DB FX Daily: Currency Markets Showing Little Concern over G7, Foreign Demand for NOK

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FX Daily: Currency Markets Showing Little Concern over G7, Foreign Demand for NOK Re-Emerges

Currency Markets Showing Little Concern over G7

The market expectation for any significant developments from the coming G7 Finance Ministers' meeting may already be fading away. Both 1W and 1M USD/JPY implied volatilities have moved lower this week due to a combination of a rebound in carry trades as well perhaps an eye to the recent history of G7 meetings. The table at left below tracks 1W USD/JPY volatility the Wednesday before the policy meeting and Monday following and reveals that only the April 2006 meeting which saw the more public discussion of "global imbalances" saw volatility move higher over the event. This recent history combined with news that the German Finance Minister was not likely to be present at the meeting and most participants downplaying the FX discussion has seen the market concern ebb. Though affected by the recent holiday weekend in many markets, the 1W realized volatility on USD/JPY spot has been lower as well as the pair has traded sideways while the USD declined against most other G10 currencies. Barring a significant surprise from the IMF meetings on the multilateral discussion of global imbalances, attention on currency policy issues which could potentially affect the FX market and USD/Asia may soon shift to the US-China strategic economic dialogue in May given the recent bilateral issues which have developed such as on the US trade policy front.

Foreign Demand for NOK Re-Emerges
The recent consolidation of EUR/NOK between 8.10 and 8.20 saw first a substantial drop in foreign purchases of NOK but now appears to have drawn foreign interest. The latest foreign exchange transaction data from the Norges Bank charted at right below reveals higher foreign demand for NOK over the past two weeks. Perhaps the perception of less positioning risk given the recent drop in foreign demand as well as the failure to break significantly above 8.20 drew NOK buyers back in. The above consensus CPI released after this latest dataset could potentially have added to NOK demand. We continue to target 7.90 in EUR/NOK as we look for a gradual appreciation limited by the substantial tightening already priced in the rates market, the bouts of positioning issues such as seen in February and potential interest rate sensitivity to the exchange rate if it were to appreciate rapidly.