In January, the Danish currency reserve declined by DKK6.1bn - the Danish Central Bank Nationalbanken now holds DKK495.6bn in currency reserves, which amounts to around 28% of Danish GDP.

DKK11.9bn of the decline was due to interventions by Nationalbanken. Hence, interventions were stepped up in January to mitigate the weakening of EUR/DKK, which traded above central parity at 7.46038 for large parts of January.

The upward pressure on EUR/DKK and subsequent currency intervention by Nationalbanken were in our view triggered mainly by the move higher in euro money market rates that widened the negative carry on long DKK positions. The reversal of safe-haven positions might also have played a role in the upward pressure on EUR/DKK.

Following the interventions, the Danish National Bank on 24 January increased its lending rate and the rate on certificates of deposits by 10bp to 0.30% and -0.10% respectively.

Today's reserve figures confirm that the reaction function of Nationalbanken is unchanged and symmetric. Hence, the rule-of thumb that it will take interventions in the area of DKK10-15bn to trigger a new rate change is still intact.

The risk is still skewed towards a new independent Danish rate hike over the coming months given the continued normalisation in financial markets. However, we doubt a new rate hike is imminent. The 24 January rate hike has supported DKK and EUR/DKK has fallen slightly and is currently trading just below central parity. The relentless rise in EONIA rates and the accompanying widening of the negative carry on DKK have also come to a halt over the past couple of days.

The current market pricing indicates that Nationalbanken will raise rates by a further 30-40bp by year-end. We think this is somewhat excessive given our view on the EONIA curve. As we write in EUR Strategy: aggressive pricing of impact from LTRO repayment (22 January), in general we see the risk skewed on the downside for EONIA rates.