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Markets are still gripped by recession fears. We have looked at past recessions based on the example of Germany and show that the economy only collapsed when the real economy or financial markets were already overheated and a tight monetary policy ended the party. We do not see such imbalances at present in the US or the euro zone. The Chinese government has the means to avert an economic slump. We therefore believe the worries about the global economy are exaggerated, although our economic forecasts are generally more cautious than the consensus. Equity prices should further recover in the mid-term. Page 2

Recession? In France less need for correction than in Spain Unit labour costs relative to euro zone, index 1999 = 100

98

100

102

104

106

108

110

112

114

116

118

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Spain France

Source: Global Insight, Commerzbank Research

Paradigm shift on the oil market. It seems that OPEC countries want to defend their market share and are prepared to do so even at the cost of a price war. In the long-term, prices are therefore likely to be lower than we had expected and we have cut our 2015 price forecast from an average of USD 105 to USD 85 per barrel. Page 6

Fed preview: QE3 ends, zero interest stays. At the meeting on 27/28 October, the Fed will terminate its asset purchase programme (QE3) after more than two years although further adjustments to monetary policy are not expected. Page 5

Product Idea: Forward Extra on copper. We believe that copper supply in the current year will again fail to meet demand. Prices are thus likely to increase again and we advise our clients to hedge their copper needs against rising prices. Page 7

Outlook for the week of 27 October to 31 October 2014 Economic data: Weak economic data are likely to fuel speculation about broad-based ECB government bond buying next week. In contrast, US data should confirm that the reversal in interest rates is drawing nearer. Page 9

Bond market: Lingering market liquidity risks are unlikely to dissipate and we recommend a neutral stance on peripheral markets. 3

FX market. If the Federal Reserve sticks to its normalisation schedule as expected, this will provide further support for the USD. Page 14

Equity market: The ongoing low-interest environment and changes in pension accounting rules are impacting on many DAX companies' equity capital. Page 15

Commodity market: Oil markets will remain over-supplied and the gold market recovery is also at risk. Page 16

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Week in Focus How recessions actually evolve

.

Chief economist

Dr Jörg Krämer +49 69 136 23650 [email protected] Editor

Peter Dixon +44 20 7475 4806 [email protected]

24 October 2014

The Week in Focus in 100 seconds Please follow this link for a video summary.

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2 research.commerzbank.com 24 October 2014

How recessions actually evolve Markets are still gripped by recession fears. We have looked at past recessions based on the example of Germany and show that the economy only slumped when the real economy or financial markets were already overheated and a tight monetary policy ended the party. We do not see such imbalances at present in the US or the euro zone. While house prices have indeed skyrocketed in China, the Chinese government has the means to avert an economic slump. We therefore believe the worries about the global economy are exaggerated, although our economic forecasts are generally more cautious than the consensus.

Recessions in Germany In a recession, economic activity drops significantly on a broad front and over a long period of time. We have looked at the underlying causes of recessions in Germany over the past 40 years, particularly because the German economy is closely linked with developments in other industrial countries.

1974/75: Economy had already overheated before the oil crisis In the Bretton Woods system of exchange rates, the D-mark was fixed to the US dollar. Consequently, until the final collapse of Bretton Woods in spring 1973, the Bundesbank was forced to more or less follow the Fed's lax monetary policy. This fuelled economic growth in Germany (Chart 1). Labour shortages emerged and wages rose at double-digit rates. The Bundesbank ultimately tried to dampen the economy, and hence inflation, with interest rate hikes totalling 400 basis points, supported by the government's stability programmes. Public expenditure was cut, a surtax was introduced and credit availability was reduced. These measures had an effect: from mid-1973, the economy grew at a much slower pace. The downswing turned into a recession when the oil price exploded in autumn 1973, withdrawing purchasing power from consumers and impacting the economy in other industrial countries.

1980/82: Second oil crisis By 1976, the German economy had emerged from the first oil crisis. Up to mid-1979, it expanded at annual rates averaging around 4%. Capacity utilisation rose again, which again raised inflation risks. The Bundesbank reacted in March 1979 with an initial rate hike from 3% to 4%. From June 1979, the oil price then climbed sharply again and the Bundesbank increased interest rates further, to 7.5% by May 1980. Restrictive monetary policy and the oil price shock caused the German economy to contract from the second quarter of 1980, as in other industrial countries.

1992/93: Recession hits after reunification euphoria German reunification in 1990 carried the West German social insurance system over to the federal states of former Eastern Germany and thus strengthened purchasing power there. At the same time, the German government invested heavily in eastern infrastructure.

CHART 1: Germany: Five recessions in 40 years GDP, in real terms, year-on-year change in per cent

CHART 2: USA: housing surplus has been worked through Residential construction, housing starts, monthly figures, annual rate in thousands

-8

-6

-4

-2

0

2

4

6

8

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

0

500

1000

1500

2000

2500

3000

1950 1960 1970 1980 1990 2000 2010

Housing starts Average 1950-2000

Source: Global Insight, Commerzbank Research Source: Global Insight, Commerzbank Research

Dr Christoph BalzTel. +49 69 136 24889

24 October 2014 research.commerzbank.com 3

The West German economy benefitted most from the pickup in demand in the east, after having already expanded at decent rates of 3.8% and 3.9% in 1988 and 1989 which put additional strains on capacity margins. On the back of this surge in demand, the economy continued to expand rapidly and inflation pressure increased, although the Bundesbank had already raised the discount rate from 2.5% in 1988 to 6% by the end of 1989. To keep inflation risks in check, it resumed interest rate hikes in early 1991. At their peak, rates reached a record level of 8.75% in summer 1992. By this point, previous hikes had already driven the economy into recession, especially since the global economy had been sluggish since 1991 and much investment in former east Germany turned out to be a mistake.

2001/2003: End of the technology boom The euphoria surrounding new opportunities in the Age of the Internet triggered a wave of investment in the 1990s, particularly in the IT sector. Investment was easy for many companies as capital was cheap on account of low interest rates and the booming equity market. When the phase of cheap money ended – for example, the ECB increased key rates from 2.5% in April 1999 to 4.75% by autumn 2000 – the bubble burst and equity markets slumped. Heavily indebted businesses had to consolidate their balance sheets and thus slashed investment. The German economy slipped into recession in mid 2001.

