Danish central bank likely to raise CD rate in next 2 months

The decline in currency reserves has boosted market expectations for a Danish rate hike. DKK money market fixings have reached the highest levels since late January. Cibor fixings are 30-50 bp higher than the bottom on 12 February, whereas CITA fixings have increased by 50 bp from their bottom. 

Part of this rise in money market fixings is also driven by the substantial decline in excess liquidity in the Danish money market. By contrast, money market fixings in EUR are close to all-time lows as excess liquidity in EUR is rising (EUR 466bn), a high since February 2013.

With low inflation in the Euro zone (0.2% in June) and falling prices of oil and many other commodities, there is not much to suggest that the ECB will tighten monetary policy this year or the next. Market prices in a rate hike by the ECB by mid-2017 at the earliest. 

"Markets, on the other hand, expect the Danish central bank to raise its CD rate by 10 bp within the next two months. This could push Cibor fixings even higher in the time ahead. This is slightly earlier than our forecast, which assumes that the CD rate will be raised by the end of this year", says Nordea Bank. 

If the past month's strong intervention continues unabated in coming months, currency reserves could approach the DKK 450bn mark by end-September. In this situation a rate hike might be sanctioned sooner than anticipated.

"The risk of a Greek euro exit has been markedly reduced, at least short term. Also, the Swiss franc has weakened since mid-July (CHF/DKK just above 7.00). This supports a further decline in EUR/DKK forward discounts while Danish money market fixings are set to rise gradually", added Nordea Bank.