Denmark’s FX reserve decline in February, DN likely to mirror ECB’s expected rate cut move

Denmark's FX reserve fell from DKK430bn in January to DKK422bn in February. DKK 8.4bn of the fall was because Danmarks Nationalbank (DN) bought DKK in FX intervention to cap EUR/DKK upside. The central bank likely carried out the FX intervention in the first half of February, when EUR/DKK was trading at higher levels.

"We expect DN to mirror a 10bp rate cut from the ECB next week, leaving the rate of interest on certificates of deposit at minus 0.75%", says Danske Bank.

However, it is a close call. The central bank had carried out FX intervention to help the DKK after it hiked the rate by 10 on 7 January. This argues for further narrowing of the DKK-EUR interest rate spread. Meanwhile, the currency pair has trended lower in the past week and currently trades lower than the central rate at the level DN has preferred historically. This shows that there is no requirement to further narrow the spread.

With the heightened projections of additional easing by the ECB in the coming year, there is a threat that the ECB might surprisingly lower the deposit rate by over 10bp next week.

"In this case, we do not expect DN to cut the rate of interest on certificates below minus 0.75%, which we view as the lower bound for the key policy rate. We forecast EUR/DKK at 7.4550 in 1M-12M", says Danske Bank.