Market Guide - August 2017 - Microsoft · 2017. 8. 24. · 3 | 24 August 2017 Market Guide Interest rate hedging We continue to recommend being overweight liability duration on the

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Market GuideConsolidation after significant central bank announcements over the summer

• ECB announcement drawing closer.

• North Korea tensions stirring market volatility.

• Risks to US and eurozone yields increasingly skewed on the upside.

• Fundamental USD weakening has started.

Investment Research

24 August 2017

Editor-in-Chief, Thomas Harr, + 45 45 13 67 31, [email protected]

I m p o r ta n t d i s c l o s u r e s a n d c e r t i f i c a t i o n s a r e co n ta i n e d f r o m p a g e 1 5 of th i s r e p o r t

2 | 24 August 2017 www.danskeresearch.com

Market Guide

Market overview

ECB announcement drawing closer

In the eurozone, all eyes will be on the ECB and the possible extension of the QE programme

into 2018. Eurozone data has surprised on the upside over the summer, unemployment is

falling and core inflation has been higher than expected. However, the stronger euro should

help keep inflation low for a prolonged period of time – a concern that the ECB has also

voiced. Hence, we still argue that the ECB will ‘be forced’ to continue its ECB purchases in

H1 18 – albeit at a reduced pace of EUR40bn a month. We expect a QE announcement at the

October ECB meeting. A continuation of the purchases should keep EUR rates in check this

year but, as we move into 2018, we expect the market to price in an ECB tapering premium.

However, the risk to interest rates is once again asymmetric. The ECB might put more

weight on the better economic data and argue that an extension of the QE programme is

unnecessary. The ‘lack’ of eligible bonds might also force the ECB to end its QE

programme earlier than we expect. If ECB does not extend the QE programme or scales it

back quickly in 2018, it would tend to steepen the yield curve.

Turbulent summer in the White House

Political uncertainty in the US has increased significantly over the summer: Donald

Trump’s administration’s plans for healthcare reform collapsed and exposed a near-

paralysed administration in terms of domestic policy. Numerous key White House staff

have also been replaced: Trump has appointed retired general John Kelly as his new chief

of staff, while Trump’s chief strategist Stephen Bannon recently resigned. Bannon, who

many credit with helping Trump win the presidential election, was a controversial figure at

the White House and many moderate Republicans have long been demanding his departure.

We expect attention to focus on whether Kelly can bring some order to the White House,

while speculation is growing that the Trump administration may strive to form a majority

for tax reform, plus the financial markets will be keen to see how Trump handles the debt

ceiling. Expectations of fiscal easing in the US look very low, in our view, so obtaining the

necessary support for tax cuts would undoubtedly be a positive surprise for the financial

markets and thus positive for equities and the US dollar.

North Korea tensions creating market volatility

The financial markets see the probability of a military conflict between the US and North

Korea as low but believe it would have a very great impact if it happened. Hence, pricing

such an eventuality is difficult for the markets. Our main scenario does not see the North

Korean situation deteriorating into military conflict but how the situation will develop is

uncertain and newsflow is likely to heavily influence sentiment. In our risk scenario where

current tensions escalate rapidly, investors would be hit by risk aversion – in other words,

a marked increase in risk premiums across asset classes, sharp declines in US and German

government bond yields, a significantly stronger JPY and CHF plus plummeting equity

prices, particularly in Europe, which is more closely linked to the global economy.

Weaker US dollar supporting oil prices

Oil prices have experienced something of a tailwind over the summer from a weaker US

dollar. In addition, US oil producers have stopped increasing the number of drilling rigs –

a reaction to the dip in oil prices in the spring. US oil inventories have declined to 2016

levels in seasonally adjusted terms. Finally, oil production in Libya has risen to above 1

million barrels a day – its highest level since 2013.

Contents

Market overview

Interest rate hedging

USD

GBP

JPY

SEK

NOK

Other majors

EMEA

Other emerging markets

currencies

FX forecasts

Read more in Danske Bank’s

recent forecasts and

publications

The Big Picture

Nordic Outlook

Yield Outlook

FX Forecast Update

Weekly Focus

Danske Daily

http://danskeresearch.danskebank.com/abo/TheBigPicture301116/$file/The_Big_Picture_301116.pdf

http://danskeresearch.danskebank.com/abo/NordicOutlook/$file/NordicOutlook.pdf

http://danskeresearch.danskebank.com/abo/YieldForecastUpdate/$file/YieldForecastUpdate.pdf

http://danskeresearch.danskebank.com/abo/FXForecastUpdate/$file/FXForecastUpdate.pdf

http://danskeresearch.danskebank.com/abo/WeeklyFocus/$file/WeeklyFocus.pdf

http://danskeresearch.danskebank.com/abo/DanskeDaily/$file/DanskeDaily.pdf


Market Guide

Interest rate hedging

We continue to recommend being overweight liability duration on the EUR curve,

while also continuing to see most value at the long end of the yield curve.

Our forecast of EUR money-market rates is slightly below the forward curve, so

one could consider hedging interest rate exposure via forward-starting swaps.

However, as we expect EUR interest rates to range trade over the next three to six

months, one could consider waiting a little to hedge EUR interest rate exposure

during this period.

