Morning report

Unpopular euro
05-Oct-2011
Since late August the euro has weakened as much as 8 per cent against the US dollar. The debt crisis has escalated and more fear a Greek bankruptcy. In addition, currency interventions and a diversification of FX reserves away for the euro have probably been important drivers. The euro must be said to have remained surprisingly strong through two years of debt turbulence in the euro area. Trade weighted the euro is unchanged since January this year, and the same applies against the dollar and the Norwegian krone. One reason for the stable euro may be that neither of the two dominant currencies has emerged as very attractive. The dollar has been weighed down by disappointing growth, expectations of low interest rates for a long time, the downgrade of US state finances and political disagreement. And the same must be said also to apply for the common European currency. Over the past few months, however, the debt crisis has escalated and resulted in a weaker euro. Since late August/early September, the euro has weakened as much as 8 per cent against the dollar. Increased fear of a Greek bankruptcy, possible consequences for the euro zone as a whole and expectations of interest rate cuts have all been important drivers behind the weakening. In addition, the dollar has benefitted from its status as a safe haven. Another possible contributing factor to the recent euro weakness is currency interventions from emerging economies. The so-called currency war that blew up last fall, has recently taken a different turn. A year back expectations of low interest rates and sluggish growth in the industrialized world resulted in increased capital flows to emerging economies. Furthermore, prospects of new monetary policy stimulus made investors look to emerging economies for additional profits. Capital inflows led to increased demand for recipient countries' currencies, which led to appreciation pressure. Several countries that experienced their currencies strengthening implemented active measures. Several Asian countries intervened in the currency market and the central banks sold their own currencies in order to prevent/limit further strengthening. Several countries have a close relation to the US dollar, and hence they bought dollars and sold their own currency. At that time the dollar was considered unattractive, with the prospect of new quantitative easing and the possibility of higher inflation in the future. Hence, the dollar was subsequently sold on, and mainly against the euro (confirmed by figures for changes in foreign exchange reserves, the euro was steadily taken a larger share). Today, the situation is quite different. Financial turmoil and fear are increasing, which has led to a capital flight from emerging economies. Hence, currencies in emerging economies have weakened over the last month. To prevent major shocks in exchange rates, the central banks have again started to intervene, but this time they purchase their own currencies to limit the depreciation pressure. Among others, South Korea, Indonesia and Poland have taken action and purchased their own currency. At the same time the desire to diversify currency reserves away from the euro has increased. A year ago, the euro appreciated against the dollar due to interventions by Asian central banks, now currency flows seem to be in the dollar's favor. The implications for the euro could be further weakening if this is correct. In our current forecasts we have a stronger euro against the dollar short term, this should be considered if we see signs that these flows persist. Furthermore, one should not forget that exchange rates often move faster and more than one predicts. In the very short run the euro may seem slightly oversold and a correction should not be ruled out. This may come as early as on Thursday. We consider an interest rate cut from the ECB as unlikely, while market participants now are pricing in an interest rate cut by 25 basis points. The euro bounced back yesterday after France and Belgium rescued the bank Dexia. It may, however, be short lived, as Moodys has downgraded Italian debt by three notches. maren.romstad@dnbnor.no As of Yesterday's key economic events (GMT) 09:00 EMU PPI Aug 14:00 US Manufacturing orders Aug 14:00 US Speech by Fed Governor Bernanke As of Todays key economic events (GMT) 08:30 UK GDP, final Q2 09:00 EMU Retail sales Aug 12:15 US ADP employment Sep 14:00 US ISM, services Sep Unit y/y % y/y % Unit y/y % m/m % 1000 Index Prior 6.1 2.4 Prior 0.7 0.2 91.0 53.3 Poll 5.8 0.1 Poll -0.2 80.0 53.0 Actual 5.9 DnB NOR

