DB FX Daily Today's Key Data and Events

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FX Daily

Today's Key Data and Events

SEK Retail Sales for May, 1.0% m/m sa market expectation (07.30 GMT)
NOK Unemployment for June, 1.8% market expectation (08.00 GMT)
EUR Eurozone M3 for May, 10.4% y/y market expectation (08.00 GMT)
GBP BoE's King testifies to Treasury Committee (08.45 GMT)
USD FOMC rate decision, no change expected (07.15 GMT)

Upcoming Event Risks

June 28: FOMC rate decision
July 2: Tankan survey for Q2

Another Scandinavian Surprise
Norges Bank surprised markets yesterday by revising its interest rate projections higher. Relative to its February inflation report, the bank now forecasts a peak in rates of 5.75% by mid-2008, compared to 5.25% previously. The initial market reaction has seen 2-year swap yields rise by more than 10bps, with Eur-Nor interest rate differentials now pointing to a EUR/NOK fair value around 8.00. Does a hawkish Norges Bank presage a renewed sharp rally in NOK?

We think not, for two reasons. First, the short EUR/NOK trade remains one of the most well-publicized consensus views in the G10 world, and as such is still vulnerable to short squeezes. Norges Bank flow data updated to 24th June shows a sharp rise in NOK buying by foreigners over the last week, pointing to a renewed building of long positioning in the currency. Second, the central bank appears to be growing increasingly sensitive to the level of the exchange rate, and as such would in our opinion be prone to moderate its hawkishness should NOK appear to run away. With the next central bank meeting almost two months away, we in any case see little prospect for monetary policy to generate surprises over the summer months, sticking instead to our view of gradual NOK appreciation, and looking to fade any squeezes higher in EUR/NOK should they materialize.

Which Central Banks Are Sensitive to Exchange Rate Moves?
Over the course of 2007, currencies have continued to move away from what many policy makers perceive as `fair value'. The second chart at right looks at the size of G10 economies' trade balance relative to GDP as a measure of their sensitivity to exchange rate movements through the impact on trade growth and import inflation. Switzerland stands out as the most open economy, perhaps giving justification to the recent step-up in rhetoric by the SNB, with the US, Japan and Europe figuring prominently at the bottom of the list.