Denmark’s FX reserve unchanged in September, key policy rate likely to stay on hold for longer time

Danish central bank, Danmarks Nationalbank (DN) yesterday published FX reserve and central bank balance sheet for September. Denmark’s FX reserve for September remained unchanged from August at DKK 450 billion. The central bank did not need to intervene in the foreign exchange market as the EUR/DKK pair traded quite within the historically preferred trading range of DN of 7.42-7.47 last month.

In the next 12 months, the EUR/DKK pair is expected to trade around the present level, which is at the lower end of the historical trading range. In the three to 12 month horizon, the pair is forecast to trade at 7.4425, according to Danske Bank.

“At this level, we look for DN to remain on the sidelines, meaning we forecast the key policy rate – the rate of interest on certificates of deposit – will stay unchanged at minus 0.65 percent in 12M”, added Danske Bank.

In recent years, the currency pair EUR/DKK has been facing downward pressure from the political risk in Europe. In the coming year there are several key political events taking place in Europe, for instance, Italy’s constitutional referendum, elections in France and Germany and negotiations of the U.K’s withdrawal from EU membership. If market concerns about political stability in Europe begin to re-emerge, it might spur demand for DKK and push down EUR/DKK, stated Danske Bank.

“We look for DN to cap the EUR/DKK lower bound around 7.4350”, said Danske Bank.

The Danish Debt Management Office bought back Danish Government Bonds worth DKK 13.6 billion in September that has raised the DKK net position and lowered government deposits at DN. In other words, it has further eased conditions in money market in the similar manner an FX intervention purchase of EUR/DKK might work.