Important disclosures and certifications are contained from page 8 of this report. www.danskeresearch.com

Investment Research

We argue that the Riksbank remains wrongly priced. Over the last week the Swedish fixed

income market has priced out some of the Riksbank rate cut expectations for the next two

meetings and market pricing in fact indicates a probability of a rate hike in autumn 2014,

which we strongly disbelieve will happen.

Swedish PMI manufacturing is expected to rise in November, in line with Germany and

NIER manufacturing index, implying that the divergence between Swedish soft and hard

data will continue for yet another month.

This year’s transfer of the Swedish pension money (PPM) will take place over the

weekend of 7-8 December, with the first trading day being 9 December. We expect the

amount to be close to last year’s SEK33bn (somewhere between SEK33bn and SEK35bn).

We find that since the beginning in 2001 EUR/SEK has more often than not risen in the

days before the PPM date and continue to target 9.00 as a 1M forecast in EUR/SEK.

The big event in the Norwegian market is Norges Bank’s interest rate decision and the

new Monetary policy Report on 5 December. We expect the policy rate to remain at 1.5%.

However, the rate path is now expected to be revised downwards, pushing back the next

rate hike to the first half of 2015. Given the high correlation with relative rates a new

2013-high in EUR/NOK is expected this week. We continue to warn about the poor

liquidity in the Norwegian currency market in December.

A soft Norges Bank could put the NOK under new pressure Sweden: Money market rates to high in 2015/2016

Source: Danske Bank Markets, Macrobond Source: Danske Bank Markets

-0.20%

0.30%

0.80%

1.30%

1.80%

2.30%

2.80%

Oct13 Apr14 Oct14 Apr15 Oct15 Apr16 Oct16 Apr17 Oct17

Pricing SEK-OIS 1m swap

2 December 2013

Chief Analyst Arne Lohmann Rasmussen +45 4512 8532 arr@danskebank.dk

Scandi markets ahead Another soft Norges Bank Monetary Policy Report

Recommended readings from Danske

See our monthly Yield Forecast

Update that covers Scandi and

core markets

See FX Forecast Update for our

latest FX Forecasts

2 | 2 December 2013 www.danskeresearch.com

Scandi markets ahead

Sweden � PMI in focus

In Sweden, the week ahead will mainly concern November PMIs. On Monday (at 08:30

CET) manufacturing PMI will be published and then on Wednesday (at 08:30 CET)

Services PMI are due to be released. PMI manufacturing is expected to rise in November,

in line with Germany and NIER manufacturing index.

As we have touched upon previously, there is a stark dichotomy between strong survey

data and weaker real data, which continues to be unresolved. Thus far, we have been

inclined to dismiss this as temporary and something that will correct with stronger real

data in the cards. But at some point we will have to give this view up, and any weakening

of the international outlook – or survey data for that matter – would trigger large

downward revisions of our GDP forecasts for the coming few years.

In addition to the weak trade balance and ditto retail sales data, we last week finally

received Q3 GDP numbers and suffice it to say, at 0.3% y/y (calendar-adjusted) it was

uninteresting, a tad below our and the Riksbank’s forecast of 0.4% y/y.

However, much of the softness is attributable to a large negative contribution from

inventories, which is somewhat of a silver lining. The number thus underlines our 2013

GDP forecasts of 0.8% y/y (calendar-adjusted) but, Nota Bene, we need to see a sturdy

acceleration of 0.6% q/q in Q4 to reach that number, which in turn implies that retail

sales, trade balance, etc. need to improve dramatically over the coming months.

In sum, our call for a December rate cut remains intact. The Riksbank needs to cut due to

too low inflation and lower inflation expectations.

Sweden should be priced for �low for longer�

In Reading the markets Sweden we argue that that Riksbank remains wrongly priced.

Over the last week the Swedish fixed income market has priced out some of Riksbank

rate cut expectations for the next two meetings, which seems reasonable in light of the

slightly stronger NIER confidence survey, but we find it hard to swallow the fact that the

pricing after that indicates a probability of a rate hike in autumn 2014, and it stands in

stark contrast with the rate developments for other central banks. Below is the change in

the OIS (overnight indexed swaps), or Stina as it is called in Sweden, between 20-28

November. After the NIER data the Swedish curve shifted up 4-5bp especially from June-

2014 and onwards.

