Strong defence of EUR/DKK peg in February

• Danmarks Nationalbank (DN) made FX intervention purchases for DKK168.7bn in February.

• In the latter part of February, DN did not intervene in the FX market.

• Despite the surge in the Danish FX reserve, it is a fair distance from the size of reserves in Hong Kong, Singapore and Switzerland.

• We expect DN to keep EUR/DKK in the range of 7.4440-7.4700 in 1M-12M and do not expect DN to make changes to the key policy rate within the coming 12 months.

Danmarks Nationalbank (DN) has just released FX reserve data for February. The FX reserve rose to DKK172.9bn in February from DKK737.1bn in January. The increase was due to FX intervention purchases for a total of DKK168.7bn. DN further comments on the release that ‘The main part of the interventions took place during the days around the interest rate reduction on 5 February. In the latter part of February, Danmarks Nationalbank did not intervene in the foreign-exchange market.’ It is unclear what period ‘the latter part of February’ covers.

The FX reserve figures mark the end of a month in which DKK experienced the strongest appreciation pressure since the introduction of the euro in 1999 as the European Central Bank’s (ECB) announcement that it will start purchasing government bonds and the Swiss National Bank’s decision to remove the floor under EUR/CHF triggered a strong inflow into DKK. This point is highlighted further by the sharp fall in Danske’s DKK Exchange Market Pressure Index (EMPI) in February. It declined to -4, from -2.8 in January – by far the lowest level since 1999.

Compared with other central banks with large FX reserves, Denmark does not stand out despite the surge in January and February. Relative to GDP, the Danish FX reserve is close to 40% of GDP and a fair distance from the level of reserves in Hong Kong, Singapore and Switzerland, where the FX reserve is around 125% of GDP, 90% of GDP and 80% of GDP respectively.

We expect DN to keep EUR/DKK stuck in the range of 7.4440-7.4700 in 1M-12M and do not expect it to make changes to the key policy rate within the coming 12 months. The rate of interest on certificates of deposits (CD rate) is currently at minus 0.75%. We could see downwards pressure on EUR/DKK resume down towards the 7.4440 level, as ECB will start bond purchases later this month. Danish companies paying dividends at the end of March may temporarily ease DKK appreciation pressure.