DN purchased FX for DKK106.3bn in January in defence of peg

• In January, Danmarks Nationalbank made FX intervention purchases for DKK106.3bn in response to appreciation pressure. The FX reserves are now at DKK564.1bn which corresponds to 29.6% of GDP.

• Interventions and rate cuts are standard tools for DN in defence of the peg. DN still has ample room to manoeuvre to keep the peg fixed.

• Going forward, we cannot rule out DN having to cut the CD rate further in order to ease appreciation pressure. That said, predicting the precise timing and size of a cut is difficult. Following today’s release, DN stated that it has an ‘unlimited supply of kroner’ and that there is ‘no limit to how high FX reserves can go.’

One of the key market developments in Denmark over the past couple of weeks has been the strong krone and appreciation pressure following the Swiss central bank’s decision to remove the floor under EUR/CHF and the ECB’s announcement of its long-awaited asset purchase programme. Danmarks Nationalbank (DN) has responded to the pressure by cutting interest rates and making intervention purchases. The lending rate and the rate on certificates of deposits (CD rate) are now at 0.05% and -0.50%, respectively, which are historic lows.

We already knew from the press releases following the three rate cuts that DN had made intervention purchases in January, so today’s figures only reveal to what extent DN actually intervened. The intervention purchases amounted to DKK106.3bn. DN has never bought/sold FX to this extent before, which shows that the krone has been under very significant appreciation pressure. It also explains why DN had to cut interest rates three times, which is very unusual. Note that FX intervention purchases have a two-day settlement period, which means that the FX reserve effectively includes FX intervention purchases made up to last Wednesday. Today’s figures do not indicate whether the combination of rate cuts and interventions have helped ease the appreciation pressure; only the coming weeks/months will tell us that. The FX reserves are now at DKK564.1bn which corresponds to 29.6% of GDP.

Interventions and rate cuts are standard tools for DN in defence of the peg. We think it is very unlikely that Denmark will be forced to give up the peg, as it is a key element of economic policy in Denmark, see also Research Denmark: The Danish peg is indisputable, 16 January 2015. DN still has ample room to manoeuvre to keep the peg fixed, both with conventional and unconventional tools. On Friday, it announced that the Ministry of Finance has, upon its recommendation, decided to suspend the issuance of government bonds in order to reduce interest-rate spreads in the longer maturity segments, see also Flash Comment Denmark: Government bond issuance suspended in defence of peg, 30 January 2015. Both the 10Y and 30Y yields have dropped significantly, in line with DN’s aim.