NOK & 3m NIBOR

8.00 7.80 7.60 7.40 25-Aug 14-Sep 3m ra. 3.20 3.10 3.00 2.90 4-Oct EURNOK

SEK & 3m STIBOR

9.5 9.3 9.1 8.9 8.7 25-Aug 14-Sep 2.50 2.45 4-Oct EURSEK 2.60 2.55

3m ra.
Headquarters 0021 Oslo Stranden 21 Offices Abroad New York London Shanghai Singapore Stockholm Sales Oslo (+47) Equity Fixed Income FX/IR Regional sales (+47) Bergen Bod Fredrikstad Hamar Haugesund Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund +47 03000

+1 212 681 3800 +44 207 6211111 +86 21 6132 2888 +65 6220 6144 +46 8 4734850 22 94 89 40 22 01 78 20 22 01 76 50 55 75 69 61 52 61 38 22 51 77 73 33 73 21 55 39 05 72 27 07 01 84 62 58 37 84 95 87 41 14 09 32 28 76 04 96 74 13 60 80 60 50 69 06 27 62 50 30 80 89 00 09

Research Regional Sales (+47) Eirik Larsen 22 01 76 55 Research FX/IR (+47) ystein Drum Kjersti Haugland Ole Andr Kjennerud Knut A. Magnussen Maren Romstad Camilla Viland Kyrre Aamdal Credit Research (+47) Ole Einar Stokstad Mikael L. Gjerding se Haagensen Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen 22 22 22 22 22 22 22 22 22 22 22 22 22 01 01 01 01 01 01 01 01 01 01 01 01 01 76 78 78 76 76 77 76 78 77 76 76 77 78 56 03 24 63 64 41 67 37 62 93 77 36 15

05-Oct-2011

Morning report

Oil spot & NOK TWI

130 110 90 70 25-Aug 14-Sep NOK TWI ra. 100 98 96 94 4-Oct $/b

SPOT RATES AND FORECASTS (Source: Reuters and DnB NOR Markets)
FX USDJPY EURUSD EURGBP EURCHF EURNOK EURSEK EURDKK USDNOK JPYNOK SEKNOK GBPNOK USDSEK JPYSEK NOKSEK GBPSEK Prior 76.86 1.334 0.862 1.223 7.836 9.130 7.443 5.875 7.629 0.859 9.086 6.846 8.892 1.167 10.603 Last 76.70 1.331 0.862 1.227 7.852 9.162 7.443 5.900 7.694 0.858 9.114 6.882 8.981 1.168 10.636 % -0.2% -0.2% 0.0% 0.3% 0.2% 0.3% 0.0% 0.4% 0.9% -0.1% 0.3% 0.5% 1.0% 0.1% 0.3% In 1 m ...3 m 80 80 1.35 1.35 0.86 0.86 1.20 1.20 8.00 7.80 9.30 9.10 7.45 7.45 5.93 7.41 0.86 9.3 6.89 5.51 1.16 10.81 5.78 7.22 0.86 9.1 6.74 5.39 1.17 10.58 ...6 m ...12 m 80 90 1.30 1.25 0.84 0.82 1.20 1.25 7.70 7.70 9.00 9.00 7.45 7.45 5.92 6.16 7.40 6.84 0.86 0.86 9.2 9.4 6.92 7.20 5.54 6.48 1.17 1.17 10.71 10.98 FX AUD CAD CHF CZK DKK GBP HKD ISK KWD LTL LVL NZD PLN SGD RUB USD 0.9552 1.0538 0.9216 18.70 5.5919 1.5447 7.7840 119.00 0.2779 2.5942 0.5331 0.7620 3.3058 1.3077 32.6515 % -0.25% 0.09% 0.51% 0.20% 0.22% -0.25% -0.02% 0.26% -0.26% 0.20% 0.21% 0.09% 0.22% -0.02% -0.02%

EUR vs GBP & CHF

1.25 1.20 1.15 1.10 1.05 25-Aug 14-Sep GBP r.a 0.89 0.87 0.85 0.83 0.81 4-Oct CHF

