing somewhat, albeit from a very high level. Consumer confidence has dropped recently, while businesses, for example in Norges Banks regional network, expect output growth in the next six months that corresponds to GDP growth of somewhat higher than 2 percent. By comparison, we expect mainland-GDP to expand by 2 percent this year. And even if unemployment is somewhat higher and employment growth has subsided compared to twelve months ago, there are few signs of a crisis in the Norwegian economy. In addition, we expect the oil price to remain above 100 dollar per barrel, which also is supporting for the krone. Admittedly, a growing uncertainty about emerging economies in general and China in particular, has raised some doubt about the performance of commodity oriented economies such as the Norwegian. That is not surprising since China alone has accounted for about half of the increase in oil demand over the last decade. This year it seems likely that growth in China will decline to 7.5 percent, down 0.2 percentage points from 2012. Despite this we remain fairly positive to China. The economy is changing, and production has become a bit more costly, which in turn makes it more challenging for Chinese enterprises to expand production as rapidly as before. The reason we see this as a positive development, is because the changes reduce the likelihood of a possible hard landing in the future. And despite the slowdown China is likely to continue to consume large volumes of commodities in the coming years. Around half of the population still lives in rural areas, and it is likely that parts of this group will move urban areas in the coming years, partly as a result of the large income disparities between urban and rural areas. This process will give rise to new megacities, which in addition to a continued development of existing megacities, is expected to contribute to strong activity growth for a number of years. In other words, China is facing a slowdown, but there is very little evidence that Chinas demand for commodities will decline dramatically in the coming years. As mentioned above the krone has strengthened gradually throughout July. Today EURNOK is traded at 7.84, which implies that the krone has appreciated by 0.2 percent against the euro since yesterday morning. Against the dollar the krone has strengthened by 0.5 percent. We expect the krone to continue to strengthen going forward, albeit moderately due to the high possibility of a rate cut by Norges Bank later this year. Within the next 1 to 3 months we expect EURNOK to be traded within the 7.70-7.80 range. We also see these levels as consistent with Norges Bank cutting the prime rate by 25 bp this autumn. However, we believe that a scenario where the krone depreciates towards the levels we saw right after Norges Banks June meeting may be one of the factors that can make Norges Bank call of any such rate cut. Yesterday the dollar weakened on weaker than expected housing sales in the US. Existing home sales dropped by 1.2 percent in June to 5.08 million units, while it was expected an increase to 5.25 million. The disappointing data had, however, little effect on equities, which rose marginally in the US yesterday. In Asia today stocks are up markedly, after Chinas Premier, Li Keqiang, reiterated that China will not allow growth to slow below 7 percent. ole.kjennerud@dnb.no Yesterdays key economic events (GMT) 12:30 USA Chicago Fed 14:00 USA Existing home sales Todays key economic events (GMT) 06:45 France INSEE business conf. 13:00 USA House prices (FHFA) 14:00 EMU Consumer conf.

Norw ay: 10y Gov't Bond

2.8 2.6 2.4 2.2 2.0 25-Jun
Rate

125

105
85 09-Jul

65 23-Jul
Diff (bp, rha)

Headquarter Dronning Eufemias gate 30 0191 Oslo Offices Abroad New York London Singapore Stockholm Sales Oslo (+47) Equity Fixed Income Regional Sales (+47) Bergen Bod Fredrikstad Hamar Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund Private Clients Research Regional Sales (+47) Eirik Larsen Research FX/IR (+47) ystein Drum Kjersti Haugland Ole Andr Kjennerud Knut A. Magnussen Camilla Viland Magne stnor Kyrre Aamdal Credit Research (+47) Ole Einar Stokstad Martin Brter Mikael L. Gjerding Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen Kristina Solbakken Magnus Vie Sundal

+47 03000

+ 1 212 681 2550 +44 207 283 0050 +65 6220 6144 +46 84 73 48 50

22 94 89 40 24 16 90 30

56 13 27 20 75 52 99 10 69 39 41 50 62 54 14 82 61 24 79 56 38 14 61 64 24 16 90 80 51 84 04 30 77 64 76 30 73 87 49 73 33 01 73 80 70 11 69 85 24 16 90 90

24 16 90 77

24 16 90 08 24 16 90 03 24 16 90 07 24 16 90 04 24 16 90 01 24 16 90 06 24 16 90 02

24 16 90 48 24 16 90 46 24 16 90 47 24 16 90 49 24 16 90 44 24 16 90 45 24 16 90 51 24 16 91 23

