Calmer post-intervention markets

(21.03.2011) Higher risk willingness weakened appetite for safe havens on Friday. The international military intervention in Libya, and continued uncertainty regarding the situation in Japan, will probably lead to another turbulent week.

By Kjersti Haugland, Analyst at DNB Markets

dealingroom DNB markets in osloStrengthened risk appetite has contributed to lifting stock markets and long government bond yields. The Swiss franc (a typical safe haven currency) has weakened, while the SEK and the NOK has strengthened. Attacks on Libya by international military forces continue today, and developments in Japan are still highly uncertain. All is set for another turbulent week in the market.

G7's coordinated interventions on Thursday night led to an immediate 3% weakening of the yen versus the dollar. The yen has strengthened somewhat again during the weekend. Conflicting forces are pulling in opposite directions for the Japanese currency. Capital flows and expectations about Japanese institutions and individuals selling foreign assets is a strengthening force. The possibility of another FX intervention is a weakening force. We believe in a sideways movement of the yen in the short term, although volatility will be high. On the longer term we stick to our view that fundamentals point to a weaker Japanese currency.

Bank of England's minutes from its interest rate meeting on 10 March is published on Wednesday. The discussion and the voting will provide us with more signals regarding the timing of the first hike. Consensus according to Reuters is that voting remained the same as in the previous meeting, where three out of nine members of the committee wanted a hike. We believe that BoE will deliver a hike in May, triggered by the fact that inflation has remained well above target for a long time. However, higher interest rates will be bad news for the UK economy, in the middle of harsh fiscal austerity measures. We get news regarding both the former factors this week: February inflation numbers tomorrow and Osbourne's new fiscal budget on Wednesday.

EURUSD came up to its highest level in four months on Friday, and Euro member leaders continue their preparatory meetings ahead of the European Council meeting on Thursday and Friday. They have already agreed to increase the effective size of its EFSF emergency fund to 440 bn euros, but details regarding how this will be achieved remains to be settled. Jean-Claude Juncker, leader of the Eurogroup, said on Friday that increased guarantees from the member countries is the most probable outcome.

Despite debt problems in the periphery, and higher uncertainty in the wake of the Japanese disaster: ECB will probably hike at its April meeting. This is the main reason why we find it more likely that Norges Bank will choose to hike in May rather than in June, given its 50/50 probability between the two meetings implied in their new interest rate path. The Norwegian central bank wishes to re-start its hiking process after halting for a year and the leeway from ECB's hike will probably be exploited immediately. Lower international forward rates since the cut-off of the Report could make the central bank wait until June though. 

The Riksbank is known to be considerably less concerned than its Norwegian colleagues about the strengthening of their currency. Deputy Governor Svante Öberg caused a marked appreciation of the SEK when he was quoted on wanting the repo rate to be hiked at every meeting this year and possibly also next year. His hawkish view should be well known already though, as it is clearly stated in minutes from the Riksbank's meeting.


China continues to tighten policy to strain high inflation by trying to put a lid on credit growth. The Chinese central bank announced on Friday that it will raise the primary reserve requirements further. This is the third time requirements are hiked this year, and the sixth time since October.