Gov. Bonds, 10y

2.25 2.00 1.75 1.50 25-Aug 14-Sep NOK, ra. 3.00 2.50 2.00 1.50 4-Oct SEK

1m 3m 6m 12m 3y 5y 7y 10y

SWAP AND MONE YM ARKET RATES (Source: Reuters) NIBOR STIBOR EURIBOR Prior Last Prior Last Prior Las t 2.76 2.77 2.32 2.32 1.30 1.30 3.00 2.96 2.51 2.51 1.50 1.50 3.28 3.19 2.53 2.52 1.71 1.71 3.35 3.28 2.58 2.57 1.87 1.87 2.75 2.76 1.96 1.96 1.60 1.54 3.09 3.09 2.18 2.18 1.95 1.90 3.31 3.31 2.34 2.34 2.20 2.20 3.51 3.51 2.41 2.41 2.47 2.47 GOVE RNMENT BONDS (Source: Reuters) NORWAY SWEDEN GERMANY Prior 116.45 2.31 0.58 Last 112.42 2.30 0.56

USD LIBOR P rior 0.24 0.38 0.56 0.71 0.77 1.25 1.66 2.04 US

Last 0.24 0.38 0.57 0.72 0.79 1.25 1.68 2.05

JPY and DowJones

14 12 10 8 25-Aug 14-Sep USDJPY ra. DowJones, 1000 78 77 76 75 4-Oct

10y 10y yield vs bund

In 3m 6m 12m
1.49 1.44 1.39

NORWAY 3m nibor 10y swap 3.05 4.25 3.20 4.50 3.50 4.50

Prior Last Prior Las t P rior Last 118.248 118.24 104.794 104.65 102.76563 102.64 1.61 1.62 1.73 1.74 1.82 1.84 -0.12 -0.11 0.09 0.10 INTEREST RATE FORECASTS SWEDEN GERMANY US 3m s tibor 10y swap 3m euribor 10y swap 3m libor 10y swap 2.50 3.00 1.50 3.00 0.35 3.00 2.75 3.25 1.50 3.25 0.35 3.25 2.90 3.25 1.50 3.25 0.35 3.25

2000 1900 1800 1700 1600 1500 25-Aug 14-Sep EURUSD ra.

USD and gold

1.34 4-Oct Gold

EURSEK & OMXS

9.4 9.2 9.0 8.8 25-Aug 14-Sep OMXS ra. 450 430 410 390 370 350 4-Oct EURSEK

FRA NOK DEC MAR JUN SEP FRA SEK DEC MAR JUN SEP

3m 2.67 2.33 2.27 2.27 3m 2.11 1.80 1.72 1.72

Prior 2.67 2.33 2.26 2.24 Prior 2.12 1.82 1.73 1.72

chg 0.00 0.00 0.01 0.03 chg -0.01 -0.01 -0.01 0.00

TWI NOK SEK EUR USD GBP Comm. Brent spot Brent 1m Spot gold

Today 98.17 120.96 104.99 79.15 79.50 Today 104.2 101.6 1638.0

% Stock ex. Today - 0.02 Dow Jones 10,808.7 - 0.45 Nasdaq 2,404.8 0.01 FTSE100 4,944.4 0.06 Eurostoxx50 2,091.1 Dax 5,216.7 Last Nikkei225 8,412.2 104.1 Oslo 323.94 99.8 Stockholm 394.71 446.32 1638.0 Copenhagen

