The spread between Denmark’s central bank and the European Central Bank’s deposit rates narrowed 30bp from early December 2015 till mid-March 2016. The DKK has appreciated against the EUR with the lower rate differential. The Danish krona has remained steady since the start of April at slightly more than 7.44. At present Denmark’s forward rates appear to rise against the euro, noted Nordea Bank. In spite of DKK’s appreciation against the EUR, the Danish central bank is unlikely to intervene in the currency market at present, said Nordea Bank.
The central bank is likely to continue with the status quo for a while, but this might change if the UK votes to leave the EU, according to Nordea Bank. If Brexit happens, financial market risk appetite is expected to fade away, resulting in safe-haven flight to bond markets. This might indicate the same situation as it was in 2012 when Euro-area debt crisis triggered a considerable safe-haven inflow to Denmark.
A renewed inflow might appreciate the DKK initially against the EUR and narrow the interest rate differential. Initially, the central bank is expected to intervene that might strengthen the currency reserves further, added Nordea Bank. If the pressure on currency rises upwards, the central bank is expected to also go ahead with independent rate cuts.
