End of negative rates in Denmark

• Danmarks Nationalbank has just announced that it is increasing the rate on certificates of deposit by 15bp to 0.05%. 
• Furthermore, the central bank has reduced the current account ceiling from DKK67.4bn to DKK38.5bn. 
• The independent rate increase follows intervention from the central bank. 
• We expect the recent action to be enough to curb the recent krone weakening. 

Danmarks Nationalbank (DN) has just announced that it is increasing the rate on certificates of deposit by 15bp to 0.05%. It has left the lending rate unchanged at 0.20% and the current account and discount rate unchanged at 0.00%. Furthermore, the central bank has reduced the current account ceiling from DKK67.4bn to DKK38.5bn following the return to a positive rate on certificates of deposit. 

The independent rate hike follows a period with a gradual rise in EUR/DKK. An increase in short-term euro money market rates has raised the negative carry on short EUR/DKK positions, which has been the main contributing factor behind the weaker krone and the subsequent need for action by the central bank. The rate increase follows intervention from the central bank.
 
The recent action from DN marks the first time in 14 months that it has intervened in the FX market. We believe the recent intervention and today’s independent rate hike are likely to be enough to curb the recent krone weakening. First, the mounting current account surplus and high foreign demand for Danish assets puts fundamental appreciation pressure on the krone. Second, we expect the European Central Bank to ease monetary policy further over coming months, which would reduce the negative carry on short EUR/DKK positions further and limit the depreciation pressure on the krone from this channel.