Range trading in 2017 but risk is skewed to the upside

We have been arguing for a while that for the rest of 2017 we should expect range trading

in most fixed income markets. We keep this view unchanged in Yield Outlook: Range

trading in yields to continue for now, but asymmetric risks are increasingly skewed to

upside, 15 August. However, importantly, we stress that the risks are increasingly skewed

on the upside for both US and EU yields.

In the eurozone, we expect all eyes to be on the ECB and the possible extension of the QE

programme into 2018. Eurozone data has surprised on the upside over the summer,

unemployment is falling and core inflation has also been higher than expected. However,

the stronger euro should help keep inflation low for a prolonged period. Hence, we still

argue that the ECB will ‘be forced’ to continue its ECB purchases in H1 18 – albeit at a

reduced pace of EUR40bn a month. We expect a QE announcement at the October ECB

meeting. A continuation of purchases should keep EUR rates in check this year but as we

move into 2018, we expect the market to price in an ECB tapering premium.

However, the risk is once again asymmetric. The ECB might put more weight on the better

economic data and argue that an extension of the QE programme is unnecessary. The ‘lack’

of eligible bonds might also force the ECB to end its QE programme earlier than we expect.

If the ECB does not extend or quickly scale back the QE programme in 2018, it would tend

to steepen the yield curve. It is also worth keeping an eye on Sweden. Higher inflation and

an already high ownership share by the Riksbank make it unlikely that the Swedish QE

programme will be extended into 2018.

Another unknown is the Fed. Despite low inflation, we maintain our call that the Fed will

make an announcement on quantitative tightening (reducing its bond portfolio) at the next

meeting in September and hike for the third time this year in December and again over

summer 2018. Our Fed forecast is more hawkish than the market has priced.

US inflation is running far below the

Fed’s target

Headline inflation set to decrease over

remainder of 2017

Source: BEA Source: Eurostat, Danske Bank

The EUR and USD yield curve has

flattened slightly over the past month

* EUR: 6M Euribor, GBP: 6M Libor, USD: 3M Libor

Source: Bloomberg

-10 -5 0 5

Fixing*

2y

5y

10y

30y

bp

Swaprates over the past month

(change in bp)

USD GB P EUR

http://bit.ly/2uKieOe




Market Guide

Despite the continued recovery in the eurozone and the risk of both the ECB and the Fed

turning more hawkish later in the year, we stick to our view that 10Y bond yields in

Germany, Scandinavia and the US will remain in a close range around the current level for

the rest of 2017, though with small upward pressure. However, in 2018, the picture looks

set to change. The ECB is likely to have started tapering and the Fed is likely to be on

course to deliver further rate hikes and very little is priced into the US curve. The risk is

that this ‘risk scenario’ materialises this year and not in 2018, underlining the asymmetric

risks to yields.

Hedging recommendation

We continue to expect a steepening of the 2Y-10Y EUR yield curve in 2018. While the

ECB still has a tight grip on the short end of the curve, this is not the case for the 10Y

segment. We expect higher 10Y EUR yields to materialise primarily on a 12M horizon.

Also, we continue to expect US yield movements to feed through into EUR yields. As such,

we maintain our general recommendation to overweight liability duration on the EUR and

US curves and we continue to see most value at the long end of the EUR curve.

On the US curve, we generally see value in maturities from 2Y and beyond. However,

given the macroeconomic outlook in the US and the positioning and current pricing of the

Fed, we favour the 5Y segment in particular, as this part of the curve is usually the most

sensitive spot regarding monetary policy. For more, see Fixed Income Strategy: US outlook

improving: Pay SWAP 5Y USD3M, 16 August).

Our forecast of EUR money-market rates is slightly below forwards, so one could consider

hedging interest rate exposure via forward-starting swaps. However, as we expect EUR

interest rates to range trade over the next three to six months, one could consider waiting a

little to hedge EUR interest rate exposure during this period.

Interest rate outlook on 6M-12M horizon

EUR GBP USD

Money

markets

With ample liquidity due to the ECB’s QE

programme and the ECB set to maintain its

deposit rate at -0.40% throughout the forecast

period, we expect Euribor fixings to remain

unchanged at around current levels for the next

12 months.

We expect the Bank of England (BoE) to remain

on hold until Brexit negotiations are concluded in

spring 2019. UK Libor fixing has grinded lower

since the 3 August BoE meeting, when the 6-2

vote in favour of keeping rates on hold was

interpreted dovishly. The market’s pricing of a

November hike has declined from 50%

probability since the 3 August meeting to around

20% currently and we expect Libor fixings to

trade more sideways.

Despite low inflation, we maintain our call that

the Fed will make an announcement on

quantitative tightening at the next meeting in

September and hike for the third time this year in

December.

However, we still think risks are skewed towards

the Fed pausing its hiking cycle due to low

inflation, which may not be just ‘transitory’ given

the low inflation expectations.

Curves We continue to expect a steeper EUR yield curve

for the 2Y10Y in 2018. The ECB maintains a

tight grip on the short-end of the curve. However,

this is not the case for the 10Y segment of the

curve, which we expect to be elevated by higher

US yields and a market slowly pricing in an end

to the QE programme/tapering in 2018.

We expect UK gilt yields to remain close to

current levels for now, before eventually moving

higher in 6-12M, driven by higher yields in the

US and Europe. We expect the 2Y10Y and

5Y10Y yield curves to steepen, as we expect the

short end of the curve to stay low and US and

EUR 10Y yields to pushed the long end higher.