As of June Jun As of Jul May Jul

Unit Index Mn Unit Index m/m % Index

Prior -0.3 5.14 Prior 93.0 7.4 18.8

Poll 5.25 Poll 94 18.3

Actual -0.13 5.08 DNB

Morning Report
23.07.2013

3m LIBOR
0.150 0.145 0.140 0.135 0.130 25-Jun
EUR

09-Jul

0.28 0.28 0.27 0.27 0.26 0.26 23-Jul

USD (rha)

Oil price & NOK TWI

98 97 96 95 94 110

105
100

FX 0700 USD/JPY EUR/USD EUR/GBP EUR/DKK EUR/SEK EUR/CHF EUR/NOK USD/NOK JPY/NOK SEK/NOK DKK/NOK GBP/NOK CHF/NOK

Last 100.00 1.3154 0.8606 7.4571 8.5984 1.2365 7.8540 5.9736 5.98 91.45 105.35 9.131 6.359

Today 99.46 1.3200 0.8587 7.4589 8.5527 1.2349 7.8424 5.9420 5.98 91.78 105.20 9.136 6.354

Spot rates and forecasts In 1m Oct-13 Jan-14 Jul-14 FX 0700 -0.5 98 102 107 110 AUD 0.3 1.30 1.26 1.30 1.32 CAD -0.2 0.85 0.85 0.86 0.87 CHF 0.0 7.45 7.45 7.45 7.45 CZK -0.5 8.55 8.45 8.50 8.60 RUB -0.1 1.24 1.25 1.27 1.30 GBP -0.1 7.80 7.70 7.70 7.70 HKD -0.5 6.00 6.11 5.92 5.83 KWD 0.0 6.12 5.99 5.54 5.30 LTL 0.4 91.2 91.1 90.6 89.5 LVL -0.1 104.7 103.4 103.4 103.4 NZD 0.1 9.18 9.06 8.95 8.85 SEK -0.1 629.03 616.00 606.30 592.31 SGD

USD NOK 0.927 5.507 1.033 5.753 0.936 634.962 19.658 30.218 32.315 18.382 1.537 9.132 7.758 0.766 0.285 20.841 2.616 2.271 0.532 11.159 0.800 4.751 6.478 91.703 1.262 4.705

25-Jun

09-Jul

95 23-Jul
USD/b (rha)

NOK TWI

US dollar 6.4 6.2 6.0 5.8 5.6

25-Jun 09-Jul
USDNOK

1.33 1.31 1.29 1.27 1.25 23-Jul

EURUSD(rha)

NOK 1m 3m 6m 12m 3y 5y 7y 10y

Prior 1.61 1.70 1.77 1.93 2.10 2.52 2.88 3.21

Last 1.61 1.72 1.77 1.93 2.11 2.52 2.89 3.22

SEK 1m 3m 6m 12m 3y 5y 7y 10y

Prior 1.10 1.20 1.28 1.62 2.01 2.29 2.56

Interest rates Last USD 1.10 1m 1.20 3m 1.28 6m #N/A 12m 1.62 3y 2.01 5y 2.29 7y 2.56 10y

Prior 0.19 0.26 0.40 0.68 0.75 1.48 2.11 2.71

Last 0.19 0.26 0.40 0.68 0.74 1.47 2.08 2.67

EUR 1m 3m 6m 12m 3y 5y 7y 10y

Prior 0.07 0.14 0.25 0.45 0.64 1.04 1.42 1.85

Last 0.08 0.15 0.25 0.45 0.67 1.06 1.42 1.85 Last 99.82 1.52 -0.96 10y sw ap 1.75 1.75 2.00

102.0 100.0 98.0 96.0 94.0

Japanese yen

25-Jun
USDJ PY

09-Jul

7.0 6.5 6.0 5.5 5.0 23-Jul

Norw ay Prior NST475 95.20 10y yld 2.56 - US spread 0.09 3m nibor 1.55 1.55 1.55

Norw ay Oct-13 Jan-14 Jul-14

Governm ent bonds Last SEK Prior Last US Prior 95.13 10y 94.48 94.48 10y 93.75 2.57 10y yld 2.10 2.10 10y yld 2.47 0.09 - US spread -0.37 -0.38 30y yld 3.55 Interest rate forecasts 10y 10y Sw eden 3m libor USA 3m libor sw ap sw ap 3.00 3.00 3.25 Oct-13 Jan-14 Jul-14 1.25 1.25 1.25 2.25 2.25 2.50 Oct-13 Jan-14 Jul-14 0.30 0.35 0.35