% 1.4% 3.0% -2.6% -2.2% -3.0% 0.0% -3.2% -3.9% -2.2%

Morning report
05-Oct-2011
IMPORTANT/DISCLAIMER This email, and any files attached with it, must be seen as marketing material unless the criteria for preparing investment research, according to the Norwegian Securities Trading Regulation 2007/06/29 no. 876, are met. The information contained in this e-mail, and any files attached with it, is confidential and intended solely for the use of the individual they are addressed to. If the reader of this message is not the intended recipient you are hereby notified that you have received this document in error, and that any review, distribution or copying of this message is strictly prohibited. If you have received this communication in error, please contact the sender by return email and destroy all copies of the original message. Please advise the sender immediately if you or your employer do not consent to Internet e-mail messages of this kind. Any attached report is based on information obtained from public sources that DnB NOR Markets believes to be reliable but which DnB NOR Markets has not independently verified, and DnB NOR Markets makes no guarantee, representation or warranty as to its accuracy or completeness. Any opinions expressed herein reflect DnB NOR Markets judgment at the time the report was prepared and are subject to change without notice. Confidentiality rules and internal rules restrict the exchange of information between different parts of DnB NOR Markets/DnB NOR Bank ASA and this may prevent employees of DnB NOR Markets who are preparing this report from utilizing or being aware of information available in DnB NOR Markets/DnB NOR Bank ASA which may be relevant to the recipients decisions. This report is not an offer to buy or sell any security or other financial instrument or to participate in any investment strategy. No liability whatsoever is accepted for any direct or indirect (including consequential) loss or expense arising from the use of this report. Distribution of research reports is in certain jurisdictions restricted by law. This report is for clients only, and not for publication, and has been prepared for information purposes only by DnB NOR Markets - a division of DnB NOR Bank ASA registered in Norway number NO 984 851 006 (the Register of Business Enterprises) under supervision of the Financial Supervisory Authority of Norway (Finanstilsynet) and the Monetary Authority of Singapore, and on a limited basis by the Financial Services Authority of UK. Further information about DnB NOR Markets can be found at website dnbnor.no. Additional information for clients in Singapore This email, and any materials attached with it, has been distributed by the Singapore branch of DnB NOR Bank ASA. It is intended for general circulation and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should seek advice from a financial adviser regarding the suitability of any product referred to in any attached report, taking into account your specific financial objectives, financial situation or particular needs before making a commitment to purchase any such product. Recipients of this report should note that, by virtue of their status as accredited investors or expert investors, the Singapore branch of DnB NOR Bank ASA will be exempt from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the FAA), the Financial Advisers Regulations and associated regulations there under. In particular, it will be exempt from: - Section 27 of the FAA (which requires that there must be a reasonable basis for recommendations when making recommendations on investments). Please contact the Singapore branch of DnB NOR Bank ASA at +65 6212 0753 in respect of any matters arising from, or in connection with, any attached report. We, the DnB NOR Group, our associates, officers and/or employees may have interests in any products referred to in this email, and any materials attached with it, by acting in various roles including as distributor, holder of principal positions, adviser or lender. We, the DnB NOR Group, our associates, officers and/or employees may receive fees, brokerage or commissions for acting in those capacities. In addition, we, the DnB NOR Group, our associates, officers and/or employees may buy or sell products as principal or agent and may effect transactions which are not consistent with the information set out in this email, and any materials attached with it. In the United States Each research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the views expressed in this report accurately reflect that research analysts personal views about the company and the securities that are the subject of this report; and (ii) no part of the research analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in this report. This email, any files attached with it, is being furnished upon request and is primarily intended for distribution to Major U.S. Institutional Investors within the meaning of Rule 15a-6 of the U.S. Securities and Exchange Commission under the Securities Exchange Act of 1934. To the extent that this report is being furnished, or will be disseminated, to non-Major U.S. Institutional Investors, such distribution is being made by DnB NOR Markets, Inc., a separately incorporated subsidiary of DnB NOR that is a U.S. broker-dealer and a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. Any U.S. recipient of this report seeking to obtain additional information or to effect any transaction in any security discussed herein or any related instrument or investment should call or write DnB NOR Markets, Inc., 200 Park Avenue, New York, NY 10166-0396, telephone number 212-681-3800 or fax 212-681-4119.