Danske Research Team
Danske Bank A/S
After the December ECB meeting we have seen a new currency outflow from Denmark, and we now forecast that over the next three months Danmarks Nationalbank (DN) will hike the Certificates of Deposit (CD) rate by a modest 10bp to -0.65%. An independent rate hike could potentially come as early as today.
Our forecast is still well below market pricing. We still believe that the significant Danish current account surplus will ensure that the Danish policy rate can stay well below that of the ECB for the foreseeable future. Our forecast is based on the view that DN favours a currency reserve close to the size at end-2014. If DN is ready to accept a further drop in the reserve, an independent Danish rate hike would not be imminent.
Denmark did not follow the latest ECB rate cut
Danmarks Nationalbank (DN) did not change its policy rates when the ECB lowered the deposit rate by 10bp at the beginning of December and the policy spread between the Danish Certificates of Deposit was narrowed to 45bp from 55bp previously. DN said that the decision not to mirror the ECB reflected, ‘... the sale of foreign exchange in the market since April 2015’.
The non-move from DN, which indirectly can be seen as an independent Danish ‘rate hike’, and the November foreign exchange reserve data, which showed that the sale of foreign currency slowed to a modest DKK7.1bn, could indicate that the outflow from Denmark has now come to an end after the strong inflow in Q1. The Danish currency reserve stood at DKK483.9bn by the end of November, which is still some DKK40bn above the level of the FX reserve at end-2014.
Furthermore, Denmark continues to run a significant current account surplus, which was recently estimated by the central bank to be 7.4% of GDP in 2016.
Given the significant current account surplus and the strong balances of the Danish economy, we have so far estimated that the Danish central bank could keep the Certificates of Deposit rates at the record low -0.75% throughout 2016.
Size of currency reserve in focus
However, recent developments seem to indicate that the currency outflow has continued in December after the ECB ‘disappointed’ the market at the beginning of December.
The banks’ so-called net position at the central bank has dropped over DKK40bn more than the official liquidity forecast from the central bank would indicate. If this ‘rough’ estimate for FX intervention so far in December is correct, it would indicate that the Danish FX reserve is now more or less at the level seen at end-2014 before the strong inflow in Q1.
This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.
Recommended Content
Editors’ Picks
EUR/USD clings to daily gains above 1.0650
EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.
Gold holds steady at around $2,380 following earlier spike
Gold stabilized near $2,380 after spiking above $2,400 with the immediate reaction to reports of Israel striking Iran. Meanwhile, the pullback seen in the US Treasury bond yields helps XAU/USD hold its ground.
Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium
Bitcoin price shows no signs of directional bias while it holds above $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research.
Week ahead – US GDP and BoJ decision on top of next week’s agenda
US GDP, core PCE and PMIs the next tests for the Dollar. Investors await BoJ for guidance about next rate hike. EU and UK PMIs, as well as Australian CPIs also on tap.