Morning Report

22.11.2012

Weakening of yen continued yesterday

NOK & 3m NIBOR
7.50 2.00

The yen weakened on a broad basis for its sixth consecutive day, while we have adjusted our FX forecasts.
1.90 1.80 1.70

7.40 7.30 7.20

12Oct
3m ra.

01Nov

21Nov
EURNOK

As discussed in this report on Tuesday, the Japanese economy has deteriorated significantly this fall. Developments in the second half of 2012 has been weaker than we had expected beforehand, partly due to a deterioration of international factors, such as weaker than anticipated growth in the euro zone, and due to rising tensions between Japan and China, Japans largest trading partner. But the slowdown in Japan also stems from a faster than expected reversal of the effects from the temporary subsidies that were introduced after the triple catastrophe in 2011, such as the temporary vehicle subsidy which now has run out. In sum, this has led to a slowdown on several areas. Among those is a fall in underlying annualized growth in core machinery orders of 4.4 percent, while the corresponding figure for manufacturing orders is down 12 percent. Meanwhile, political tensions have increased, and Prime Minister Noda has called for new elections after severe pressure from the opposition. In response to this, markets have started selling yen on a broad basis. This is primarily because Shinzo Abe, the leader of the main opposition party, the LDP, has requested more fire power from the Bank of Japan. Abe wants BoJ to buy unlimited JGBs, in addition to raising the inflation target from 1 to 2 percent. But one thing is to raise the target another thing is that the central bank should maintain its credibility, which might be more difficult if the target is out of reach. Just to put things into perspective: Inflation in Japan has not been close to 2 percent since 1993. For most of the years since then Japan has struggled with deflation. The reason behind this is of course complex, but in an article Nishizaki et al. (2012) shows that prices in Japan have declined primarily due to structural factors, which has affected inflation through lower inflation expectations and a permanent negative output gap. The latter has for example been pulled down by the combination of an ageing population and a rigid supply side. The common denominator of this type of factors, i.e. that lack of inflation stems from structural matters, is that a more expansionary monetary policy, for example by money printing-en-masse, will not influence actual inflation by very much. In light of the above developments, we have revised our forecast for USDJPY. Uncertainty about monetary policy over the next few weeks is expected to produce relatively high volatility, while the level will probably fluctuate around the current levels. In the longer term, we expect that the uncertainty about the Bank of Japan will reduce, which will contribute to a slightly stronger yen against the dollar. We have also revised down our forecasts for USDCNY, but we still expect a moderate depreciation of the yuan against the dollar. This follows from our view on the Chinese economy, were our estimate for 2013 implies growth to moderate a bit. Slower growth in China next year stems from both cyclical and structural factors. The cyclical part will probably not deteriorate - but reflects international turmoil which mitigates growth in Chinese exports. The structural part is complex, but reflects our view that investment growth will slow due to a desire for a more balanced economy. To cushion the negative impulses caused by these factors, we believe the Chinese government will keep the yuan relatively stable against the dollar over the next 12 months, but at a slightly higher level for USDCNY than we have today. This morning Markit published data that shows that the cyclical factors have started to improve somewhat in China. HSBC Manufacturing PMI climbed above 50 for the first time since October last year. Normally levels above 50 indicate expansion, but for Chinas part it is likely to indicate an expansion of growth, whereas levels below 50 indicate deterioration of growth. The improvement from October to November is partly a result of a jump in the output sub-index, which also passed the 50 threshold. Despite the improvement, we are still cautious to interpret this as a renewed strength of the Chinese economy. There are still plenty of sources for why growth will remain tepid, e.g. export growth to the US and Europe has failed to improve despite overall export growth has been lifted recently. Yesterdays market movements were somewhat mixed. European equities were mostly flat while stock markets in the US increased moderately, with the Dow up 0.4 percent. In Asia this morning, however, most bourses have opened up on the positive data from China. In the currency market, the yen continued to weaken, and EURJPY is up almost 1.5 percent, while USDJPY is up 0.6 percent. The euro has also weakened against the dollar and the EURUSD is up 0.7 percent to 1.28 this morning. ole.kjennerud@dnb.no

SEK & 3m STIBOR

8.7

8.6 8.5 8.4 12-Oct

01Nov 21Nov

1.55 1.50 1.45 1.40 1.35

EURSEK

3m ra.

Headquarters 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

+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 62 96 80 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

Yesterdays key economic events (GMT) 09:00 Norway LFS unemployment 10:30 UK Minutes from MPC meeting 14:55 USA Michigan consumer conf. Todays key economic events (GMT) 01:45 China HSBC-PMI (flash) 09:00 EMU Manuf. PMI (flash)

As of Sep Nov As of Nov Nov

Unit % Index Unit Index Index

Prior 3.1

Poll 3.1

Actual 3.0 82.7 DNB 50.4

84.9 84.5 Prior Poll 49.5 45.4 45.5

Morning Report
22.11.2012

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 1.00 0.50 0.00 12-Oct
01-Nov

94 92 90 21-Nov
$/b

NOK TWI ra.

