Stronger NOK

(21.01.2011) Fear of monetary policy tightening in China weighed on equities and commodity currencies yesterday. US key figures came in stronger than expected and supported the dollar, while the Norwegian krone has weakened versus most currencies.

By Camilla Viland, Analyst at DNB Markets

norske kroner DNB markets ccThe Norwegian krone has weakened by about 1 per cent versus both the euro and the dollar over the last 24 hours. The development may be due to a lower oil price and a decline in the Norwegian stock market.

A January phone survey done by Norges Bank among a sample of the Regional network enterprises show that production and employment has developed in line with expectations reported in the November survey. Capacity utilisation is reported to be unchanged. Norges Bank's Q4 lending survey shows that households' demand for loans has increased, while banks had expected unchanged demand. Going forward, banks expect demand to stay unchanged. Credit practise has been, and is expected to remain, unchanged. In total yesterday's figures do not give any reasons to reassess Norges Bank's interest rate plans. We believe that the central bank will wait until June to hike next, although strong house price growth the latest months has increased the risk that Norges Bank will move faster.

The weekly US labour market figures came in stronger than expected. The number of Americans filing for first-time unemployment benefits dropped sharply, from 441,000 to 404,000 last week. This was the sharpets weekly drop since February last year. A Labor Department official said the larger than expected decline was partly explained by jobless claims returning to trend after the big rise the week prior, which may have been due to the holiday season. Continued claims also fell and came in at 3.86 million people, the lowest since October 2008.

The Philadelphia Fed index fell from 20.8 in December to 19.3 in January. The details do however paint a more positive picture. New orders rose to the highest level in six year and the employment index is the strongest in four years. Existing home sales rose by more than 12 per cent in December, to an annual rate of 5.28 million units. This was far stronger than expected. This was the fifth rise in six months. In general the US key figures released yesterday were seen as positive and supported the dollar which in particular strengthened versus the yen and the Swiss franc.

The Australian dollar came under pressure yesterday as stronger than expected Chinese growth data fuelled speculation of further monetary policy tightening from the Chinese central bank. The AUD has generally benefited from high Chinese demand for the country's commodities and last month the currency hit a 28 year high versus the US dollar. Other commodity currencies, like the Canadian and the New Zealand dollar also weakened yesterday. Fear of Chinese monetary policy tightening also weighed on equity markets yesterday and most international stock markets declined.

The German IFO index rose to record strong levels in December (109.9). At these levels, the index indicate an annual growth rate in the German economy of 4 per cent. Earlier this week a large spike in the ZEW index revealed that optimism still is high. Still, consensus expects the IFO index for January, which is released today, to go down to 106.5. British retail sales figures for December are also due today. After two months of increases, consensus expects retail sales to decline by 0.2 per cent m/m this month. In general, fiscal tightening is expected to weigh on private consumption going forward.