Denmark 2017 Outlook: views and ideas for the FI and FX market
Danish Cita, swap and cross-currency basis (CCS) market: We expect stable and Cita fixings in 2017 and like the roll in the 12M6M Cita swap. The negative EURDKK CCS still offers foreign investors a pickup when swapping Danish assets such as T-bills into, in particular, USD.
The transatlantic Donald Trump/Mario Draghi trade with a Scandi twist: In Danish swaps, we recommend to receive DKK 5y5y (3m Cibor) versus paying USD 5y5y and do the opposite in the 2y2y spread.
We remain negative on 10Y DGBs: We enter 2017 with a negative stance on 10Y DGBs relative to Bunds given (1) higher-than-expected DGB supply, (2) a repo squeeze in Bunds, (3) the possibility bond purchases financed by the central government's account might slow down and (4) foreigners continuing to be net sellers.
Value in 2Y DGBs versus semi core: The short end of the DGB curve is starting to look interesting after recent underperformance. We see value in DGB 0.25% 2018 versus 2Y semi-core countries like Austria for example. We do not recommend to be short Schatz against 2Y DGB.
Sidelined on Danish covered bonds: Given the recent solid performance of the Danish callables relative to swaps and DKK government bonds and the current low OAS values, we recommend investor to stay side-lined and await buying Danish callables. For investors who prefer bonds with a low BPV, we recommend floating rate bonds and short-dated non-callable Flex bonds.
Support to the Danish krone: We expect the continual QE from the ECB, potential political jitters in the eurozone, the high Danish current account surplus and an already-strong DKK to keep Danmarks Nationalbank alert in 2017. We recommend Danish pension funds with a hedging mandate and EUR assets to hedge EUR exposure in longer dated EUR/DKK FX forwards, i.e. on a 8-10Y horizon and beyond.
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