However, our baseline scenario is still that the

Fed will deliver a rate hike at the December

meeting. The market, meanwhile, has continued

to price out the probability of a new rate hike this

year, with a hike now priced in around 35%.

Hence, if our baseline scenario is correct, it

should push US yields slightly higher. However,

we do not see a major sell-off this year. In 2018,

we expect growth in the US economy to continue,

which would trigger another rate hike in summer

2018. We continue to expect a flattening of the

curve for the 2Y10Y on a 12M horizon. The

short-end would be pushed higher by Fed rate

hikes, while the long-end would be kept low by

investors buying ‘high yielding’ US fixed income

assets.

Source: Danske Bank

Moderate overweight duration in EUR

Source: Danske Bank

Hedge only the very long end in EUR

Source: Danske Bank

Min Max

EUR

USD

GBP

Current recommendat ion Previous recommendat ion

Liability duration

(relative to individual benchmark)

Neutral

1 2 3 4 5 6 7 8 9 10 +

EUR - 2 1 1

USD 1 1 1 1 1 1 1 1 1

GBP 1 1 1 1

reduce delt a increase delt a f orward st art

Curve views

(tenors, spot)

http://danskeanalyse.danskebank.dk/abo/StrategyUSoutlookimproving160817/$file/Strategy_US_outlook_improving_160817.pdf

http://danskeanalyse.danskebank.dk/abo/StrategyUSoutlookimproving160817/$file/Strategy_US_outlook_improving_160817.pdf


Market Guide

Danske Bank’s interest rate forecasts

3M Euribor and forecast 3M GBP Libor and forecast 3M USD Libor and forecast

Source: Danske Bank Source: Danske Bank Source: Danske Bank

5Y EUR swap rate and forecast 5Y GBP swap rate and forecast 5Y USD swap rate and forecast

Source: Danske Bank Source: Danske Bank Source: Danske Bank

Danske Bank’s yield outlook 16 August 2017

* German government bonds are used, EUR swap rates are used

Source: Danske Bank Markets

Horizon Policy rate 3m xIbor 2-yr swap 5-yr swap 10-yr swap 2-yr gov 5-yr gov 10-yr gov

Spot 1.25 1.32 1.59 1.88 2.21 1.33 1.80 2.26

+3m 1.25 1.50 1.65 2.05 2.30 1.40 1.95 2.35

+6m 1.50 1.62 1.85 2.20 2.45 1.60 2.10 2.50

+12m 1.75 1.87 2.25 2.40 2.70 2.00 2.30 2.70

Spot -0.40 -0.33 -0.17 0.22 0.86 -0.71 -0.26 0.44

+3m -0.40 -0.33 -0.10 0.25 0.95 -0.65 -0.25 0.50

+6m -0.40 -0.33 -0.05 0.30 1.05 -0.60 -0.20 0.60

+12m -0.40 -0.33 0.00 0.40 1.20 -0.50 -0.10 0.75

Spot 0.25 0.28 0.55 0.81 1.17 0.24 0.50 1.10

+3m 0.25 0.27 0.55 0.90 1.25 0.20 0.60 1.20

+6m 0.25 0.27 0.55 0.95 1.35 0.20 0.65 1.30

+12m 0.25 0.27 0.60 1.15 1.55 0.25 0.85 1.50

Note: * German government bonds are used, EUR swap rates are used

US

DE

UR

*G

BP


Market Guide

USD – heading for the 1.20s once pricing of ECB exit

resumes

We look for a consolidation period over the next few months, on the back of

the rapid EUR strengthening targeting EUR/USD at 1.17 in 1-3M. Further

out, we think the ECB exit story will come into light and strengthen the EUR

further. We target 1.18 in 6M and 1.22 in 12M.

Outlook for EUR/USD

US data have turned markedly better in recent months and our quantitative

business-cycle models suggest the US economy is set to recover in H2. In

contrast, the eurozone seems to have lost some growth momentum lately and

our models suggest this will continue near term. Optimism is renewed

regarding the outlook for the eurozone as populist parties have lost support.

In our view, the ECB’s Mario Draghi let the euro out of the bottle when

he spoke at the late-June Sintra conference, revealing that the ECB is

starting to flirt with exit discussions. While a first 10bp hike from the ECB

is priced a bit early at present (around New Year 2018/19) we stress that

key for the FX market is the direction in which the ECB is now headed.

Albeit challenged by the lack of sustained inflationary pressure, the Fed

looks eager to move on with both rate hikes (next in December in our view,

which is priced with only 40% probability) and balance-sheet reduction

(QT) near term but may, as a result, be forced to pause further out.

EUR/USD has staged a significant upturn recently, driven first by political

risks abating since the French election and then by the ECB letting out the

exit discussion. While the usual short-term factors such as relative interest

rates have not shadowed the latest uptick, unhedged equity flows seem to

have a key role in supporting the single currency. We think the cross is now

in a consolidation phase and will stay range-bound around 1.17 near term.

Hedging recommendations

Income Expenses We recommend hedging short-term USD-income with knock-in forwards. Longer term, we find it attractive to lock in at current levels, using FX forwards. Alternatively, consider using risk-reversals to alleviate the negative carry.

