DKK102bn in FX intervention since April

• The Danish FX reserve fell to DKK626.3bn in June on the back of DKK33.5bn in FX intervention by Danmarks Nationalbank (DN).

• Since April, FX intervention has totalled DKK102bn – we expect the outflow to continue before the key policy rate is hiked by 15bp on 3M and 10bp on 6M to minus 0.50%.

• Government deposits declined to DKK204bn in line with expectations – we expect them to have to fall close to or below DKK100bn before government bond issuance will be restarted in Q4 this year or H1 next year.

DN has just published June’s FX reserve and balance sheet. The FX reserve declined DKK32.6bn to DKK626.3bn. The decline was due to DN purchasing DKK in FX intervention. FX intervention totalled DKK33.5bn in June. The balance sheet showed that government deposits declined DKK21bn in June to DKK204bn.

EUR/DKK traded above the central rate of 7.46038 for most of June and FX intervention thus reveals DN’s efforts to cap EUR/DKK topside. June marks the third consecutive month of DN purchasing DKK in FX intervention. Over this three month span, DN has purchased an accumulated DKK102bn in DKK in FX intervention. Despite the steep decline in the FX reserve, it remains large in an historical context. The fall over the past three months erases only a little over a third of the total increase in the FX reserve in January and February and it currently amounts to around 31% of GDP compared with 23% of GDP in December.

That DN has conducted sizable FX intervention without raising its policy rates indicates that its reaction function currently differs from its historical reaction function. This may be because DN is targeting a lower FX reserve on the back of the sharp rise at the beginning of the year or because it wants to be on hold with uncertainty regarding the effects on the EUR of the ECB’s bond purchases and the Greek debt crisis still looming. Nevertheless, we expect the outflow from the FX reserve to continue in coming months before DN hikes the rate of interest on certificates of deposits by 15bp on 3M and 10bp on 6M to minus 0.50%.

The decline in government deposits in June was more or less in line with the projection in this year’s fiscal budget adjusting for net issuance of treasury bills and buybacks of government bonds. We expect the deposits to have to fall close to or below DKK100bn alleviating the government from paying a negative interest rate on deposits before issuance of government bonds will be restarted. In its recent budget review, the government projected the deposits on its account at the central bank will reach DKK103.5bn by the end of the year. Hence, it seems probable that issuance will be resumed in Q4 this year or in H1 next year, in line with recent comments from Lars Rohde indicating that DN can/will wait to resume issuance until at least 2016.