2009: Recession had already begun before the Lehman bankruptcy ECB rate cuts after the end of the New Economy boom helped the German economy to regain momentum. At the end of 2005, the ECB viewed the economic recovery in the euro zone as sufficiently strong to withstand higher interest rates intended to ward off growing inflation risks. By mid 2007, the key interest rate had risen by 200 basis points. At the same time, the USA slipped into recession at the end of 2007. Under the pressure of ECB interest rate hikes and lower export demand, the German economy contracted in the second quarter of 2008. The uncertainly shock posed by the Lehman bankruptcy on 15 September 2008 then accelerated the slide into the severest recession of the post-war period – a phenomenon not confined only to Germany.

How do things stand now? In the euro zone, the bubble has already burst These examples show that an economy slips into recession when central banks are forced to pursue a restrictive monetary policy to fight inflationary excesses in the real economy or market bubbles. Are investors therefore right to be worried about the global economy today?

In the euro zone, the bubble that formed as a result of overly expansionary monetary policy in the periphery already burst in 2008. Countries like Spain, Ireland and Portugal have reformed their economies and are working their way out of the trough. Of course, in France, unit-labour costs have risen too sharply and private households have accumulated too much debt. But the imbalances are much smaller than in Spain for example. Consequently, the need for correction is not so high that it has to end in a recession. At the same time, the ECB is driving the economy with ultra-loose monetary policy. Sooner or later, it is likely to pile the fire still higher with broad-based government bond purchases. This all suggests sluggish growth in the euro zone (2015: 0.8%) but not a recession.

Despite all the negative sentiment – the US economy is still looking robust We see no arguments for a recession in the US either. The imbalances that could trigger a recession are not in evidence. The clean-up after the housing bubble is well advanced. In past years, fewer housing units have been built compared to pre-recession norms (Chart 2, page 2). Over-investment should therefore have been corrected. At the same time, house prices have fallen noticeably from their peak and are at a more normal level relative to rents. Consumers have adjusted their excess consumption, which was partly financed by rising home equity, and have driven the household savings rate to 5.4% of disposable income. This is much higher than before the crisis (3%) and appears to be an appropriate level given current circumstances. At the same time, the level of private debt relative to disposable income has fallen significantly.

Of course, the other side of the coin is that the government has accepted a relatively high budget deficit to cushion the reform of private households. This deficit has also decreased significantly though; at the federal level, it is likely to come in at a relatively unproblematic 2% of GDP in the


current budget year (30 September 2015), compared to almost 10% in 2009. This progress is attributable to the strong economy which has filled the government’s coffers. Spending cuts or tax increases that could apply the brakes to the economy are not on the agenda.

At the same time, Fed monetary policy should continue to support the US economy for a while yet. Although the Fed is set to stop asset purchases at the end of the month (QE3), this does not alter the fact that its balance sheet, at 4.5 trillion dollars, has been hugely expanded compared to pre-crisis times.

The focus in the meantime is naturally on prospective Fed interest rate increases and we expect the first hike in June 2015. However, as the effects of this move will be felt only with a lag, this step is hardly likely to dampen the economy before mid-2016. And the Fed will hike rates only if the US economy proves to be robust, as we expect: US economic growth probably reached an annualised 3½% in the third quarter, and this is after strong growth of 4.6% in the second quarter. At the same time, all components of GDP likely contributed to growth in the last quarter, but particularly investment. This suggests that the economic recovery is broad based. This is also reflected in the labour market: irrespective of all short-term fluctuations in sentiment, the US economy has created over 200,000 jobs in seven of the past eight months and the outlier to the downside in August can be explained by special factors.

Greater risks in Emerging Markets, especially China There are no signs of an imminent slump in emerging markets where the year-on-year rate of industrial production and key leading indicators are moving sideways. There are dangers under the surface though. The Bank for International Settlements (BIS) has pointed out that emerging countries have been pursuing an overly expansive monetary policy for many years. In an environment of a strong domestic economy and inflation risks, higher interest rates would have been appropriate. Central banks sat tight though, because their currencies would have otherwise depreciated. The flipside is that low interest rates allowed debt levels to rise markedly in many countries.

This applies especially to China, where debt relative to GDP is much higher than in other emerging countries, albeit not as high as in the G7 countries. Furthermore, the Chinese housing sector is causing problems against a backdrop of oversupply. That said, most loans in China were granted by state-owned banks, which could hope for government support if required. And the central government at least should have the necessary fiscal scope to act. It is also conceivable in our view that the government will loosen various restrictions to revive housing demand. Moreover, the central bank could orchestrate lower mortgage interest rates, either by an across-the-board interest rate cut or by allowing targeted interest rate cuts aimed at mortgages.

In an environment of strong growth, it is also easier to service debt. The Chinese economy is still expanding at above-average rates, even if the pace of 7.7% last year is unlikely to be achieved this year (7.3%) due to property-related issues, and we envisage further weakening to 6.5% in 2015. The latest economic data for China (Q3 GDP growth of 7.3%, year-on-year) is in line with this and suggest a gradual slowdown rather than a slump.

In short, no global recession in sight, equity prices have upside potential Some part of investors' recession fears could result from the fact that the global economy is generally growing at a slower pace today than it was a few years ago, partly due ageing populations in many countries with the result that growth rates are rather closer to the zero line than they once were. We see few signs of a growth slump in major global regions or indeed globally, provided that Chinese economic policy avoids any major mistakes. Instead, we are likely to be witnessing a limited mid-cycle weakness.

Furthermore, the markets will profit when the ECB decides on further stimulus, as we expect, and buys government bonds on a large scale (QE). Our equity strategists therefore believe that indices have already priced in most of the negative news. Our Cross-Asset strategists recommend a moderate pro-risk positioning. In the sample portfolio, equities, REITs (Real Estate Investment Trusts) and commodities are overweighed, while bond investment in the USA, the UK and emerging countries are underweighted.


Fed preview: QE3 ends, zero interest rates remain

At the meeting on 27/28 October, the Fed will terminate its asset purchase programme (QE3) after more than two years. Further adjustments to monetary policy are not expected and the US central bank will probably not change its “Forward Guidance”. Amid the latest market turmoil, it will not want to drop the assurance that key interest rates will remain close to zero for some time yet. The Federal Open Market Committee (FOMC) will decide at its meeting next week to end QE3 completely. The central bank recently bought bonds on a scale of 15 billion dollars a month. All in all, the Fed has purchased assets totalling 1.7 trillion dollars under the QE3 programme. The Fed’s balance sheet has expanded to 4.5 trillion dollars in three rounds of quantitative easing, and now corresponds to 26% of GDP. Since 2007, the central bank balance sheet has increased fivefold.