Clients with USD expenses should consider hedging strategies that secure a worst-case rate in the event of further USD appreciation. We generally recommend hedging USD payables via knock-in forwards for the coming 12 months.

Source: Danske Bank

3M volatility 3M risk reversal 3M forward premium (% p.a.)

Source: Bloomberg, Danske Bank Source: Bloomberg, Danske Bank Source: Bloomberg, Danske Bank

cheap neutral expensive

Price indicator: implied volatility

6

7

8

9

10

11

12

Aug-16 Nov-16 Feb-17 May-17 Aug-17

Implied volatility (EUR/USD) realised volatility


Price indicator: risk reversal (USD seller)

-3.50

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50


EUR/USD risk reversal


Price indicator: forward rate (USD seller)

1.30%

1.40%

1.50%

1.60%

1.70%

1.80%

1.90%

2.00%

2.10%

2.20%


3M forward (%, ann.)

EUR/USD

Source: Bloomberg, Danske Bank

3M 6M 12M

DB forecast 1.17 1.18 1.22

Forward 1.18 1.19 1.20

Cons. Forecast 1.17 1.17 1.18

0.90

1.00

1.10

1.20

Sep/16 Feb/17 Aug/17 Feb/18 Aug/18

EUR/USD ForecastForward Consensus


Market Guide

GBP – strong EUR and BoE on hold to underpin the cross

near term

A too optimistic BoE and continued Brexit uncertainties are likely to weigh on

the GBP. We target EUR/GBP at 0.91 in 1M, 0.91 in 3M, 0.90 in 6M and 0.88

in 12M.

Outlook for EUR/GBP

The UK economy has slowed substantially and while GDP growth in Q2

accelerated to 0.3% q/q from 0.2% q/q in Q1, GDP growth in H1 17 was the

weakest since the European debt crisis. The near-term growth outlook remains

subdued as real wage growth has turned negative, implying less scope for

private consumption growth. CPI inflation is running at relatively high levels

and could peak at around 3% later this year. Additional uncertainty following

the UK general election adds to the risk of slowing activity.

The BoE maintained the Bank Rate at 0.25% in August and kept the targets

for government bond purchases and corporate bond purchases at

GBP435bn and GBP10bn, respectively. The vote count for the Bank Rate

was 6-2 against 5-3 last time, which was interpreted dovishly. In our view,

it underscores that a rate hike is not imminent and we still expect the BoE

to remain on hold until Brexit negotiations are concluded in spring 2019.

The main reasons are that we think the bank is still too optimistic on both

wage growth and GDP growth and political uncertainty remains high due

to Brexit.

The third round of Brexit negotiations is set to take place in Brussels

between 28 August and 4 September. Previously, the EU’s chief negotiator

Michel Barnier had said the negotiations were proceeding too slowly,

meaning that negotiations in phase one (divorce bill, citizens’ rights and

Irish border) may not be concluded in October as hoped.


Income Expenses We recommend hedging GBP income with knock-in forwards over the coming 12 months.

We recommend hedging GBP expenses with a risk-reversal strategy.

Source: Danske Bank





6

7

8

9

10

11

12

13

14

15

16


Implied volatility (EUR/GBP) realised volatility


Price indicator: risk reversal (GBP seller)

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00


EUR/GBP risk reversal


Price indicator: forward rate (GBP seller)

0.60%

0.70%

0.80%

0.90%

1.00%

1.10%

1.20%



EUR/GBP


3M 6M 12M

DB forecast 0.91 0.90 0.88

Forward 0.92 0.92 0.93


0.60

0.70

0.80

0.90


EUR/GBP ForecastForward Consensus


Market Guide

JPY –steady soft BoJ supports further JPY weakness

While an escalation in the tensions between the US and North Korea could lend

support to the JPY, our base case is no further escalation. Furthermore, we see

a continued soft Bank of Japan (BoJ), which would keep a lid on the JPY. We

target EUR/JPY at 130 in 1M, 133 in 3M, 137 in 6M and 142 in 12M.

Outlook for EUR/JPY

Exports have shown signs of weakness in Q2 after a few impressive

quarters. However, the Q2 Tankan report and the PMIs continue to paint a

positive economic outlook and domestic demand has shown signs of

improvement recently, with both retail sales and consumer confidence

looking fairly good. We expect the economy to continue expanding in the

coming year and expect a further increase in the already positive output

gap. Consumer price inflation (CPI) remains low, standing at 0.4 % y/y in

June and wage inflation also remains low.

The Bank of Japan (BoJ) has explicitly promised to continue easing until

inflation expectations are above the 2% target on a sustainable basis. In our

main scenario, we expect the BoJ to keep its policy unchanged: maintaining

the short-term policy interest rate at -0.1% and the 10Y Japanese

government bond (JGB) yield at 0% throughout our 12M forecast horizon

assuming that BoJ governor Haruhiko Koruda is reappointed when his term

as governor ends in April 2018.

The main risk to the BoJ’s extremely accommodative policy stance is PM

Shinzō Abe’s plummeting approval ratings. Recently, they have tumbled to

around 35% in the wake of a series of scandals involving him and his close

political allies and accusations that Abe used his influence to secure the

approval of a new department at a university run by a close friend.


Income Expenses We recommend hedging JPY income with FX forwards. We recommend hedging JPY expenses via knock-in forwards.