Pricing of Riksbank(OIS), bp change over the last week

Source: Danske Bank Markets

Riksbank stance suffers another blow

Sources: Macrobond, Riksbank

Riksbank pricing

Sources: Macrobond, Riksbank

3 | 2 December 2013 www.danskeresearch.com

Scandi markets ahead

We still see EUR/SEK testing 9.00 in December

The fact that we look for a flatter SEK FRA curve and a rate cut on 17 December also

means that we continue to see short-term upside risks for EUR/SEK. We have for a while

being targeting 9.00 in EUR/SEK and we continue buying the cross after the EUR/SEK

dip on Friday in the aftermath of the GDP numbers that turned out to be a “buy the

rumour, sell the fact” event.

While we have reduced our risk exposure in the money market (see last week’s issue), we

still see the cross edging higher when the rate cut is actually confirmed. Especially, if the

Riksbank at the same time underlines that the first rate will be further delayed. Such an

outcome will tend to flatten the Swedish money market even further and result in a tighter

rate spread vs. the euro area. Note in that respect that EUR/SEK is still highly correlated

with relative rates.

EUR/SEK vs. 2-year swap spread

Source: Macrobond

SEK: PPM disbursement to hit the market 9 December This year’s transfer of pension money (PPM) will take place over the weekend of 7-8 December, with the first trading day being 9 December. We expect the amount to be close to last year’s SEK33bn (somewhere between SEK33bn and SEK35bn).

Part of the money will be invested in domestic funds and part of it in foreign funds. Under the assumption that part of the foreign investment is hedged (on average), we estimate that around SEK10bn will affect the SEK. That said, while sizeable, the evidence suggests the market impact has gradually diminished. If anything, the krona has had a tendency to weaken before the actual transfer date and then appreciate afterwards.

We find that since the beginning in 2001 EUR/SEK has more often than not risen in the days before the PPM date and more often than not fallen after the PPM date; not the PPM effect you might expect but arguably logical from a game theoretical and rational expectations point of view, where investing funds and market players in general have learned to pre-trade on this information. A similar trading pattern around the PPM date applies for volatility in EUR/SEK.

Hence, we see the PPM money as a temporary headwind for the Swedisk krone. For more see FX research: PPM Disbursement – not the impact you might think.

4 | 2 December 2013 www.danskeresearch.com

Scandi markets ahead

Norges Bank: New downward revision of rate path

The big event in the Norwegian market the first week of December is undoubtedly

Norges Bank’s interest rate decision and the new Monetary policy Report on 5 December.

We expect the policy rate to remain at 1.5% with great certainty. However, the rate path

is now expected to be revised downwards.

We expect Norges Bank to push back the next rate hike to the first half of 2015. It is also

possible, but by no means certain, that Norges Bank will revert to its dovish bias earlier

this year by indicating that for next year a rate cut is more likely than a hike.

The chart below illustrates that our estimate of the rate path is very much in line with

market pricing at the time of writing. We should add that we believe that the risk is to the

downside: Norges Bank has on numerous occasions the last year showed a dovish

interpretation of economic statistics. We would not be surprised if this repeats itself this

time around.

Weak Regional Network Report from Norges Bank

Since the previous monetary policy meeting in September, the economic landscape has

changed along several dimensions:

First of all international interest rates have come down considerably, which would lead

Norges Bank to consider reducing the rate path. A somewhat lower inflation pattern, after

the surprisingly high readings over the summer, should point in the same direction.

Last but not least, Norges Bank’s own business survey (Regional Network), which came

out on Friday 29 November, was surprisingly weak. The important survey points to an

annualised growth of less than 1.5% in H1 next year. The overall picture was clouded by

a particularly weak outlook for the retail and construction sectors, which was largely as

expected. What disappointed us most was that optimism in the export industry is not yet

increasing even though the krone has weakened and global growth is improving. Based

on the Regional Network Report we expect Norges Bank to reduce its growth forecast for

Norway for 2014 from 2.25% to 1.75%.

The one factor that counteracts these changes is the exchange rate: The Norwegian krone

has depreciated about 10% since February this year and about 2.5% since the September

meeting. These huge swings will certainly work as a stimulus to Norway’s exporters and

Chart 1: Norges Bank rate paths; the market and projections (%)

Source: Norges Bank, Bloomberg, Danske Bank Markets

Norway: Growth slows further

Source: Macrobond

Weaker NOK not enough to mitigate

weaker growth outlook

Source: Macrobond, Nprges Bank

1

1.5

2

2.5

3

sep.