The next step on the way to normalising monetary policy would be a departure from the zero-interest-rate policy conducted since the end of 2008. Of course, this is not expected in the near term as the Fed has always indicated in its statements that key interest rates will remain at zero for a “considerable time” after asset purchases end.

In recent weeks, significantly increased financial market volatility and signs of global economic weakening suggest that the Fed will be very careful in making changes to its communication, and is playing for time. We therefore believe that the FOMC will leave the phrase “considerable time“ in its statement.

Federal Reserve Board chair, Janet Yellen, has punched enough holes into the calendar-based Forward Guidance to make it largely irrelevant in any case in the past few months. Accordingly, the central bank will not make its decision in terms of timing and will focus on the economic data. The stable labour market recovery shows that the Fed has made considerable progress in fulfilling the employment part of its mandate. Consequently, as long as the recovery does not falter, and there as yet are no signs of it doing so, full employment should come within reach in 2015. It is therefore clear that key interest rates will rise in the not too distant future.

The precise timing of the “lift-off“, the first rate hike, should largely depend on whether inflation gradually moves towards the 2% target. It is presently at 1.5% and the sharp fall in oil prices should put downside pressure on inflation. The Fed will try and ignore short-term factors in assessing the inflation trend and be guided by an estimation of the underlying price pressure. This is better reflected by the core rate (i.e. the rate ex. volatile food and energy prices) which currently also stands at 1.5%. According to John Williams, president of the San Francisco Fed, an argument for a later lift-off would be if inflation “stuck” at 1.5%. So far, Williams has been assuming a first rate hike in about nine months time, implying a point around mid-2015.

Williams' estimate probably reflect the Fed’s timetable quite well and is in line with our forecast. There is therefore no hurry to adjust the communication and the US central bank can continue to head towards normalisation of monetary policy slowly and methodically. We may see a larger adjustment to the communication in December, when a press conference also takes place following the last meeting of the year and Yellen would then have the opportunity to explain in detail a new line of communication.

This is likely to be too slow for Philadelphia and Dallas Fed presidents, Plosser and Fisher who might vote against the majority, as they did at the last meeting.

Bernd WeidensteinerTel. +49 69 136 24527


Paradigm shift on the oil market

Even with geopolitical unrest on several fronts, the oil price has continued falling in recent months and is currently trading close to a four-year low. This could indicate a paradigm shift on the oil market. OPEC countries obviously want to defend their market shares and appear to be ready to do so even at the cost of a price war. Long-term, prices are therefore likely to be lower than recently expected. We have significantly cut our price forecast for 2015 from an average of USD 105 to USD 85 per barrel. The price of Brent oil has lost around 25% over the past four months and is currently trading close to a four-year low, at around USD 85 per barrel (chart 3). We believe recent events are above all due to fundamental factors.

For one, global oil demand has decelerated significantly of late. With the euro zone economy stagnating and emerging markets slowing considerably, the International Energy Agency (IEA) has cut its forecast for demand growth this year to 0.65m barrels a day. This is the smallest increase since the economic crisis in 2009. Even with an improvement in the demand outlook next year, the IEA projects daily demand for OPEC oil at just 29.3m barrels, which is significantly lower than OPEC’s current production level of just under 31m barrels a day (chart 4).

For another, global oil production expanded massively in recent months, despite a multitude of risks. This has been helped by the return of Libya to the market and, above all, the massive rise in US (shale) oil production. According to the US Energy Information Administration (EIA), US crude oil production is expected to rise by around 1m barrels per day this and next year, and reach an average of 9.5m barrels a day in 2015, which would be the highest level since 1970. The rise in production of 4m barrels a day recorded since 2010 would be equivalent to a new oil producer with the combined output of Iraq and Qatar entering the market.

In the past, OPEC has often implemented production cuts to rebalance the market and “defend” certain oil price levels. To the surprise of most market players, however, such a reaction has not materialised yet, putting additional pressure on the price of oil. Major OPEC countries have even offered their customers the highest discounts on international benchmarks for November oil deliveries since the start of the economic crisis in 2008. Unlike in the past, OPEC members' primary aim obviously is to defend market share. By contrast, the price is no longer as much in focus. The motivation behind this move is not clear yet, above all with regard to Saudi Arabia – does it intend to discipline the other cartel members or weaken US shale oil producers and other non-OPEC producers? Nevertheless, a true price war appears to be raging within OPEC at present, so that in the long-term the price of oil should come in much lower than we had previously expected. We have therefore revised our oil price forecast for 2015 from USD 105 down to USD 85 per barrel on average.

CHART 3: Price of Brent oil close to 4-year low In USD per barrel

CHART 4: Risk of oversupply in case of no OPEC cut OPEC oil production and IEA estimate on demand of OPEC oil for 2015 in million barrels per day

60

70

80

90

100

110

120

130

2010 2011 2012 2013 2014

27

28

29

30

31

32

33

2007 2008 2009 2010 2011 2012 2013 2014

IEA estimate for demand of OPEC oil in 2015

Source: Bloomberg, Commerzbank Research Source: IEA, Reuters, Commerzbank Research

Eugen WeinbergTel. +49 69 136 43417

Carsten Fritsch Tel. +49 69 136 21006


Product idea: Forward Extra on copper Zero-cost hedging with participation in rising prices

The price of copper has fallen above all due to fears of a deceleration in Chinese economic growth. Recent data have sounded the all-clear, though. Moreover, in contrast to initial expectations, copper supply in the current year will again fail to meet demand. We therefore expect prices to increase again and advise our clients to hedge their copper needs against rising prices.

The price of copper recently dropped to just over USD 6,500 per tonne, i.e. its lowest level in six months. This appears to have been mainly driven by higher economic pessimism, which was also reflected in weak equity markets. Fears of a significant slowdown in the Chinese economy, in particular, proved a drag given that China accounts for just over 45% of global copper demand. Yet recent macro data have calmed markets a bit: the Chinese economy grew by 7.3% year-on-year in Q3, which was somewhat better than feared. The strong increase in industrial production in September also brightened the picture. Consequently, a slump in copper demand should not be feared even though the ailing property sector likely to weigh on growth.

The global copper market is in any case tighter than indicated by the low price. At its autumn meeting, the International Copper Study Group (ICSG) revised its market view significantly and is now looking for the fifth consecutive supply deficit in 2014 which is expected to come in at 307,000 tonnes. Operating problems in mine production are weighing on supply growth. At the same time, China apparently recorded strong demand in the first half. While the ICSG – on the back of the weakening in global growth – is looking for a supply surplus of 393,000 tonnes next year, it has often been too “optimistic” in recent years. We are looking for another supply shortfall, which should drive up the price of copper medium- to long-term.