Source: Danske Bank





7

8

9

10

11

12

13

14

15

16

17


Implied volatility (EUR/JPY) realised volatility


Price indicator: risk reversal (JPY seller)

-5.50-5.00-4.50-4.00-3.50-3.00-2.50-2.00-1.50-1.00-0.500.00


EUR/JPY risk reversal


Price indicator: forward rate (JPY seller)

-0.20%

-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%



EUR/JPY


3M 6M 12M

DB forecast 133.38 136.88 141.52

Forward 128.52 128.82 128.86

Cons. Forecast 131.17 133.59 134.26

100

110

120

130

140

150


EUR/JPY ForecastForward Consensus


Market Guide

SEK – data-driven summer boost to the SEK

Both GDP and inflation have surprised on the upside in Sweden, giving

support to a stronger SEK. However, we believe that the Riksbank will stay

soft in order to mitigate any unwanted SEK strengthening. We see EUR/SEK

at 9.50 in 1M, 9.40 in 3M, 9.30 in 6M and 9.20 in 12 months.

Outlook for EUR/SEK

Growth in Sweden accelerated sharply in the second quarter. It rose 1.7%

q/q and 4.0% y/y, exceeding the Riksbank’s 2.6% y/y forecast by a wide

margin. The numbers are preliminary and are due to be revised on 13

September. We see Swedish growth as a positive factor for the SEK relative

to the EUR, as it is outpacing both eurozone growth and potential growth

in Sweden.

Both GDP and inflation have been higher than the Riksbank’s forecasts.

Hence, we believe these should be revised upwards at the September

meeting. That inflation is back at (and above) 2%, where we think it will

stay in the near term, is nothing less than a milestone. However, the

Riksbank is likely to maintain a dovish tone in order to keep rates and the

SEK in check. The ECB is set to continue buying bonds in 2018 but we

think the Riksbank will stop in December.

The SEK’s advance versus the EUR over the summer has been

fundamentally justified in our view on the back of very strong GDP and

much higher than expected inflation data. However, recent (inflation) data

must be followed by a clear hawkish shift from the Riksbank in order to

push EUR/SEK much lower in our view. While we expect an adjustment in

the language, we think the bank will make only marginal policy

adjustments, which may clash with current pricing (rates and KIX) at the

September meeting.


Income Expenses We recommend hedging SEK income via knock-in forwards. We recommend hedging SEK expenses via FX forwards.

Source: Danske Bank





4

5

6

7

8


Implied volatility (EUR/SEK) realised volatility


Price indicator: risk reversal (SEK seller)

0.00

0.20

0.40

0.60

0.80

1.00


EUR/SEK risk reversal


Price indicator: forward rate (SEK seller)

-0.80%

-0.70%

-0.60%

-0.50%

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

0.10%



EUR/SEK


3M 6M 12M

DB forecast 9.40 9.30 9.20

Forward 9.54 9.53 9.54


9.00

9.25

9.50

9.75

10.00


EUR/SEK ForecastForward Consensus


Market Guide

NOK – in for range trading over the next few months

The story to look for over our forecast horizon is that of Norwegian

normalisation, which we believe will see the NOK strengthening. Short term,

however, we see range trading for the NOK. We see EUR/NOK at 9.30 in 1M,

9.30 in 3M, 9.10 in 6M and 9.00 in 12M.

Outlook for EUR/NOK

Data releases received during the summer continue to show a recovering

economy. Labour market reports still suggest above-trend growth, the

manufacturing sector is stabilising and private consumption is picking up,

driven by improved confidence and higher real wages. The housing market

continues to cool – especially in Oslo – but we do not pencil in any dramatic

real effects on the economy. The yearly core inflation rate has as expected

fallen but the decline has been less than expected.

As expected, Norges Bank left the sight deposit rate unchanged at 0.50% at

the June meeting. The Board maintained the ‘neutral bias’ introduced back in

September 2016 and stated that ‘the Executive Board’s current assessment of

the outlook and the balance of risks suggests that the key policy rate will

remain at today’s level in the period ahead’. Norges Bank also announced that

the decision was ‘unanimous’. Importantly, the 40% cut probability embedded

into the rate path was removed, thereby mirroring the signals from the ECB.

We think Norges Bank will leave rates unchanged for the rest of this year and

pencil in the first hike in mid-2018.

The Norwegian normalisation story, valuation and real rates remain clear

NOK positives but we think we will first have to see the cross range trade in

the 9.25-9.45 range in the coming months. Importantly, the NOK is now more

than 2% stronger than pencilled in by Norges Bank, which in our view limits

the near-term potential.


Income Expenses We recommend hedging NOK income via knock-in forwards. Short term, we recommend hedging with FX forwards, as we see limited potential for a lower EUR/NOK over coming months.

We recommend hedging short-term NOK expenses via a risk-reversal strategy. We recommend increasing the hedge ratio and the hedging horizon through FX forwards if EUR/NOK goes above 9.454.

Source: Danske Bank





5

6

7

8

9


Implied volatility (EUR/NOK) realised volatility


Price indicator: risk reversal (NOK seller)

0.20

0.40

0.60

0.80

1.00

1.20

1.40


EUR/NOK risk reversal


Price indicator: forward rate (NOK seller)

1.10%

1.20%

1.30%

1.40%

1.50%

1.60%

1.70%

1.80%

1.90%

2.00%



EUR/NOK


3M 6M 12M

DB forecast 9.30 9.10 9.00

Forward 9.33 9.37 9.43


8.50

8.75

9.00

9.25

9.50

9.75


EUR/NOK ForecastForward Consensus


Market Guide

Danske Bank’s hedging recommendations: other majors

Currency Instrument

Forecasts Income Expenses

CHF

We recommend hedging CHF income via FX forwards.

