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Factors affecting DKK

Mon, Oct 6 2008, 09:36 GMT
by John Hydeskov

Danske Bank A/S

• • There has recently been some modest pressure on the DKK. We have reason to believe that this is due to the negative FX forward spread. Danmarks Nationalbank (DN) intervened to a limited extent in September - only DKK0.7bn. In this note we look at the factors affecting EUR/DKK. 

• • Around this time of year, we are usually being asked about two things: First, whether the coupon money due in mid-November could have an impact on EUR/DKK if foreigners do not reinvest their proceeds. Second, could an outflow in relation to the refinancing auction arise if foreigners don't reinvest their holdings of non-callables, maturing on January 1 2009? 

• • In both cases the answer is "no", as the proceeds from both events are too small. Coupon money to foreign investors is just DKK6bn and the proceeds from the refinancing auction amounts to modest DKK7.3bn. Thus even if all the proceeds is repatriated - which in our view is quite unlikely - it will not have any significant affect on EUR/DKK or should warrant any additional action from DN. 

• • The new political agreement on financial stability between the Danish government and commercial lenders will, in our view, provide relief to DKK as it reduces systemic risk substantially and limits the risk premium attached to DKK relative to EUR, all other things being equal.

• • Other factors, likely to impact on EUR/DKK going forward include the general level of risk aversion, capital flows and M&A flows. In our view, these do not represent significant upside risk to EUR/DKK. The DKK is currently not burdened by any significant outflows; the trade balance posts a healthy surplus while the current account, FDI and equity flows not are alarming.

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Published on  Mon, Oct 6 2008, 09:41 GMT