In April, the Danish central bank did not sell the Danish krone in FX intervention after the EUR/DKK pair dropped to 7.4400. The pair dropped below 7.4400 at the starting of this month. The Danmarks Nationalbank (DN) is expected to be required to intervene in order to underpin it in the months to come, noted Danske Bank in a research note. A tighter policy rate spread to ECB, hedging of possible EUR risk because of EU referendum, a low net position and foreigners purchasing the krone at the Dong IPO on 10 June are likely to support the DKK.
“We forecast EUR/DKK will trade at 7.4375 on 1-12M with downside risk to 7.4350, where we look for DN to cap EUR/DKK through FX intervention”, added Danske Bank.
Selling the Danish krone in FX intervention is expected to be sufficient for the central bank. This is because it will raise net positions of the banks, push down short-term money market rates and EUR/DKK further into negative territory, said Danske Bank. Therefore, the central bank is likely to maintain the interest rate in certificates of deposit at -0.65% on 12m.
But if the central bank requires intervening by selling krone of around DKK10-20 billion in shorter period, it might set off a rate reduction of 10bp to -0.75%. Similarly, if the European Central Bank plans to further lower its deposit rate, the Danish central bank is expected to follow the move and reduce rate to -0.75%, according to Danske Bank.
“In our view, EUR/DKK is set to trade close to the strong end of the historical trading range on a 12M horizon. We see limited downside risk from the current level, as DN stands ready to intervene in the FX market to cap EUR/DKK downside”, added Danske Bank.