A near-term recovery in the price of copper would be possible if speculative financial investors were to cover their high short positions. In recent weeks, investors were mostly positioned on the short side. In the past, extreme positioning in one direction has been a good indication of an upcoming countermove.

Overall, we expect copper prices to move much higher by the end of next year. While current uncertainties on financial markets could drive prices lower in the near-term, the current price level basically offers an attractive hedging opportunity, in our view. We therefore advise our clients to hedge their copper needs against rising prices.

Forward Extra on copper in EUR – Zero-cost hedging for raw material purchasers Maturity: January to December 2015, reference quantity 50 mt per month (600 mt in total) Strike price: EUR 5,440.00/mt Participation barrier: EUR 6,185.00/mt Prices will be averaged over all commodity business days in the respective period, with monthly payment based on the agreed reference quantity. If the variable price of a period is above the strike price without reaching or exceeding the participation barrier, the client will receive a compensatory payment amounting to double the difference between the variable price and the strike price. If the variable price exceeds the strike price and reaches or exceeds the participation barrier, the client receives the single difference between the variable price and the strike price. If the variable price is fixed below the strike price, the client will pay the single difference between the strike price and the variable price. Comparable fixed price: EUR 5,275/mt (basis 3-month copper USD 6,649.00/mt, EUR/USD 1.2656) In addition to copper, Commerzbank AG also offers hedging instruments in the base metals sector on aluminium, lead, nickel, zinc, tin, iron ore fines and steel.

Daniel BriesemannTel. +49 69 136 29158


Major publications from 17 – 22 October 2014 Economic Insight: US – Will the rising dollar prevent US rate hikes? The dollar has gained sharply in the last few months. If this continues, the hoped-for rise in US inflation could be delayed and growth dampened. The “doves” in the Fed will therefore use the dollar as a welcome argument to defer the turnaround on interest rates. In our opinion, a rate hike in March 2015 is already off the agenda, though the lift-off has not been cancelled – merely postponed – as this would require a labour market slump. more

Economic Briefing: Greece – new aid programme likely Yields of ten-year Greek government bonds have climbed more than 300 basis points to 9% after reaching a low in mid-September. Following this vote of no confidence by the markets Greece will have no alternative but to accept another support programme in the form of a precautionary ESM credit line. If it does, it is likely that private investors will again be willing to lend the country money on acceptable terms. more

EM Briefing: China – No abrupt slowing in the economy GDP data for Q3 showed that the economy slowed in year-on-year terms, but improved in quarterly terms. Moreover, industrial production for September showed a healthy rebound from the alarming slump recorded in August. However, the GDP expenditure components, retail sales and fixed asset investment continued to slow. Overall the data eases fears of an abrupt slowing in the economy, but does not change the broad trajectory of the economy. We still think that weakness in the property sector will drag growth down and we continue to target GDP growth at 7.3% in 2014 and 6.5% in 2015. more

FX Hotspot: Time to buy EUR-JPY downside Investors looking to profit from earlier than expected ECB quantitative easing should give thought to buying downside strikes in EUR-JPY. Downgrades to global growth expectations can easily lead to a period of JPY short covering meaning that EUR-JPY could experience a significant pullback. With longer dated JPY volatility so cheap, there has rarely been a better time to buy downside strikes in EUR-JPY. more

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Preview – The week of 27 to 31 October 2014 Time Region Indicator Period Forecast Survey Last

Monday, 27 October 2014

• 9:00 GER Ifo Business Climate Oct sa 104.5 104.8 104.7 14:00 USA Pending home sales Sep mom, sa 0.0 – -1.0

Tuesday, 28 October 2014 8:30 SWE Riksbank interest rate decision % 0.15 0.05 0.25 9:00 EUR M3 Sep yoy 2.3 – 2.0 Loans to the private sector Sep yoy -1.4 – -1.5 12:30 USA Durable goods orders Sep mom, sa 0.0 0.3 -18.2 Durable goods orders excl. transport Sep mom, sa 0.5 0.5 0.7 13:00 Case-Shiller-index Aug yoy 5.2 5.7 6.8 14:00 Consumer sentiment (Conference Board) Oct sa 87.0 87.0 86.0EU-Commission: Autumn forecasts (1000)

Wednesday, 29 October 2014 7:45 FRA Consumer confidence Oct 86.0 – 86.0• 18:00 USA FOMC interest rate decision % 0.25 0.25 0.25

EUR: Bank Lending Survey (0900 )

Thursday, 30 October 2014 8:00 ESP GDP, preliminary Q3 qoq, sa

yoy 0.5 1.6

––

0.61.2

Consumer prices (HICP) Oct yoy -0.2 – -0.3 8:55 GER Unemployed Oct mom, k, sa 5 5 12 10:00 EUR Economic Sentiment Indicator Oct sa 99.5 – 99.9 Business confidence, manufacturing Oct sa -6.0 – -5.5 Business confidence, services Oct sa 3.0 – 3.2 12:30 USA Initial claims Oct 25 k, sa 278 – 283• GDP Q3 SAAR, qoq 3.5 2.9 4.6 13:00 GER Consumer prices, first state results Oct mom

yoy -0.1 0.9

––

0.00.8

Friday, 31 October 2014 0:30 JPN CPI Sep yoy 3.2 3.2 3.3 # GER Retail sales, volume Sep mom, sa

yoy -1.0 2.5

––

2.50.1

• 10:00 EUR CPI, preliminary Oct yoy 0.4 – 0.3 CPI excl. food, tobacco, and energy Oct yoy 0.8 – 0.8 Unemployment rate Sep % 11.5 – 11.5 12:30 USA Personal income Sep mom, sa 0.3 0.3 0.3 Personal spending Sep mom, sa 0.0 0.1 0.5 13:45 Chicago PMI Oct sa 59.0 61.0 60.5 13:55 Consumer confidence (University of Michigan) Oct sa 85.5 86.2 86.4JPN: Monetary Policy Meeting Source: Bloomberg. Commerzbank Economic Research; *Time GMT (subtract 4 hours for EDST. add 1 hour for CET). # = Possible release; mom/qoq/yoy: change to previous period in percent. AR = annual rate. sa = seasonal adjusted. wda = working days adjusted; • = data of highest importance for markets.