13

nov.

13

jan.

14

mar

. 14

mai

. 14

jul.

14

sep.

14

nov.

14

jan.

15

mar

. 15

mai

. 15

jul.

15

sep.

15

nov.

15

jan.

16

mar

. 16

mai

. 16

jul.

16

sep.

16

nov.

16

Rate path at MPR3.13 Implied by FRA market

DB estimate of new rate path

5 | 2 December 2013 www.danskeresearch.com

Scandi markets ahead

will reduce the need for a rate cut. The aggregate effect of these changes should lead

to a downward shift in the rate path by about 0.25% towards the mid and latter half

of 2014.

Norges Bank has gone to great lengths to be as transparent as possible, by indicating how

it will react to changes in the economic environment along several dimensions. However,

Norges Bank still retains substantial discretion, not least when it comes to its forecast of

growth for Norway and its trading partners in the future. In estimating the rate path for

the upcoming monetary policy report, we have assumed that Norges Bank will leave the

growth outlook for its trading partners unchanged from September. It could, however,

defend a reduction in the growth forecast for Norway’s trading partners by a quarter of a

percent for next year. That could in our experience lead to an additional downward

revision of the rate path by about 0.1%, and a signal of a future possible rate cut

would be clearer.

All in all, it seems to us that Norges Bank after the weaker than expected Regional

Network Report will once again deliver a soft message.

The Norwegian krone remains exposed here in December

The NOK has after the AUD been the second worst G10 performing currency over the

last six months.

Spot-performance against the NOK, %

Source: Bloomberg

But the trouble might not yet be over for the former “Northern star”. The combination of

a soft Norges Bank on Wednesday and a global currency market that has the poor

liquidity in the NOK over the summer in fresh memory and a general lack of interest in

commodity currencies does not bode well for the NOK here in December, where liquidity

is often an issue. Hence, we once again see a pronounced risk that implied volatility will

spike in EUR/NOK, pushing EUR/NOK higher once again as illustrated in the graph to

the right.

In respect of Norges Bank note that EUR/NOK continues to trade closely on relative rates

with EUR/NOK having the third highest correlation with relative rates among 14

EUR/XXX crosses that we cover in FX Hot Picks.

Liquidity remains an issue for the NOK

Source: Macrobond, Nprges Bank

6 | 2 December 2013 www.danskeresearch.com

Scandi markets ahead

EUR/NOK still trading on relative rates and sensitive to Norges Bank message

Source: Bloomberg, Macrobond

From a technical point of view the next target is 8.4050 ( 21 December 2009 high). If this

target is breached a test of the strong resistance level at 8.4380 level (19 December 2009

high) is likely. Note that the cross does not yet look technically overbought with RSI at

66.9. For more support/resistance levels see Danske Technical Update.

In fact, the poor Regional Network Report might indicate that the poor performance for

the NOK might extend into 2014. It is yet another warning that the Norwegian economy

is getting more and more out of synch with the euro zone. The latter is seeing signs of

recovery and Norway is cooling down. In particular, we will follow the important oil

investment data that by the way will be published simultaneously with the rate decision

on Wednesday. Given that oil investments are not easily reversed, we believe the survey

will still point to growth in oil investments in 2014. But risk is tilted to the downside.

However, that said, the growth outlook for 2014 is still much stronger for Norway and in

the end we do now expect to see a rate cut from Norges Bank in 2014 keeping the NOK

in the carry currency camp. Hence, we stick to the view that the NOK will eventually

recover when the current “liquidity premium” is priced out sometime in 2014.

Note that our long NOK/SEK recommendation is now closed with a total profit of 0.55%.

Denmark: Currency reserve numbers in focus

In Denmark the week brings Statistics Denmark’s industrial production data for October.

Manufacturers have generally become more optimistic, due partly to improvements in

local export markets, but we still expect a small decrease of 1% m/m after the rise in

September.

