NEWS / Foreign Exchange

Focus on the rhetoric at the monetary-policy meeting at the ECB

Fundamental highlights this week

The US: ISM Service ??“ Monday

• ISM is one of the indices where any consequences of the financial crisis are reflected.

• In September, ISM for the service sector fell to 54.8 from 55.8 while new orders fell from 57 to 53.4. The employment index rose to 52.7 from 47.9.

• So attention will be paid to the employment index in this report.

• We expect a minor fall in the ISM service index in October.

The euro zone: monetary-policy meeting at ECB ??“ Thursday

• Several members of the ECB with Germany??™s Weber at the helm have in recent weeks sharpened their rhetoric on inflation which rose from 1.7% in August to 2.6% in October.

• Core inflation is, however, still stable.

• But the short-term growth prospects are gloomy.

• We therefore expect unchanged interest rates and the rhetoric not to be sharpened at the coming monetary-policy meeting.

The US: Bernanke testifies before Congress - Thursday

• The Fed??™s Bernanke will testify before the Joint Economic Committee in the Congress.

• Mr Bernanke will be asked about the development of growth, inflation, the housing market and the financial markets. Including the situation in the credit market.

• It will be interesting to hear Mr Bernanke??™s view on these points.

Expected Exchange Rates

United States Dollar EUR/USD USD/DKK

• The most important macroeconomic events are ISM Service on Monday and the Fed chairman Ben Bernanke??™s testimony before the Congress on Thursday.

• The downgrading of Citigroup and rumours re-introduced risk aversion, which led to USD strengthening on Thursday.

• However, EUR/USD seemed on Friday to be heading towards 145 again.

• Therefore, we maintain our BUY recommendation on EUR/USD for the time being. Risk aversion may change the picture once again.

Great Britain Pound EUR/GBP GBP/DKK

• The highlight of the week is the monetary policy meeting at the Bank of England (BoE).

• We expect the BoE to leave rates unchanged at Thursday??™s meeting and that the bank will lower interest rates in mid-2008.

• GBP seems to be trading in a range at the moment. GBP strengthened during the week from the top of the range and reached the bottom during Thursday??™s trading session.

• We maintain our current neutral recommendation, since our indicators point in the opposite direction.

Japanese Yen EUR/JPY JPY/DKK

• The markets are relatively jittery at the moment, where focus is directed towards the release of Q3 results from the large banks and corporations.

• Investors are primarily focused on the effect that the turbulence in the financial markets has had on earnings and global growth.

• We expect that market participants will continue to be jittery. That being said, we expect carry trades will continue to dominate in the absence of news that can shake up the markets.

Swiss Franc EUR/CHF CHF/DKK

• There are not many significant macroeconomic events in Switzerland this week. Hence we expect market sentiment to be the all-important factor.

• We do, however, note that the SNB has stated that a rising inflationary pressure will prompt it to raise rates. This has supported CHF lately.

• We expect that the predominant theme this week will be rumours and speculations regarding the prospects for global growth.

Norwegian Krone EUR/NOK NOK/DKK

• The Norwegian krone has been affected by the oil price which is rising rapidly with the USD 100 mark within reach.

• Lately rising oil prices have had a more limited effect on NOK.

• Last week, Norges Bank revised down its expectations of future rates and inflation, which contributed to a weakening of NOK.

• Hence NOK is affected by several contradictory effects and as a consequence we maintain our neutral view.

Swedish Krona EUR/SEK SEK/DKK

• SEK is extremely sensitive towards the sentiment in the equity markets at the moment. Hence the direction of EUR/SEK will shift in line with developments in the equity markets.

• Our main scenario is that carry trades and risk seeking behaviour will continue in the short term.

• Hence we have chosen to take profit on a long position in EUR/SEK.

• At the moment, we have a neutral position in the cross rate, but in our view definitive breach of the 21-day moving average will indicate that there is further downside potential while breach of 928.50 will point to a further climb.