Economic data preview:

Euro zone: QE remains an issue

Falling sentiment indicators, ongoing poor lending activity and persistent low inflation look set to fuel speculation about broad-based government bond buying by the ECB next week. This is in contrast to the USA where decent economic growth in the third quarter will confirm that the reversal in interest rates is drawing nearer. The euro-zone manufacturing purchasing managers’ index (PMI) surprisingly increased last week. But this does not mean the end of bad news from the euro zone (yet). In Germany, the Ifo business climate looks set to have dropped to 104.5 (consensus: 104.8). The deceleration in emerging market growth is likely to have prompted export-oriented business to further lower their expectations. In the euro zone as a whole, business sentiment also appears to have deteriorated again. The Economic Sentiment Indicator, which had a one-month lag on the PMIs in the past, should be in for another decline in October (Commerzbank forecast: 99.5).

The lacklustre euro zone economy is also reflected in bank lending. The ECB’s hopes for an increase in lending should be disappointed once again (Commerzbank forecast: -1.4% y/y). And the ECB is unlikely to be pleased by the inflation rate in October either. Originally, a marked increase in inflation had been on the cards as last October’s slump in energy prices will drop out of the year-on-year comparison. However, based on the recent fall in the oil price, October 2014 is also expected to come in with much lower energy prices (chart 5). We therefore believe the rate of inflation will edge up only 0.1pp to 0.4%. Excluding highly volatile energy, food, drink and tobacco prices, the rate of inflation should stick to 0.8%.

USA: Decent growth in the third quarter The US economy is likely to have kept growing at a strong rate in the third quarter. Investment in equipment and residential construction appears to have increased considerably based on currently available data. A strong turnaround in net exports will offset the opposite trend in inventory investment – following the strong inventory build-up in the second quarter, a weaker trend appears likely in the third quarter. Finally, even with the trend slowing, household consumption will also contribute to growth. Overall, we are looking for a 3.5% gain in real GDP (on the second quarter, annualised; consensus: 2.9 %). Hence, the US economy is outperforming its euro zone peer once more (chart 6).

CHART 5: Euro zone: Energy prices in October 2014 likely to have fallen as much as in October 2013 Energy component of the HICP, m/m change in percent, oil price in €

CHART 6: USA – Clearly in the lead in terms of growth Real GDP, annualised q/q growth in %, Q3 2014: forecast

60

65

70

75

80

85

90

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Jan-13 Jan-14

energy prices (lhs) oil prices (rhs)

-3

-2

-1

0

1

2

3

4

5

13.Q1 13.Q2 13.Q3 13.Q4 14.Q1 14.Q2 14.Q3

USA EMU

Source: Global Insight, Commerzbank Research Source: Global Insight, Commerzbank Research

Christoph WeilTel. +49 69 136 24041


Central Bank Watch (1) Fed

CHART 7: Expected interest rate for 3-month funds (USD)

0,0

0,5

1,0

1,5

2,0

current Dez 14 Mrz 15 Jun 15 Sep 15 Dez 15

23.10.14 16.10.14 CommerzbankFutures

TABLE 1: Consensus forecasts Fed funds rate

Q4 14 Q2 15 Q4 15

Consensus 0.25 0.25 1.00

High 0.25 1.00 2.00

Low 0.25 0.25 0.25

Commerzbank 0.25 0.50 1.50

One major argument of the Fed doves is that the rate of inflation is hardly rising so far. The consumer price index in September put the inflation rate at 1.7% and even excluding energy and food prices, the rate remains the same. Since the summer, the rate of inflation has even fallen slightly again. The majority view among FOMC members is that this is due to the still-muted trend in wages. Hourly wages have risen at an annual rate of only 2% per year and this trend has not gained traction, even with the rate of unemployment slumping in recent years. More representative wage indicators such as the employment cost index confirm that wage pressure is low. The slack on labour markets thus appears to be greater than indicated by the rate of unemployment which has fallen below 6%. One such indication is the still-large number of employees in involuntary part-time work: 7.1m at present, which is 54% higher than before the recession. However, an analysis that focuses above all on wage pressure is at risk of identifying inflation risks too late. After all, experience has shown that wages react with a considerable lag to the economic situation.

Bernd Weidensteiner

+49 69 136 24527

Source: Bloomberg, Commerzbank Research

ECB CHART 8: Expected interest rate for 3-month funds (EUR)

0,0

0,2

0,4

0,6

0,8

1,0


23.10.14 16.10.14 Commerzbank

Futures

TABLE 2: Consensus forecasts ECB minimum bid rate

Q4 14 Q2 15 Q4 15

Consensus 0.05 0.05 0.05

High 0.05 0.05 0.05

Low 0.05 0.05 0.05

Commerzbank 0.05 0.05 0.05

According to press releases referring to undisclosed ECBsources, the central bank is also considering corporate bondpurchases. This decision might be taken as soon as the December meeting, with first purchases possible in early 2015, according to said sources. The President of the Belgiancentral bank, Coene, said this had not been discussed in anyserious way although corporate bond purchases had beenmentioned in internal discussions. No concrete plans were onthe table, he went on.

The ECB has only started the recently agreed buying ofcovered bonds and Pfandbriefe. Therefore, it is questionablewhether the monetary authority wants to expand its measuresso soon. Should the ECB primarily focus on the massiveexpansion of its balance-sheet total, all these programmeswill be problematic as its purchases occur in a market that isvery fragmented and offers low liquidity. While, after all, theECB has mentioned an amount of around EUR 1.4trn as“eligible marketable assets” with regard to corporate bonds,these also include commercial paper and medium-term notes,i.e. paper that does not necessarily qualify for a corporatebond purchase programme. Sooner or later, the ECB is therefore likely to buy government bonds.

Dr Michael Schubert+49 69 136 23700



Central Bank Watch (2) BoE

CHART 9: Expected interest rate for 3-month funds (GBP)

0,0

0,5

1,0

1,5

2,0



The minutes of the October MPC meeting did not produceany new insight, with two external members of the Committeemaintaining their call for a 25 bps rate increase. Although themeeting took place before the worst of recent market turmoil,the minutes did highlight the potential impact of euro zoneweakness on the UK which reinforces the case for rates onhold – particularly in view of the ongoing weakness ofinflation. This view was strengthened following a couple ofspeeches by BoE officials. Chief economist Andy Haldanepointed out that whilst there are reasons for economic cheer,the storm clouds are gathering and he is "gloomier" aboutnear-term prospects. Deputy Governor Ben Broadbent took adifferent tack by noting that one reason why central bankrates are low may be due to the fact that the globalequilibrium interest rate has fallen – possibly as a result of theAsian savings glut and demographic factors. In MrBroadbent's view, the global neutral rate is likely to remainlow for the foreseeable future and, by implication, the scopefor the BoE to raise UK rates is limited. As a result, marketsare now only fully pricing the first rate hike in Q3 2015.

