DB FX Daily : Norges Bank and EUR/NOK, USD/CAD

[RTFX-Trading]

[B]DB FX Daily : Norges Bank and EUR/NOK, USD/CAD[/B]

FX Daily: London
Norges Bank and EUR/NOK, USD/CAD
Today's Key Data and Events
GBP UK Bank of England minutes, 9-0 rates unchanged vote expected (08:30 GMT)
NOK Norges Bank rates announcement, hike to 4.75% expected (12:00 GMT)
USD Core CPI for July, 0.2% mom expected (12:30 GMT)
USD TICS data for June, $62.8bn expected (13:00 GMT)
USD IP and IP and CAPU for July, 0.3% mom and 81.7% expected (13:15 GMT)
USD NAHB housing market index for August, 23 expected (17:00 GMT)

Upcoming Event Risks
Aug 23: BoJ rate decision
Aug 31: Jackson Hole Symposium
Sept 5: BoC rate decision
Sept 6: ECB rate decision

No end in sight
Risk aversion remained the dominant theme on Tuesday, even though liquidity issues in money markets appeared to be moderating. The S&P 500 ended 1.8% lower, while by the New York close a G 10 carry basket was down around 5.6% per cent from its late July peak. The current carry drawdown has now stretched further beyond our 5% `line in the sand' and with fall out from sub prime and a more broadly based credit crunch expanding (USD/CAD taking most of the headlines on Tuesday) markets appear likely to remain volatile over the near term, with carry trades also likely to continue to struggle.

Norges Bank and EUR/NOK
The consensus opinion appears clear - despite the turmoil in markets all 21 of the economists surveyed by Bloomberg are looking for a 25 basis point rate hike by Norges Bank today (as is DB). Likewise markets remain priced for a hike - indeed 2 year swap rates in Norway have been relatively stable over the past week or so and at the time of writing were trading around the middle of the 5.70-5.80% range seen since mid June. That said, we think that the risk/reward into today's Norges Bank announcement likely favors trading from the other side (i.e. long EUR/NOK) as there must be a very reasonable prospect that Norges Bank sits this meeting out to buy time to assess developments in global markets. We are tempered a little in this trading view by the tendency of recent Norges Bank announcements to either see a modest rally in EUR/NOK (the most common response) or a sharper sell off as the central bank surprises on the hawkish side (see our first chart below). With Tropical Storm Dean having formed in the Atlantic we would also not be inclined to hold long EUR/NOK positions for too long.

Adam Boyton
Strategist
(+1) 212 250-8646
[email]adam.boyton@db.com[/email]