EUR vs GBP & CHF 1.22 1.21 1.21 1.20 12Oct

GBP r.a

0.82 0.81 0.80 0.79 0.78 01Nov 21Nov

CHF

FX USDJPY EURUSD EURGBP EURCHF EURNOK EURSEK EURDKK USDNOK JPYNOK SEKNOK GBPNOK USDSEK JPYSEK NOKSEK GBPSEK

Prior 82.55 1.283 0.804 1.205 7.355 8.677 7.458 5.715 6.925 0.851 9.114 6.726 8.151 1.181 10.772

Last 82.48 1.285 0.805 1.205 7.337 8.629 7.457 5.712 6.925 0.851 9.118 6.720 8.146 1.177 10.725

% -0.1% 0.1% 0.1% 0.0% -0.3% -0.6% 0.0% -0.1% 0.0% 0.0% 0.0% -0.1% -0.1% -0.3% -0.4%

In 1 m ...3 m 82 80 1.27 1.20 0.80 0.78 1.20 1.20 7.30 7.25 8.60 8.55 7.45 7.45 5.75 6.04 7.01 7.55 0.85 0.85 9.1 9.1 6.77 7.13 5.55 5.70 1.18 1.18 10.75 10.76

...6 m ...12 m 78 80 1.20 1.25 0.78 0.80 1.20 1.20 7.25 7.40 8.50 8.60 7.45 7.45 6.04 5.92 7.75 7.40 0.85 0.86 9.1 9.1 7.08 6.88 5.53 5.50 1.17 1.16 10.70 10.60

FX AUD CAD CHF CZK DKK GBP HKD ISK KWD LTL LVL NZD PLN SGD RUB

USD 1.0389 0.9961 0.9380 19.85 5.8063 1.5959 7.7510 126.67 0.2826 2.6882 0.5427 0.8159 3.2070 1.2250 31.1644

% 0.17% -0.05% -0.10% -0.08% -0.14% 0.03% 0.00% -0.17% 0.06% -0.16% -0.09% 0.11% -0.09% 0.00% -0.08%

EURSEK & OMXS

8.7 8.6 8.5 8.4 12-Oct 520 500 480 460 21-Nov
EURSEK

01-Nov

OMXS ra.

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

NIBOR Prior 1.81 1.97 2.13 2.27 2.30 2.58 2.88 3.23

SWAP AND MONEYMARKET RATES STIBOR EURIBOR Last Prior Last Prior 1.80 1.40 1.40 0.06 1.95 1.44 1.44 0.13 2.12 1.53 1.53 0.25 2.26 1.62 1.62 0.37 2.30 1.40 1.40 0.56 2.60 1.62 1.62 0.92 2.89 1.86 1.86 1.31 3.23 2.10 2.10 1.75

Last 0.06 0.13 0.25 0.37 0.57 0.92 1.31 1.75

USD LIBOR Prior 0.21 0.31 0.53 0.70 0.48 0.80 1.27 1.72

Last 0.21 0.31 0.53 0.70 0.49 0.82 1.23 1.72

Gov. Bonds, 10y 1.80 1.60 1.40 1.20 12Oct 01Nov 21Nov
SEK NOK, ra.

2.40 2.20 2.00 1.80

10y 10y yield vs bund

85 80 75

NORWAY Prior Last 98.28 97.95 2.18 0.76 2.22 0.79

GOVERNMENT BONDS SWEDEN GERMANY Prior Last Prior Last 117.32 117.32 100.581 100.66 1.53 0.11 1.53 0.10 1.42 1.43

US Prior 99.5 1.68 0.26

Last 99.50 1.69 0.26

JPY and Dow Jones 14.0 13.0 12.0 12-Oct

01Nov 21Nov

USDJPY ra. DowJones, 1000

USD and gold 1800 1750 1700 1650 1600 12Oct 01Nov 21Nov
Gold

1.35 1.30 1.25 1.20

EURUSD ra.

INTEREST RATE FORECASTS NORWAY SWEDEN GERMANY US 3m nibor 10y sw ap 3m stibor 10y sw ap 3m euribor 10y sw ap 3m libor 10y In 3m 1.90 3.25 1.30 2.25 0.35 1.75 0.45 Not 6m 1.90 3.25 1.30 2.25 0.25 1.75 0.45 updated 12m 2.15 3.50 1.30 2.50 0.25 2.00 0.45 MISCELLANEOUS FRA NOK 3m Prior chg TWI Today % Stock ex. Today DEC 1.96 1.96 0.00 NOK 91.74 0.04 Dow Jones 12,836.9 MAR 1.91 1.91 0.00 SEK 114.75 - 0.06 Nasdaq 2,926.6 JUN 1.92 1.92 0.00 EUR 101.70 - 0.07 S&P 500 1,391.0 SEP 1.92 1.92 0.00 USD 80.84 0.08 Eurostoxx50 2,519.7 FRA SEK 3m Prior chg GBP 83.70 Dax 7,184.7 DEC 1.43 1.43 0.00 Comm. Today Last Nikkei225 9,366.8 MAR 1.29 1.28 0.01 Brent spot 111.9 Invalid field(s). Oslo 439.27 JUN 1.23 1.23 0.00 Brent 1m 110.8 110.9 Stockholm 499.45 SEP 1.23 1.23 0.00 Spot gold 0.0 1724.0 Copenhagen 631.16 Sources to all tables and graphics: Reuters and DNB Markets

sw ap 1.75 1.75 2.25

% 0.4% 0.3% 0.2% 0.4% 0.2% 0.0% -0.1% 0.0% 0.2%

Morning Report
22.11.2012
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