We recommend hedging CHF expenses via knock-in forwards.

Price indicators

Currency Instrument


AUD

We recommend hedging AUD income via FX forwards.

We recommend hedging AUD expenses via knock-in forwards.

Price indicators

Currency Instrument


NZD

We recommend hedging NZD income via FX forwards.

Hedge NZD expenses via knock-in forwards.

Price indicators

Currency Instrument


CAD

We recommend hedging CAD income via FX forwards.

We recommend hedging CAD expenses via knock-in forwards.

Price indicators

Source: Danske Bank

3M 6M 12M

DB forecast 1.14 1.16 1.20

Forward 1.13 1.13 1.13


1.00

1.10

1.20


EUR/CHF ForecastForward Consensus

implied volatility

risk reversal (CHF seller)

forward rate (CHF seller)


3M 6M 12M

DB forecast 1.54 1.57 1.63

Forward 1.50 1.51 1.53


1.30

1.40

1.50

1.60


EUR/AUD ForecastForward Consensus

implied volatility

risk reversal (AUD seller)

forward rate (AUD seller)


3M 6M 12M

DB forecast 1.65 1.69 1.74

Forward 1.62 1.64 1.66


1.40

1.50

1.60

1.70

1.80


EUR/NZD ForecastForward Consensus

implied volatility

risk reversal (NZD seller)

forward rate (NZD seller)


3M 6M 12M

DB forecast 1.52 1.57 1.63

Forward 1.49 1.49 1.51


1.30

1.40

1.50

1.60


EUR/CAD ForecastForward Consensus

implied volatility

risk reversal (CAD seller)

forward rate (CAD seller)



Market Guide

Danske Bank’s hedging recommendations: EMEA

Currency Instrument

Forecast Income Expenses

PLN

We recommend hedging PLN income via knock-in forwards.

We recommend hedging PLN expenses via FX forwards.

Price indicators

Currency Instrument


RUB

We recommend hedging RUB income via knock-in forwards.

We recommend hedging RUB expenses via FX forwards.

Price indicators

Currency Instrument


HUF

We recommend hedging HUF income via knock-in forwards.

We recommend hedging HUF expenses via FX forwards.

Price indicators

Currency Instrument


CZK

We recommend hedging CZK income via knock-in forwards.

We recommend hedging CZK expenses via FX forwards.

Price indicators

Source: Danske Bank

3M 6M 12M

DB forecast 4.24 4.18 4.16

Forward 4.30 4.32 4.37


4.10

4.20

4.30

4.40

4.50


EUR/PLN ForecastForward Consensus

implied volatility

risk reversal (PLN seller)

forward rate (PLN seller)


3M 6M 12M

DB forecast 69.50 64.55 65.27

Forward 71.04 72.71 75.67

Cons. Forecast 69.99 70.20 71.20

50.0

60.0

70.0

80.0

90.0


EUR/RUB ForecastForward Consensus

implied volatility

risk reversal (RUB seller)

forward rate (RUB seller)


3M 6M 12M

DB forecast 306.00 304.00 300.00

Forward 304.15 304.34 305.32

Cons. Forecast 306.76 308.88 309.72

295

300

305

310

315

320


EUR/HUF ForecastForward Consensus

implied volatility

risk reversal (HUF seller)

forward rate (HUF seller)


3M 6M 12M

DB forecast 25.90 25.70 25.50

Forward 26.08 25.98 25.97

Cons. Forecast 25.99 25.86 25.57

25.0

25.5

26.0

26.5

27.0

27.5


EUR/CZK ForecastForward Consensus

implied volatility

risk reversal (CZK seller)

forward rate (CZK seller)



Market Guide

Danske Bank’s hedging recommendations: other emerging markets

Currency Instrument


CNH

(CNY)

We recommend hedging CNH income via FX forwards.

We recommend hedging CNH payables via a risk-reversal strategy.

Price indicators

Currency Instrument


ZAR

Hedge ZAR income with FX forwards. We recommend hedging ZAR expenses via knock-in forwards.

Price indicators

Currency Instrument


TRY

Hedge TRY income with FX forwards. We recommend hedging TRY expenses via knock-in forwards.