Last Germany Prior 93.66 10y 99.78 2.48 10y yld 1.53 3.54 - US spread -0.94 10y sw ap 2.25 2.25 2.50 3m euribor 0.20 0.25 0.20

Germany Oct-13 Jan-14 Jul-14

JPYNOK(rha)

SEKNOK & CHFNOK

93 6.6

91
89

6.4
6.2

87 25-Jun
SEKNOK

09-Jul

6.0 23-Jul
CHFNOK (rha)

Equities 15700 15200 14700 14200 13700 25-Jun 09-Jul

Dow Jones

500 480 460 440 420 23-Jul

Os lo (rha)

NOK sov. NST21 NST22 NST23 NST471 NST472 NST475 NST475 NST475 NOK FRA SEP DEC MAR JUN

Miscellaneous Prior Last Change Maturity year rem. NOK-index TWI Prior 1.53 1.54 1 18.12.2013 0.41 Last 95.28 95.46 1.42 1.43 1 19.03.2014 0.65 Oil price: (Ldn,cl) 1m 1.52 1.52 0 18.06.2014 0.90 SPOT 109.41 108.28 1.44 1.44 0 15.05.2015 1.81 Gold price 22.07.2013 PM 1.70 1.70 -1 19.05.2017 3.82 AM: 1295.8 1327.0 2.56 2.55 -1 24.05.2023 9.84 Equities Today 0700 % last 2.56 2.55 -1 24.05.2023 9.84 Dow Jones 15545.55 0.0% 2.56 2.57 1 24.05.2023 9.84 Nasdaq C. 3600.39 0.4% 3 mnd 6 mnd NOK NIDR NIBOR FTSE100 6623.17 -0.1% 1.72 1.81 1m 1.75 1.61 Eurostoxx50 2725.40 0.3% 1.72 1.82 3m 1.82 1.72 DAX 8331.06 0.0% 1.73 1.85 6m 1.87 1.77 Nikkei 225 14744.81 0.6% 1.76 1.92 12m 2.00 1.93 OSEBX 496.29 0.0% Sources to all tables and graphics: Thomson Reuters, Thomson Datastream and DNB Markets

Morning Report
23.07.2013
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Morning Report
23.07.2013

3m LIBOR
0.150 0.145 0.140 0.135 0.130 25-Jun
EUR

09-Jul

0.28 0.28 0.27 0.27 0.26 0.26 23-Jul

USD (rha)

Oil price & NOK TWI

98 97 96 95 94 110

105
100

FX 0700 USD/JPY EUR/USD EUR/GBP EUR/DKK EUR/SEK EUR/CHF EUR/NOK USD/NOK JPY/NOK SEK/NOK DKK/NOK GBP/NOK CHF/NOK

Last 100.00 1.3154 0.8606 7.4571 8.5984 1.2365 7.8540 5.9736 5.98 91.45 105.35 9.131 6.359

Today 99.46 1.3200 0.8587 7.4589 8.5527 1.2349 7.8424 5.9420 5.98 91.78 105.20 9.136 6.354

Spot rates and forecasts In 1m Oct-13 Jan-14 Jul-14 FX 0700 -0.5 98 102 107 110 AUD 0.3 1.30 1.26 1.30 1.32 CAD -0.2 0.85 0.85 0.86 0.87 CHF 0.0 7.45 7.45 7.45 7.45 CZK -0.5 8.55 8.45 8.50 8.60 RUB -0.1 1.24 1.25 1.27 1.30 GBP -0.1 7.80 7.70 7.70 7.70 HKD -0.5 6.00 6.11 5.92 5.83 KWD 0.0 6.12 5.99 5.54 5.30 LTL 0.4 91.2 91.1 90.6 89.5 LVL -0.1 104.7 103.4 103.4 103.4 NZD 0.1 9.18 9.06 8.95 8.85 SEK -0.1 629.03 616.00 606.30 592.31 SGD

USD NOK 0.927 5.507 1.033 5.753 0.936 634.962 19.658 30.218 32.315 18.382 1.537 9.132 7.758 0.766 0.285 20.841 2.616 2.271 0.532 11.159 0.800 4.751 6.478 91.703 1.262 4.705

