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The Danish central bank, Danmarks Nationalbank (DN) published the data of its balance sheet and June’s FX reserve. The DN continued to sell Danish kroner in the FX market in order to keep the DKK from strengthening too much against the euro. Denmark’s FX reserve increased to DKK 452 billion in June from DKK 427 billion in May as the central bank sold DKK 25 billion in FX intervention.
This is the second straight month where the nation’s FX reserve has increased. In total, the Danish central bank has sold DKK 49 billion in FX intervention in the months of May and June.
In June, there was a rise in government deposits to DKK 172 billion from May’s DKK 159 billion. The EUR/DKK pair, in June, has traded at a lower level. This urged the central bank to sell Danish kroner. Meanwhile, the IPO revenue added to the increase in government deposits. The Danish central bank commented that most of the interventions “took place prior to the United Kingdom’s referendum on 23 June on European Union membership”.
The EUR/DKK pair has been weighed on since March due to the nation’s tight monetary condition and the threat of spillover to the euro area from a UK vote to exit the EU. Selling the kroner in May and June helped in alleviating monetary conditions and therefore the downward pressure on the EUR/DKK pair.
But the short-term money-market rates and EUR/DKK FX forwards continue to be high, implying that monetary conditions remain too tight and a further liquidity injection to the money market is required, noted Danske Bank in a research report.
“We forecast EUR/DKK will stay low over the coming year at 7.4375 in 1-12M and look for DN to cap EUR/DKK around 7.4350 using FX intervention,” added Danske Bank.
In spite of the strong intervention in May and June, an independent rate cut is unlikely to be seen any time soon, noted Nordea Bank in a research report. Therefore, the FX reserves continue to be slightly lower than the recent years’ average level. The DN, is thus likely to maintain the interest rate on certificates of deposits on hold at -0.65 percent on a 12 month horizon, according to Danske Bank.
But, if there is a heightened requirement to sell kroner in FX intervention, the central bank might consider lowering the rate to -0.65 percent, which is a level still seen as the lower bound for Denmark’s key policy rate. If the ECB takes the decision to further lower its deposit rate, the DN is likely to copy this move and lower its rates to -0.75%, said Danske Bank.