Elsewhere, the Danish Nationalbank will be releasing its report on the foreign exchange

reserves in November. The EUR/DKK cross has been relatively stable below the central

parity rate of 7.46038 throughout November, so there has been no pressure on the fixed

rate policy and we do not expect the central bank to have felt the need to intervene. While

the Danish central bank has not intervened for quite a long time to support the Danish

krone, the Danish money market continue to price in a “normalisation” of the Danish

curve in 2014 relative to the EUR curve.

Last week we saw an agreement reached on the budget for 2014, but this did not include

anything that would have a significant impact on economic growth for next year.

Still high correlation for EUR/NOK

with relative rates

Source: Bloomberg, Danske Bank Markets *

Correlations based on weekly changes using 26-

week rolling window,

DKK rates expected to be above EUR

rates in 2014

Source: Danske Bank Markets

Top 5 correlations with relative rates

EUR-crosses vs. 2Y swap spreads

1. EUR/USD (73%) ↑

2. EUR/CAD (69%) ↑

3. EUR/NOK (68%) ↑

4. EUR/AUD (62%) ↑

5. EUR/NZD (52%) ↑

-0.20%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

Nov13 May14 Nov14 May15 Nov15 May16 Nov16 Jun17

Pricing DKK-OIS 1m swap

28-Nov-13 28-Nov-13 Current policy rate Next policy move

7 | 2 December 2013 www.danskeresearch.com

Scandi markets ahead

Scandi market movers ahead

Source: Danske Bank Markets

Key Data and Events in Week 49

Period Danske Bank Consensus Previous

8:30 SEK PMI Index Nov 52

9:00 NOK PMI Indeks Nov 53.7 53.6

10:00 NOK Credit indicator (C2) y/y Oct 6.1% 6.2%

Tuesday, December 3, 2013 Period Danske Bank Consensus Previous

16:00 DKK Currency reserves DKK bn Nov 491

Wednesday, December 4, 2013 Period Danske Bank Consensus Previous

8:30 SEK PMI services Index Nov

Thursday, December 5, 2013 Period Danske Bank Consensus Previous

9:30 SEK Service production m/m|y/y Oct -0.4%|1.15

Friday, December 6, 2013 Period Danske Bank Consensus Previous

9:00 DKK Industrial production m/m Nov 1.6%

9:30 SEK Budget balance SEK bn Nov -7.4

10:00 NOK Industrial production m/m|y/y Oct 0.7%|-1.4%

10:00 NOK Manufacturing production m/m|y/y Oct 0.3%|� -0.2%|3.2%

The editors do not guarantee the accurateness of figures, hours or dates stated above

Monday, December 2, 2013

8 | 2 December 2013 www.danskeresearch.com

Scandi markets ahead

Disclosure This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske

Bank’). The author of the research report is Arne Lohmann Rasmussen.

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

Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject

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.

The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’

rules of ethics and the recommendations of the Danish Securities Dealers Association.

Conflicts of interest

Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-

quality research based on research objectivity and independence. These procedures are documented in Danske

Bank’s research policies. Employees within Danske Bank’s Research Departments have been instructed that any

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

and the Compliance Department. Danske Bank’s Research Departments are organised independently from and do

not report to other business areas within Danske Bank.

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 or debt capital transactions.

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 upon 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.

Date of first publication

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

General disclaimer This research has been prepared by Danske Bank Markets (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 as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments

(i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or

options, warrants, rights or other interests with respect to any such financial instruments) (‘Relevant Financial

Instruments’).

The research report has been prepared independently and solely on the basis of publicly available information that

Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not

untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates

and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation

any loss of profits, arising from reliance on this research report.

The opinions expressed herein are the opinions of the research analysts responsible for the research report and

reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not

undertake to notify any recipient of this research report of any such change nor of any other changes related to the

information provided in this research report.

This research report is not intended for retail customers in the United Kingdom or the United States.

9 | 2 December 2013 www.danskeresearch.com

Scandi markets ahead

This research report is protected by copyright and is intended solely for the designated addressee. It may not be

reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank’s prior

written consent.

Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer

and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S.

Securities and Exchange Commission. The research report is intended for distribution in the United States solely

to ‘U.S. institutional investors’ as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this

research report in connection with distribution in the United States solely to ‘U.S. institutional investors’.

Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence

of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are

not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements

of a non-U.S. jurisdiction.

Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial

Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non-

U.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be

registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and

auditing standards of the U.S. Securities and Exchange Commission.