Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Aug 28 08 08:05 GMT |
Danske Daily

* The positive sentiment in the US stock market continues after higher than expected durable goods orders. Strong demand from foreign central banks at the biggest 2Y US treasury auction yesterday supports the US bond market
* Oil prices continue to rise as Hurricane Gustav approaches the Mexican Gulf
* SEK weakened against EUR yesterday from weaker than expected confidence data. Hence, weak Swedish retail sales would support expectations of the Riksbank being on hold at the September meeting and weaken SEK
* Key events today - German unemployment data, Euroland M3 growth, SEK retail sales and revised US GDP data

Markets Overnight

The positive sentiment continues in the US stock market, which rose for a second day after orders for durable goods unexpectedly advanced in July and analysts said new investments by Fannie Mae and Freddie Mac will boost their earnings.

Several financial stocks such as Bank of America Corp. and American Express gained after the durable goods orders report bolstered expectations that the economy is recovering. Fannie Mae and Freddie Mac rose more than 15 percent each after they sold USD 3bn in debt at yields which suggest they may not need a government bailout. Finally, energy producers received a boost from higher oil prices. Oil prices went up more than USD 2 per barrel due to fear that hurricane Gustav might disrupt production in the Mexican Gulf. This pushed up most energy producers in the S&P500 and the index closed up 0.8%, while the Dow Jones index rose 0.8%.

Initially US bond yields rose after the release of the durable goods orders data, but given the demand at a record high auction of 2Y UST notes, rates began to decline. 2Y yields ended the day down by some 5bp after the government sold a record USD 32bn securities at the lowest yield since April. The Treasury's sale of securities drew more indirect bidders than average, an investor class that includes foreign central banks. The USD 54bn total of 2- and 5-year government notes for sale this week is the largest ever. Foreign central banks have been increasing their holdings of US Treasuries in recent weeks as they dump agency debt, according to the Fed. Treasuries held by foreign central banks increased to a record USD 1.4 trillion on August 20, while agency bonds fell to USD 975m from USD 984bn held on July 16.

It has been a mixed session in the Asian stock markets with the Japan's Topix index declining among concerns of bankruptcies of Japanese real estate companies. Other major Asian indices saw a rise on the back of the better than expected US data released yesterday and higher energy prices.

The outlook for the dollar is slightly more mixed after hawkish comments from ECB's Weber on the one hand, but with better than expected US economic data released yesterday. This morning the dollar has continued to weaken against the euro, and is trading just below the 148-level, up from the 147-level. Swedish kroner weakened considerably yesterday versus the euro after weaker than expected consumer confidence data which sent EUR/SEK from 937 to 941 yesterday. We have seen a modest rebound to 940.5. NOK remains strong against the euro and looking to test the 790-level.
Global Daily

This morning Germany releases unemployment figures for August. The numbers are scheduled for 9.55CET, but note that they are often leaked in advance so look out for the data throughout the morning. Consensus is a decline of 10k (from -20k last month) but we would not be surprised to see unemployment around zero or even in positive territory. The labour market has been slowing gradually this year and with the German economy getting close to recession in the second half we should soon start to see unemployment rise.

Euroland M3 and credit growth is also released this morning (10.00CET). We look for a further decline in M3 and credit growth in line with consensus. The credit growth numbers are used by ECB to gauge the extent of any credit crunch, but so far the ECB has been confident that there is no sign of a credit crunch, since credit to non-financial companies is growing steadily. Only yesterday ECB's Papademos stated that there is no sign of a credit crunch in Euroland. Retail PMI data is also released (10.00CET) but is not a very reliable indicator for retail sales. In the UK, we receive August's CBI Distributive Trades Report at 12:00, which is expected to confirm the poor situation of the UK consumer. Overall, we remain bearish on the GBP and are looking for EUR/GBP to rise towards 0.81 in the coming months.

In the US focus is on the jobless claims and the second release of GDP (both 14.30CET). Jobless claims continue to be at an elevated level around 430k but the numbers are distorted by the extension of the benefit period. It is therefore hard to judge whether there is an underlying further deterioration in the labour market. Consensus is for a broadly unchanged level of 425k. The revised GDP numbers should not bring much new information.

Yesterday, Euroland bond markets got a big hit from hawkish comments from ECB's Weber, who is still talking about the potential of further rate hikes in 2009. This came after the scene had been set for a further decline in bond yields with very weak German Ifo on Tuesday and lower than expected German inflation numbers yesterday. But Weber's comments spoiled the fun in the bond market and sent the 2y yield up by 10bp. The commentssuggest that the barrier for ECB cuts is still quite high and will likely work to keep us in the range seen over the last two weeks.

In Switzerland, employment numbers covering Q2 are published at 09:15. The Swiss labour market has remained very strong despite a marked slowdown in economic activity, and it shall be interesting to see if there are any signs of beginning weakness in today's report. In general, however, the employment numbers are not expected to impact on the CHF, which remains largely driven by movements in the global stock market. As we expect deleveraging to remain a key theme on the financial markets in the months to come, we continue to look for further strengthening of the CHF.
Scandi Daily

From Sweden we receive retail sales data today, which will of course be very interesting given the current strong focus on the household sector. Our forecast is a notch below the market consensus, in line with the very weak consumer confidence data and preliminary flash data on shoe and clothing store sales.

The Statistical office SSB releases its new economic forecasts for the Norwegian economy today. The SSB often takes a very bearish view on the economy and often calls for lower rates. We think the release today will be no exception. The latest GDP numbers have been soft and housing construction is under heavy pressure. In that respect we will most likely see a report indicating that rates can be cut aggressively for the next two years. We will probably also see quite low growth forecasts. The report might push Norwegian rates lower today, albeit a soft report should be no big surprise to the market.

Today we will also see the release of registered unemployment numbers for August. We expect the level to drop from 1.8% in July to 1.7%, but due to seasonal factors. The Norwegian labour market is also softening, albeit slowly. Hence, we would not be surprised to see an unchanged reading.

Danske Bank
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