Danske Research Team
Danske Bank A/S
- Danmarks Nationalbank drew DKK12.1bn on the FX reserve to intervene in the FX market to cap EUR/DKK topside.
- It marks the fourth month in a row of FX intervention. DN has intervened for a total of DKK17.8bn since October.
- We now forecast DN to make a 10bp independent rate hike to minus 0.65% in H1 this year - moved forward from H2 previously.
Danmarks Nationalbank (DN) has just published January's FX reserve data and central bank balance sheet figures. The FX reserve was DKK426bn in January down from DKK435bn in December. DN drew DKK14.9bn on the FX reserve - DKK12.1bn due to FX intervention. Value adjustment increased the FX reserve DKK5.8bn. Government deposits rose to DKK85bn from DKK70bn in December.
The DKK12.1bn in FX intervention during January marks the fourth consecutive month DN has sold drawn on the FX reserve to intervene in the FX market. FX intervention since last October now totals DKK17.8bn. DN has intervened in the FX market to cap EUR/DKK topside.
In our view, the main reason for the persistent weak DKK is too low interest rates in Denmark - the introduction of negative rates on personal deposits since December has further contributed to the weak DKK. Hence, we do not expect the tide will turn for DKK before DN raises its policy rate.
DN can afford patience due to the still high level of FX reserve. In our view, it can opt to allow the FX reserve to fall another DKK20bn before it needs to hike its policy rates. In that case, a rate hike is still some time away - 2 to 4 months at the current pace of intervention. However, it may also conclude that a rate hike is warranted regardless and hike at one of the coming Thursday's. In FX Edge Rules or discretion? A look at past rate hikes in Denmark we concluded that there is no strong evidence of a systematic relationship between amount of FX intervention and when DN hike rates.
We now forecast a 10bp independent hike of the rate of interest on certificates of deposit to minus 0.65% in H1 this year - before today's data release we had expected the hike to come in H2 2020. In our view, the front end of the CITA-EONIA swap curve does not fully price the high chance of a rate hike in Denmark this year (or the a decline in the net position) (see more in Reading the Markets Denmark Short-term rates set to rise ).
Finally, note that government deposits rose DKK14bn in January mainly due to large seasonal tax payments. Danish pension funds pay taxes on pension returns during Q1 - the payments are likely record high this year due to the strong returns seen last year.
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