Danish FX reserves unchanged in June, DN unlikely to hike interest rate before ECB

The recent data release from Denmark’s central bank indicates that currency market intervention was not required in June either. This marked the 15th consecutive month without intervention – the longest period since the advent of the euro. The current long period of EUR/DKK stability came after some turbulent years that ended at the start of 2015 when DN sold Danish kroner for a total of DKK 275 billion to avert the krone from strengthening too much against the euro. In this light, it is even more extraordinary that the bank after a comparatively short time has managed to find the equilibrium level of interest rate differential, noted Nordea Bank in a research report.

But the long period without intervention might end in the autumn when the different monetary policy approaches by the ECB and the Danish central bank would become more explicit. The excess liquidity in the euro area would begin to drop as banks repay their large loans granted by the ECB years ago to stimulate monetary policy. This might push money market rates in the euro area higher at a more rapid rate than in Denmark, initially causing the Danish krone to soften versus the euro.

“Even if our assumption that the krone will weaken versus the euro proves correct, we do not expect the Danish central bank to sanction a rate hike before the ECB”, noted Nordea Bank.

If the expected krone weakening brings EUR/DKK above the central parity, the bank would probably initially resort to intervention to counter krone softening. The central bank has historically been very careful to avoid opposite movements in its independent interest rate decisions. Thus, it would take considerable and extended upward EUR/DKK pressure for the central bank to consider an independent rate hike.

“We consequently believe that the current differential of 25bp between ECB and Danish central bank deposit rates will stay unchanged until end-2019 when the ECB will likely deliver its first rate hike” added Nordea Bank.

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