The Danish Central Bank is expected to be preparing for another independent 10bp rate cut, narrowing the policy rate spread to Euroland to 35bp. Contrary to what one might have anticipated, EUR/DKK has drifted slightly lower after the latest Danish rate cut on 13 August and DKK continues to be supported by a high market spread. Timing is as always tricky as the Danish CB is very brief in its communication, but we expect the rate cut this Thursday or one of the following Thursdays (prior to the market operations on Fridays).
Stronger DKK and larger currency reserve
No wonder that the DKK is strengthening! Even though the Danish CB has gradually lowered the lending rate throughout the year, deposit spreads still provide solid support to DKK. Specifically, the 3M deposit spread has barely moved since April and is still around 85bp. FRA-spreads – even further out of the curve – also indicate that holding DKK instead of EUR continues to be attractive. The spreads are still much higher than before the pressure on DKK emerged in October last year. Accordingly, we are not surprised to see EUR/DKK drifting lower.
Thanks to the higher-than-usual policy spread and wide market spreads, the Danish CB has been able to build up a large currency reserve. By the end of July, the reserve stood at a record-high DKK336.4bn and we have reason to believe that the Danish CB has added further to the reserve in August. Only the Danish CB knows the desired size of the reserve, but according to our judgement and taking into account the current financial conditions that have eased significantly, the need for a further build-up is very limited. There is in fact scope for some reduction as the ‘threats’ to DKK are substantially smaller than half a year ago.
