DN cuts for a third time in less than two weeks

• Danmarks Nationalbank (DN) is cutting the certificates of deposits (CD) rate by15bp to an historical low minus 0.50%. The rate cut follows FX interventionpurchases. 

• DN has thus delivered the third 15bp rate cut in less than two weeks to fend ofstrong appreciation pressure on the DKK. 

• Going forward, we cannot rule out DN needing to cut the CD rate further intothe negative to curb downward pressure on EUR/DKK.

Danmarks Nationalbank (DN) has just announced a cut in the rate of interest oncertificates of deposits (CD rate) by 15bp to minus 0.50%. It left the lending rateunchanged at plus 0.05%. It kept the current account rate and discount rate unchanged at0.00%. The interest rate reduction follows Danmarks Nationalbank’s purchase of foreignexchange in the market. 

Today’s rate cut shows that the appreciation pressure on the DKK has continued evenafter several rate cuts last week. Hence, despite a significant cost in long DKK positionscurrency inflow has continued. 

Although we are in an unusual situation, the reaction from DN has so far been business asusual. First intervention and then a rate cut. The lending rate stays positive and we expectit to remain positive even if DN cuts the lending rate further. 

So, the rate corridor continues to widen and this implies that the day-to-day fixings in themoney market will become increasingly volatile. We expect the Cita T/N on average tohover around 6-7bp above the CD rate, although we believe it will become increasinglyvolatile. 

Further, the market is now pricing in a negative Cibor 3M fixing in the coming monthsand Cibor 6M is priced down to just above zero. If DN cuts further, we cannot rule outCibor 6M also turning negative. 

Going forward, we expect DN to continue defending the currency around today’s level inorder to avoid further speculation about the sustainability of the peg. 

We cannot rule out DN having to cut further to wave off appreciation pressure. Further,as Danish mortgage and government bonds still offer a decent pickup to Germany, thereis still value in Denmark, in our view. 

Hence, inflow might continue from domestic and international investors looking for apickup or from investors looking for a next rate cut to materialise.