Price indicators

Source: Danske Bank

3M 6M 12M

DB forecast 7.90 8.02 8.48

Forward 7.91 7.99 8.13


6.50

7.00

7.50

8.00

8.50


EUR/CNH ForecastForward Consensus

implied volatility

risk reversal (CNH seller)

forward rate (CNH seller)


3M 6M 12M

DB forecast 15.56 15.93 16.71

Forward 15.83 16.16 16.76

Cons. Forecast 15.88 15.99 16.32

12.0

14.0

16.0

18.0


EUR/ZAR ForecastForward Consensus

implied volatility

risk reversal (ZAR seller)

forward rate (ZAR seller)


3M 6M 12M

DB forecast 4.27 4.48 4.88

Forward 4.25 4.38 4.65


2.50

3.00

3.50

4.00

4.50

5.00


EUR/TRY ForecastForward Consensusimplied volatility

risk reversal (TRY seller)

forward rate (TRY seller)



Market Guide

FX forecasts

Source: Danske Bank

G10

Last Update: 16/08/2017

Spot +1m +3m +6m +12m

Exchange rates vs EUR

EUR/USD 1.171 1.17 1.17 1.18 1.22

EUR/JPY 129.8 130 133 137 142

EUR/GBP 0.909 0.91 0.91 0.90 0.88

EUR/CHF 1.139 1.140 1.140 1.160 1.200

EUR/SEK 9.483 9.50 9.40 9.30 9.20

EUR/NOK 9.306 9.30 9.30 9.10 9.00

EUR/DKK 7.437 7.4400 7.4400 7.4400 7.4400

EUR/AUD 1.490 1.500 1.539 1.573 1.627

EUR/NZD 1.617 1.625 1.648 1.686 1.743

EUR/CAD 1.489 1.498 1.521 1.569 1.635

EM

Spot +1m +3m +6m +12m

EUR/PLN 4.276 4.26 4.24 4.18 4.16

EUR/HUF 304 305 306 304 300

EUR/CZK 26.038 26.00 25.90 25.70 25.50

EUR/RUB 69.756 70.20 69.50 64.55 65.27

EUR/TRY 4.136 4.21 4.27 4.48 4.88

EUR/ZAR 15.504 15.54 15.56 15.93 16.71

EUR/BRL 3.721 3.57 3.51 3.54 3.54

EUR/CNY 7.835 7.84 7.90 8.02 8.48

EUR/INR 75.142 75.42 76.05 76.70 81.74


Market Guide

Disclosures This research report has been prepared by Danske Bank A/S (‘Danske Bank’). The author of this research report is

Morten Thrane Helt, Senior Analyst.

Analyst certification

Each research analyst responsible for the content of this research report certifies that the views expressed in the

research report accurately reflect the research analyst’s personal view about the financial instruments and issuers

covered by the research report. Each responsible research analyst further certifies that no part of the compensation

of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed

in the research report.

Regulation

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to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske

Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority

(UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation

Authority are available from Danske Bank on request.

Danske Bank’s research reports are prepared in accordance with the recommendations of the Danish Securities

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research based on research objectivity and independence. These procedures are documented in Danske Bank’s

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that might impair the objectivity and independence of research shall be referred to Research Management and the

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Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes

investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance

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Financial models and/or methodology used in this research report

Calculations and presentations in this research report are based on standard econometric tools and methodology as

well as publicly available statistics for each individual security, issuer and/or country. Documentation can be

obtained from the authors on request.

Risk warning

Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis

of relevant assumptions, are stated throughout the text.

Expected updates

Monthly.

Date of first publication

See the front page of this research report for the date of first publication.

General disclaimer This research report has been prepared by Danske Bank (a division of Danske Bank A/S). It is provided for

informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered

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instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options,

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consent.


Market Guide

Disclaimer related to distribution in the United States This research report was created by Danske Bank A/S and is distributed in the United States by Danske Markets

Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank A/A, pursuant to SEC Rule 15a-6 and related

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Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely

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Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S.

Securities and Exchange Commission.

Report completed: 24 August 2017, 12:23 GMT

Report first disseminated: 24 August 2017, 15:10 GMT

D a n s k e B a n k , D a n s k e R e s e a r c h , H o l m e n s K a n a l 2 - 1 2 , D K - 1 0 9 2 C o p e n h a g e n K . P h o n e + 4 5 4 5 1 2 0 0 0 0 w w w. d a n s k e r e s e a r c h . co m

N o r way

C h i e f A n a l y s t & H e a d of F r a n k J u l l u m+ 4 7 8 5 4 0 6 5 4 0f j u @ d a n s k e b a n k . c o m

J o s te i n T v e d t+ 4 7 2 3 1 3 9 1 8 4j t v @ d a n s k e b a n k . c o m

I N t e r N at I o N a l M a c r o

C h i e f A n a l y s t & H e a d of J a ko b E k h o l d t C h r i s te n s e n+ 4 5 4 5 1 2 8 5 3 0j a k c @ d a n s k e b a n . co m

A l l a n v o n M e h r e n + 4 5 4 5 1 2 8 0 5 5a l v o @ d a n s k e b a n k . d k

P e r n i l l e B o m h o l d t H e n n e b e r g+ 4 5 4 5 1 3 2 0 2 1p e r n i @ d a n s k e b a n k . co m

M i k a e l O l a i M i l h ø j+ 4 5 4 5 1 2 7 6 0 7m i l h @ d a n s k e b a n k . co m

A i l a E v c h e n M i h r+ 4 5 4 5 1 3 7 8 6 7a m i h @ d a n s k e b a n k . co m

F I x e d I N c o M e r e s e a r c h

C h i e f A n a l y s t & H e a d of A r n e L o h m a n n R a s m u s s e n + 4 5 4 5 1 2 8 5 3 2a r r @ d a n s k e b a n k . c o m

J e n s P e te r S ø r e n s e n+ 4 5 4 5 1 2 8 5 1 7 j e n s s r @ d a n s k e b a n k . c o m

