Danske Daily

Today's Key Points

• There has been no major impact on FX markets from the G7 statement. With no explicit mention of JPY, intervention is probably ruled out. For a change China was praised in the statement.
• GDP in Japan contract sharply by 12.7% q/q in Q4, confirming that the quarter was indeed miser-able for the global economy
• Today is likely to be a quiet day: there are no important data releases and US markets are closed for Presidents' Day. The main event will be ECB chairman Trichet's speech at 15:45.

Markets Overnight

There were no major surprises in the statement from the G7 meeting in Rome this weekend. Unlike the state-ment from October last year, the G7 statement from Rome did not explicitly express concern about the JPY appreciation. This probably rules out intervention and JPY has weakened slightly to 91.7 against USD. For a change China was praised in the final statement, underlining that the US administration currently does not want to push the currency issue aggressively against China (please see Global Daily). Otherwise the main trend on the FX markets has been weaker EUR with EUR this morning trading at 1.2752 against USD and 117.0 against JPY.

Sentiment on the US stock market remained slightly negative on Friday despite the final House and Senate approval of the USD787bn stimulus package. Confidence in financials took another hit after Lloyds Banking Group in the UK reported a worse-than-expected loss in the newly acquired HBOS and US regulators an-nounced they had closed another four minor regional banks. S&P 500 closed down 1.0% dragged down by a 4.2% plunge in financials.

The Japanese economy in Q4 08 contracted sharply by 12.7 q/q AR, confirming that Q4 was miserable growth-wise for the global economy. This was in line with expectations and the market impact has been limited. Nikkei this morning is only slightly down by 0.2%. However, the overall sentiment on Asian stock markets is negative this morning with Hong Kong's Hang Seng down 1.7% this morning.

Despite the weaker stock market US bond yields edged higher and the yield curve continued to steepen as the market digested increased supply from funding auctions last week. This morning 2Y and 10Y US bond yields are up by 2bp and 4bp respectively since European markets closed on Friday.

Global Daily

Risk markets had a rough week as investors showed significant disappointment in the lack of specifics in US Treasury Secretary Geithner's announcement of the new Financial Stability Plan. This provided support for government bonds through most of the week - in the US mostly in 10-year Treasuries, while in Euroland, softer rhetoric from the ECB supported shorter-term bonds as well.
Short term we see room for further decline in two-year rates in Euroland and hence a further steepening of the yield curve as we expect the ECB to cut rates to 1% by the summer. In the US, the Fed will not abandon the ZIRP any time soon, and the US yield curve will be shaped by movements in 10-year yields. In the coming months, we expect 10-year yields to range trade, though with large fluctuations as markets remain twisted between signs of stabilisation in activity indicators, gloomy real economic data, possible intervention from global authorities and a massive supply of government bonds.

Today is likely to be a quiet day; there are no important data releases and US markets are closed to observe Presidents' Day. However, ECB chairman Trichet's speech at 15:45 CET could attract some attention. Juergen Stark, a member of the ECB executive board, is quoted in the FT today stating that 'aggressive interest rate reductions will increase uncertainty' and that the ECB will keep its policy of gradualism and this afternoon's speech by Trichet could clarify that view. We expect the ECB to cut rates by 50bp in March followed by 25bp in April and June.

As expected the G7 meeting in Rome at the weekend focused on the financial crisis and the growing tensions among the G7 countries regarding increasing signs of protectionism measures. The G7 communiqué said it 'remains committed to avoiding protectionist measures, which risks exacerbating the downturn'. The G7 countries softened the language regarding China, saying they welcomed the country's bid to invigorate its economy. Also US Secretary Geithner sounded more welcoming towards China compared with a month ago when he accused China of manipulating its currency. But still the group repeated its traditional messages that 'excess volatility' and 'disorderly movements' in exchange rates must be avoided.

The communiqué did not contain any references to any G7 currencies. Hence, the speculation in the market that the G7 would try to tackle the weak GBP turned out to be unfounded. Overall we expect a muted reaction today. However, with regard to EUR/GBP, we do expect it to trade marginally higher after the sensationally soft Inflation Report from the Bank of England last week. Otherwise we do not expect any major movements today with the US market closed.

On Friday we published new FX forecasts. In general we expect EUR/USD to trade lower over the next couple of months, notably due to broad-based euro weakness. We also look for further SEK and GBP weakness based on the aggressive monetary policy responses from the Riksbank and the Bank of England. We also expect the recent strengthening of the NOK to continue the next three to six months

Scandi Daily

In Norway short rates jumped on Friday after the annual address on Thursday night. The address did not con-tain any references to a more aggressive monetary policy in Norway than earlier envisaged. In that respect, the address was in line with our forecast, which expects the Norwegian policy rate to only drop marginally below 2%. This week focus will be on mainland GDP numbers on Thursday. They are expected to drop 0.6% q/q and show that Norway is also feeling the headwind from the global economy. However, they should also under-line that the Norwegian downturn is likely to be less severe compared with many other countries. We continue to look for a lower EUR/NOK this week.

In Sweden the market will focus on the CPI numbers (also due on Thursday). They are expected to show a muted price pressure despite the weak SEK. EUR/SEK will very much be in the hands of risk appetite, but in general we expect the upside pressure on EUR/SEK to continue.

Danske Bank
http://www.danskebank.com/danskeresearch

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