Peter Dixon+44 20 7475 4806

Riksbank (Sweden) CHART 10: Expected interest rate for 3-month funds (SEK)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

current Dec-14 Mar-15 Jun-15 Sep-15 Dec-15


The negative inflation rate remains a headache for the Riksbank. In September, inflation fell on a broad basis and remained considerably below expectations. The minutes of the latest meeting made clear that some council members do not wish to tolerate such a decline, implying that they are likely to vote for a rate cut next week. Additional arguments for lower rates are the further deterioration of the global growth outlook and the interest-rate environment which is likely to remain low for longer. Thus, the ECB announced unconventional easing measures.

When making its interest rate decision, however, the Riksbank will also have an eye on Sweden’s relatively robust economic data. For instance, the improved labour market situation, higher unit labour costs, rising producer prices and the krona, which has been weaker since early 2013, are pointing to increasing pressure in the inflation pipeline. Add to this improved consumer sentiment, as well as the high and further growing debt burden of private households.

Ultimately, however, concerns about the credibility of the 2% inflation target, which the Riksbank recently clearly moved into its focus, are likely to maintain the upper hand. We expect the Riksbank to lower its policy rate by 10 basis points and indicate a further rate move in its interest rate outlook next week.

Elisabeth Andreae+49 69 136 24052


Bond market preview: Bumpy sideways trend

The sharp rise in risk premiums for euro zone government bonds has given way to a bumpy sideways trend. The results of the stress tests should further reduce uncertainty. However, as market liquidity risks linger on despite speculation of further ECB measures, risk appetite is unlikely to recover significantly going into year-end. We recommend a neutral stance on peripheral markets, while fundamental impetus argues for stable Bund yields.

TABLE 3: Weekly outlook for yields and curves

Bunds US Treasuries

Yield (10 years) sideways sideways

Curve (2 - 10 years) neutral neutral

Source: Commerzbank Research

Following the sharp rise in risk premiums for € government bonds last week, reminiscent of the volatility during the height of the sovereign debt crisis, bond markets have calmed somewhat again. Speculation about corporate bond buying by the ECB has helped risk appetite recover.

Going into the weekend, speculation about the upcoming results of the stress test could move up yet another gear, with the detailed results due to be released by the ECB and the European Banking Authority (EBA) on Sunday at noon. Apart from minor surprises, we do not expect to see any systemic problems to flare up. Once market participants have digested the results, bond markets should calm down further.

However, an analysis of market dynamics over recent weeks’ also indicates that periods of extreme volatility may not remain one-offs, rendering tactical long positions in peripheral markets until year-end unconvincing as market liquidity, in particular, can fade quickly. As a result, minor imbalances in supply and demand can quickly produce major swings, with the trend of rising spreads and larger bid/offer spreads re-enforcing each other. The prime reason for lower market liquidity should be the vast number of forthcoming new regulatory requirements. Even though some regulation is only planned for the future it is affecting business decisions and hence trading conditions already today, particularly ahead of the balance-sheet dates.

Valuations on peripheral markets appear to have become more attractive after last week’s sharp correction. While we turn a bit less cautious, significant overweights are still premature. A neutral tactical positioning appears sensible for now. Only accounts able to look through year-end volatility may start to consider adding to strategic longs. Bund yields should also stabilise at current levels. The conflicting fundamental signals should largely offset each other. The upcoming Fed meeting and solid growth figures will remind the market of the upcoming turnaround in US interest rates, while euro zone data are more likely to provide food for the doves on the ECB Council, further driving speculation of government bond purchases.

CHART 11: Spread tightening is no one-way street Yield spread of ten-year government bonds versus Bunds, in basis points

CHART 12: Bund yield still close to its record low Ten-year Bund yield, in percent

100110120130140150160170180190

01/07/14 01/08/14 01/09/14 01/10/14

SPA ITA

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Jan 13 Jul 13 Jan 14 Jul 14

Source: Bloomberg, Commerzbank Research Source: Bloomberg, Commerzbank Research

Outlook for the Bund future, 27-31 October

Economy ↑

Inflation →

Monetary policy ↓

Trend →

Supply →

Risk aversion →

Rainer Guntermann Tel. +49 69 136 87506


FX market preview: Central bank crescendo

A total of four G10 central banks are due to take a monetary policy decision next week. If the Federal Reserve Bank sticks to its normalisation schedule as expected that is likely to support USD. The central banks in Sweden, New Zealand and Japan on the other hand are struggling with inflation data that is lagging behind expectations.

TABLE 4: Expected weekly trading range Range Bias Range Bias

EUR-USD 1.2450-1.2850 EUR-GBP 0.7800-0.8000 EUR-JPY 134.50-138.75 GBP-USD 1.5850-1.6250 USD-JPY 106.25-110.00 EUR-CHF 1.2000-1.2120

Source: Commerzbank Research

EUR-USD took a breather in its depreciation trend in October. The strong USD and concerns about weaker global economic growth fuelled speculation that the Federal Reserve might normalise its monetary policy more slowly than previously expected (chart 13). The FOMC meeting on Wednesday might end this speculation for the time being, thus supporting USD. Even though the Fed is likely to leave its communiqué largely unchanged, an end to bond purchases would signal to the markets that the Fed is sticking to its normalisation course. That would benefit USD and as a result we would expect slightly lower EUR-USD levels around 1.25 by year-end.

Riksbank on the other hand is a long way away from a normalisation of monetary policy. On the contrary: following the low inflation data for September we expect a rate cut (chart 14). This would probably weaken SEK against EUR only temporarily. Contrary to the ECB, Riksbank’s threshold for unconventional measures is likely to be high due to high private debt levels. EUR-SEK is therefore dominated by downside risks.

The markets are also expecting dovish signals from New Zealand and Japan. In Q3 the New Zealand inflation rate recorded a surprise fall to the lower end of the target range (1-3%). The central bank will have to comment on the matter. There is no end in sight for the rate pause. As a result there is hardly any upside scope in NZD-USD. The same cannot be said for USD-JPY: the BoJ seemed optimistic recently that its monetary policy easing was having the intended effects and that the Japanese economy continued to recover moderately. Like the majority of analysts we therefore do not expect further monetary policy easing next week. However JPY will be unable to benefit from this decision. As long as the BoJ’s optimism is not really reflected in the data, markets will be dominated by JPY pessimism.