C h r i s t i n a E . Fa l c h + 4 5 4 5 1 2 7 1 5 2c h f a @ d a n s k e b a n k . c o m

J a n We b e r Ø s te r g a a r d+ 4 5 4 5 1 3 0 7 8 9j a s t @ d a n s k e b a n k . c o m

H a n s R o a g e r J e n s e n+ 4 5 4 5 1 3 0 7 8 9h r o a @ d a n s k e b a n k . c o m

M a th i a s R ø n M o g e n s e n + 4 5 4 5 1 4 7 2 2 6m m o g @ d a n s k e b a n k . c o m

F x & c o M M o d I t I e s s t r at e g y

G l o b a l H e a d of F I C C R e s e a r c hT h o m a s H a r r+ 4 5 4 5 1 3 6 7 3 1th h a r @ d a n s k e b a n k . c o m

C h r i s t i n K y r m e Tu x e n + 4 5 4 5 1 3 7 8 6 7tu x @ d a n s k e b a n k . co m

M o r te n T h r a n e H e l t+ 4 5 4 5 1 2 8 5 1 8m o h e l @ d a n s k e b a n k . c o m

J e n s N æ r v i g P e d e r s e n + 4 5 4 5 1 2 8 0 6 1j e n p e @ d a n s k e b a n k . co m

K r i s tof f e r K j æ r L o m h o l t+ 4 5 4 5 1 2 8 5 2 9 k l o m @ d a n s k e b a n k . c o m

F I N l a N d

C h i e f A n a l y s t & H e a d of P a s i P e t te r i K u o p p a m ä k i+ 3 5 8 1 0 5 4 6 7 7 1 5p a k u @ d a n s k e b a n k . co m

M i n n a E m i l i a K u u s i s to+ 3 5 8 1 0 5 4 6 7 9 5 5m k u u @ d a n s k e b a n k . co m

J u k k a S a m u l i A p p e l q v i s t+ 3 5 8 4 4 2 6 3 1 0 5 1a p p @ d a n s k e b a n k . co m

d c M r e s e a r c h

C h i e f A n a l y s t & H e a d of T h o m a s M a r t i n H o v a r d+ 4 5 4 5 1 2 8 5 0 5 h o v a @ d a n s k e b a n k . c o m

L o u i s L a n d e m a n+ 4 6 8 5 6 8 8 0 5 2 4l l a n @ d a n s k e b a n k . s e

J a ko b M a g n u s s e n + 4 5 4 5 1 2 8 5 0 3j a k j a @ d a n s k e b a n k . co m

M a d s R o s e n d a l+ 4 5 4 5 1 4 8 8 7 9m a d r o @ d a n s k e b a n k . co m

G a b r i e l B e r g i n+ 4 6 8 5 6 8 8 0 6 0 2g a b e @ d a n s k e b a n k . co m

B r i a n B ø r s t i n g+ 4 5 4 5 1 2 8 5 1 9b r b r @ d a n s k e b a n k . co m

S v e r r e H o l b e k+ 4 5 4 5 1 4 8 8 8 2h o l b @ d a n s k e b a n k . co m

N i k l a s R i p a+ 4 5 4 5 1 2 8 0 4 7n i r i @ d a n s k e b a n k . co m

H e n r i k R e n è A n d r e s e n + 4 5 4 5 1 3 3 3 2 7h e n a @ d a n s k e b a n k . co m

L u k a s P l a t z e r+ 4 5 4 5 1 2 8 4 3 0l p l a @ d a n s k e b a n k . c o m

K a tr i n e J e n s e n+ 4 5 4 5 1 2 8 0 5 6k a tr i @ d a n s k e b a n k . co m

H a s e e b S y e d+ 4 7 8 5 4 0 5 4 1 9h s y @ d a n s k e b a n k . co m

B e n d i k E n g e b r e ts e n+ 4 7 8 5 4 0 6 9 1 4b e e @ d a n s k e b a n k . c o m

d e N M a r k

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L o u i s e A g g e r s tr ø m H a n s e n+ 4 5 4 5 1 2 8 5 3 1l o u h a n @ d a n s k e b a n k . c o m

B j ø r n Ta n g a a S i l l e m a n n + 4 5 4 5 1 2 8 2 2 9b j s i @ d a n s k e b a n k . c o m

s w e d e N

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M i c h a e l G r a h n + 4 6 8 5 6 8 8 0 7 0 0m i k a @ d a n s k e b a n k . co m

C a r l M i l to n+ 4 6 8 5 6 8 8 0 5 9 8c a r m i @ d a n s k e b a n k . co m

M a r c u s S ö d e r b e r g+ 4 6 8 5 6 8 8 0 5 6 4m a r s d @ d a n s k e b a n k . co m

S te f a n M e l l i n+ 4 6 8 5 6 8 8 0 5 9 2m e l l @ d a n s k e b a n k . c o m

S u s a n n e P e r n e b y+ 4 6 8 5 6 8 8 0 5 8 5s u p e @ d a n s k e b a n k . co m

Global Danske ReseaRch

e M e r g I N g M a r k e t s

C h i e f A n a l y s t & H e a d of J a ko b E k h o l d t C h r i s te n s e n+ 4 5 4 5 1 2 8 5 3 0j a k c @ d a n s k e b a n . co m

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R o k a s G r a j a u s k a s+ 3 7 0 5 2 1 5 6 2 3 1

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