25-Jun

09-Jul

95 23-Jul
USD/b (rha)

NOK TWI

US dollar 6.4 6.2 6.0 5.8 5.6

25-Jun 09-Jul
USDNOK

1.33 1.31 1.29 1.27 1.25 23-Jul

EURUSD(rha)

NOK 1m 3m 6m 12m 3y 5y 7y 10y

Prior 1.61 1.70 1.77 1.93 2.10 2.52 2.88 3.21

Last 1.61 1.72 1.77 1.93 2.11 2.52 2.89 3.22

SEK 1m 3m 6m 12m 3y 5y 7y 10y

Prior 1.10 1.20 1.28 1.62 2.01 2.29 2.56

Interest rates Last USD 1.10 1m 1.20 3m 1.28 6m #N/A 12m 1.62 3y 2.01 5y 2.29 7y 2.56 10y

Prior 0.19 0.26 0.40 0.68 0.75 1.48 2.11 2.71

Last 0.19 0.26 0.40 0.68 0.74 1.47 2.08 2.67

EUR 1m 3m 6m 12m 3y 5y 7y 10y

Prior 0.07 0.14 0.25 0.45 0.64 1.04 1.42 1.85

Last 0.08 0.15 0.25 0.45 0.67 1.06 1.42 1.85 Last 99.82 1.52 -0.96 10y sw ap 1.75 1.75 2.00

102.0 100.0 98.0 96.0 94.0

Japanese yen

25-Jun
USDJ PY

09-Jul

7.0 6.5 6.0 5.5 5.0 23-Jul

Norw ay Prior NST475 95.20 10y yld 2.56 - US spread 0.09 3m nibor 1.55 1.55 1.55

Norw ay Oct-13 Jan-14 Jul-14

Governm ent bonds Last SEK Prior Last US Prior 95.13 10y 94.48 94.48 10y 93.75 2.57 10y yld 2.10 2.10 10y yld 2.47 0.09 - US spread -0.37 -0.38 30y yld 3.55 Interest rate forecasts 10y 10y Sw eden 3m libor USA 3m libor sw ap sw ap 3.00 3.00 3.25 Oct-13 Jan-14 Jul-14 1.25 1.25 1.25 2.25 2.25 2.50 Oct-13 Jan-14 Jul-14 0.30 0.35 0.35

Last Germany Prior 93.66 10y 99.78 2.48 10y yld 1.53 3.54 - US spread -0.94 10y sw ap 2.25 2.25 2.50 3m euribor 0.20 0.25 0.20

Germany Oct-13 Jan-14 Jul-14

JPYNOK(rha)

SEKNOK & CHFNOK

93 6.6

91
89

6.4
6.2

87 25-Jun
SEKNOK

09-Jul

6.0 23-Jul
CHFNOK (rha)

Equities 15700 15200 14700 14200 13700 25-Jun 09-Jul

Dow Jones

500 480 460 440 420 23-Jul

Os lo (rha)

NOK sov. NST21 NST22 NST23 NST471 NST472 NST475 NST475 NST475 NOK FRA SEP DEC MAR JUN

Miscellaneous Prior Last Change Maturity year rem. NOK-index TWI Prior 1.53 1.54 1 18.12.2013 0.41 Last 95.28 95.46 1.42 1.43 1 19.03.2014 0.65 Oil price: (Ldn,cl) 1m 1.52 1.52 0 18.06.2014 0.90 SPOT 109.41 108.28 1.44 1.44 0 15.05.2015 1.81 Gold price 22.07.2013 PM 1.70 1.70 -1 19.05.2017 3.82 AM: 1295.8 1327.0 2.56 2.55 -1 24.05.2023 9.84 Equities Today 0700 % last 2.56 2.55 -1 24.05.2023 9.84 Dow Jones 15545.55 0.0% 2.56 2.57 1 24.05.2023 9.84 Nasdaq C. 3600.39 0.4% 3 mnd 6 mnd NOK NIDR NIBOR FTSE100 6623.17 -0.1% 1.72 1.81 1m 1.75 1.61 Eurostoxx50 2725.40 0.3% 1.72 1.82 3m 1.82 1.72 DAX 8331.06 0.0% 1.73 1.85 6m 1.87 1.77 Nikkei 225 14744.81 0.6% 1.76 1.92 12m 2.00 1.93 OSEBX 496.29 0.0% Sources to all tables and graphics: Thomson Reuters, Thomson Datastream and DNB Markets