CHART 13: Doubts about rate hikes persist Fed Funds rate: Fed expectations as dots and curves based on market expectations of Fed Funds Futures at various dates, in percent

CHART 14: Will a rate cut in Sweden bring about an inflation reversal? Swedish repo rate, consumer price inflation yoy, in percent

0,00

0,25

0,50

0,75

1,00

1,25

1,50

1,75

2,00

Dez-14 Mrz-15 Jun-15 Sep-15 Dez-1530/09/2014 23/10/2014

0,00

0,25

0,50

0,75

1,00

1,25

1,50

Jan-13 Aug-13 Mrz-14 Okt-14-0,8

-0,6

-0,4

-0,2

0,0

0,2

0,4

Sweden Repo Rate (LHS) CPI Inflation (RHS)

Source: Bloomberg, FOMC Source: Commerzbank Research

Esther ReicheltTel. +49 69 136 41505


Equity market preview: Low interest rates drive up pension obligations, weighing on German companies’ equity capital

Although most German companies’ pension obligations are only due to be paid out in the distant future, the ongoing low-interest environment and changes in accounting look set to result in additional charges. These would have to be offset against the respective companies’ equity capital. The DAX companies particularly affected would include ThyssenKrupp, Deutsche Post, Continental, Lanxess, BASF and Deutsche Lufthansa.

TABLE 5: DAX index recovering a bit Earnings 2014e

Performance (%) since Index points Growth (%) P/E 2014e

Index 30.09 30.06 31.12 Current 31.12 Current 31.12 Current 31.12

DAX 30 8,940 -5.6 -9.1 -6.4 707.1 731.1 1.7 11.6 12.6 13.1

MDAX 15,583 -2.6 -7.3 -6.0 933.8 994.2 27.2 41.6 16.7 16.7

Euro Stoxx 50 3,009 -6.7 -6.8 -3.2 222.1 242.3 4.8 12.1 13.5 12.8

S&P 500 1,927 -2.3 -1.7 4.3 116.9 119.3 7.7 9.9 16.5 15.5

Source: Commerzbank Corporates & Markets, I/B/E/S

Net pension obligations of most German companies which have their own pension fund, or which have outsourced these obligations to a trustee, consist of two components: (i) gross pension obligations, which must be reported as the discounted present value of employee’s future claims and (ii) plan assets such as equities and bonds that are to fund those obligations.

The ongoing low-interest environment has a negative impact on both components. The lower the discount rate for gross pension obligations, the higher the current present value of future pension payments. Although DAX companies lowered their average discount rate from 4.8% to 3.8% at the end of 2013, we do not expect this to be sufficient. We believe this rate will have to be cut down to at least 3% as the current yield on European corporate bonds with high investment grade (AA+/AA) is just under 1.4% and this low level of interest rates is likely to remain with us for now. On the other hand, the allocation of fixed assets to cover gross pension obligations is very much focused on fixed income securities. At the end of 2013, average holdings of fixed income securities amounted to just under 52%. The ongoing negative impact of the current level of interest rates on both components should further increase net pension obligations. Based on the new accounting rules, this potential adjustment would have to be offset against the respective company’s equity capital. The DAX companies particularly affected would include ThyssenKrupp, Deutsche Post, Continental, Lanxess, BASF and Deutsche Lufthansa (chart 15).

CHART 15: DAX: Rising pension obligations keep weighing on equity capital Change in equity capital in % in case of a potential increase in pension obligations

-35

-30

-25

-20

-15

-10

-5

0

TKA

DPW

CO

N

LXS

BAS

LHA

LIN

HEI

SIE

BM

W

BAYN DAI

DBK

RW

E

CBK

MR

K

IFX

HEN

3

BEI

ALV

EO

AN

MU

V2

FRE

FME

DTE

SD

F

AD

S

DB1

VO

W3

SAP


Markus WallnerTel. +49 69 136 21747


Commodities market preview: Put to the test

The price slump on the oil market has stalled of late. Yet we remain sceptical as to whether the low has already been reached. In October, OPEC is likely to have produced about as much crude oil as in the previous month. The market thus remains clearly oversupplied. The gold market recovery is also at risk. However, stronger Chinese gold imports from Hong Kong could lend support next week. TABLE 6: Tendencies in important commodities

% change Tendency Commodity specific events

23 Oct 1 week 1 month 1 year Short-term

Brent (USD per barrel) 84.8 0.3 -12.5 -21.4

EIA: “Availability of oil and oil products in

countries other than Iran” (30), news

agencies’ production estimates

Copper (USD per ton) 6682 2.0 -0.6 -6.8

Gold (USD per troy

ounce) 1240 0.1 1.3 -7.0 CHN: Gold trading with Hong Kong (Sep)


The slump on the oil market has decelerated considerably this week. However, whether the price of Brent oil will be able to actually form a base around USD 85 per barrel is likely to be put to the test next week. At the end of the month, both the news agencies and the US Energy Information Administration, in its quarterly report on the “availability of petroleum and petroleum products in countries other than Iran,” will provide estimates on OPEC production. We believe the oil cartel produced about as much crude oil in October as in the previous month: After all, swing producer Saudi Arabia is unlikely to have reduced its supply to offset the considerable increase in Libya’s production in recent months (chart 16). The largest oil producer by far is obviously keen on defending market shares rather than supporting the price through production cuts (see p. 6). At just under 31m barrels a day, however, OPEC production would keep outpacing demand (chart 4, page 6). Investors are likely to use Saudi Arabia's behaviour as an excuse for further selling. Near-term, the price of Brent oil should thus drop further. As a result of this paradigm shift, OPEC could decide no production cuts at its regular meeting at the end of November. Rather than expecting prices to recover medium-term, we have therefore lowered our annual average price forecast for 2015 from USD 105 to 85 USD per barrel.

The price recovery on the gold market, too, is currently being put to the test: A stronger dollar and higher risk appetite recently sent the gold price lower again. It is thus still trading 4% above its annual low in early October, though. A marked rise in Chinese gold imports from Hong Kong could lend renewed support next week (chart 17). After all, China advanced to become the world’s largest gold consumer last year. After Chinese demand in the first half of the year had disappointed, net imports were back on the rise in August. Significantly higher gold exports from Switzerland to Asia argue for another increase in September. A revival of physical demand should also send prices on the gold market higher in the long-term.

CHART 16: Swing producer Saudi-Arabia is stubborn m barrels a day

CHART 17: Is China’s interest in gold back on the rise? Chinese net gold imports via Hong Kong, in tons

Source: Bloomberg, Commerzbank Research Source: Hong Kong Statistical Office, Commerzbank Research

Barbara LambrechtTel. +49 69 136 22295


Commerzbank forecasts TABLE 7: Growth and inflation Real GDP (%) Inflation rate (%) 2013 2014 2015 2013 2014 2015 USA 2.2 2.2 2.9 1.5 1.7 1.8 Canada 2.0 2.3 2.5 0.9 2.1 2.0 Japan 1.5 1.0 1.3 0.4 2.8 1.5 Euro area -0.4 0.7 0.8 1.4 0.6 1.0 - Germany 0.1 1.3 1.3 1.5 1.1 2.1 - France 0.4 0.3 0.5 0.9 0.6 0.7 - Italy -1.7 -0.2 0.3 1.2 0.4 0.6 - Spain -1.2 1.4 2.3 1.4 0.0 0.5 - Portugal -1.4 1.0 1.5 0.3 -0.2 0.8 - Ireland 0.2 5.2 3.1 0.5 0.6 1.4 - Greece -4.2 1.0 2.0 -0.9 -1.3 0.5 United Kingdom 1.7 3.0 2.6 2.6 1.6 1.9 Switzerland 2.0 1.7 1.8 -0.2 0.0 0.5 China 7.7 7.3 6.5 2.6 2.3 2.5 India 4.7 5.8 6.2 6.3 6.5 6.2 Brazil 2.5 0.3 0.9 6.2 6.3 6.5 Russia 1.3 0.3 0.9 6.8 7.3 6.5

World 2.9 3.1 3.4

• The ultra-expansionary policy of the Fed is boosting the US economy. At the same time, fiscal policy is at least no longer a headwind. We therefore expect US growth to markedly accelerate.

• Growth in China decelerates further, also due to decreasing house prices.

• The recovery in the euro zone will only continue at a slow pace. GDP growth will remain lower than that of the USA.

• EMU has survived the sovereign debt crisis, but is gradually evolving into an “Italian-style monetary union”.

• Despite its current weakness, the German economy looks set to continue outperforming the rest of the euro area – partly because ECB target rates are much too low for Germany.

• High unemployment in most countries is keeping inflation low for the time being. In the long term, however, inflation is likely to rise, as central banks have given up some of their independence.

TABLE 8: Interest rates (end-of-quarter) 23.10.2014 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15

USA

Federal funds rate 0.25 0.25 0.25 0.50 1.00 1.50

3-months Libor 0.23 0.25 0.30 0.80 1.35 1.90

2 years* 0.39 0.70 0.90 1.20 1.60 2.00

5 years* 1.47 2.10 2.40 2.70 2.95 3.20

10 years* 2.24 2.70 2.90 3.10 3.30 3.50

Spread 10-2 years 186 200 200 190 170 150

Swap-Spread 10 years 14 10 10 10 15 15

Euro area

Minimum bid rate 0.05 0.05 0.05 0.05 0.05 0.05

3-months Euribor 0.09 0.05 0.05 0.05 0.05 0.05

2 years* -0.05 -0.10 -0.10 -0.10 -0.05 0.00

5 years* 0.16 0.25 0.20 0.25 0.35 0.40

10 years* 0.88 1.10 0.80 1.00 1.20 1.35

Spread 10-2 years 93 120 90 110 125 135

Swap-Spread 10 years 25 15 25 30 35 35

United Kingdom

Bank Rate 0.50 0.50 0.75 0.75 1.00 1.25

3-months Libor 0.56 0.80 0.90 1.05 1.25 1.40

2 years* 0.67 1.00 1.25 1.30 1.35 1.55

10 years* 2.21 2.60 2.85 3.05 3.20 3.35

• The Fed is set to gradually reduce its QE3 programme and end it in October 2014. Interest rate hikes are on the cards from 2015Q2, due to a continuously decreasing US unemployment rate and gradually rising inflation.

• Due to the deteriorating growth outlook and increasing downside risks for inflation we expect the ECB to announce QE within the next 12 months.

• 10y Bund yields are likely to stabilise around 1% later this year when the Fed communication changes but mark new record lows when the ECB announces QE in 2015. Thereafter, yields should rise gradually. The structurally low interest rate environment remains intact.

• The focus on the Fed’s lift-off will put upward pressure on US$ rates. A return to 3% for 10y USTs is only on the cards for 2015, though. The curve is in for a textbook-style flattening via the short-end in the coming quarters.

• Risk premiums of peripheral government bonds are set to decline further.

TABLE 9: Exchange rates (end-of-quarter) 23.10.2014 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 EUR/USD 1.27 1.25 1.22 1.19 1.17 1.15 USD/JPY 108 110 113 116 118 120 EUR/CHF 1.21 1.21 1.21 1.21 1.21 1.21 EUR/GBP 0.79 0.77 0.76 0.75 0.74 0.73 EUR/SEK 9.19 9.10 9.00 8.95 8.90 8.90 EUR/NOK 8.31 8.05 7.80 7.70 7.70 7.65 EUR/PLN 4.23 4.15 4.10 4.08 4.06 4.05 EUR/HUF 307 312 310 309 308 306 EUR/CZK 27.69 27.50 27.30 27.00 27.00 26.90 AUD/USD 0.88 0.87 0.85 0.83 0.81 0.80 NZD/USD 0.78 0.77 0.75 0.73 0.71 0.70 USD/CAD 1.12 1.13 1.15 1.16 1.17 1.18 USD/CNY 6.12 6.10 6.05 6.00 5.95 5.95

• USD should further profit from the expectations of Fed interest rate normalization. Current USD rates have not priced in the speed of rate hikes that we expect.

• The high yielding G10 currencies should particularly suffer from US rate hikes.

• EUR will remain under pressure due to increasing likelihood of an ECB QE program. ECB wants a weaker EUR and is active in achieving this goal.

• CEE currencies are generally benefiting from the dovish ECB backdrop, meaning central banks have room to cut rates further. HUF, PLN and RON should trade range-bound, while EUR/CZK will float above the 27.0 floor set by the CNB.

Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries, Bunds, Gilts, JGBs


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