- Danmarks Nationalbank (DN) sold DKK33.9bn of FX in intervention to support DKK in April.
- The move highlights that the downward pressure on EUR/DKK has reversed and that DN is now reacting to cap EUR/DKK upside.
- Government deposits declined as projected in April and we stick to our view that bond sales will be resumed in Q4 this year.
DN’s intervention in the FX market in April indicates that the downward pressure on EUR/DKK has reversed and that DN is now reacting to cap EUR/DKK upside. Historically, FX intervention of this amount has triggered a unilateral rate hike from DN and, therefore, the market will keep a close eye on DN on Thursday for a possible rate announcement.
However, the current circumstances are not normal. DN allowed accumulated inflow into the FX reserve of above DKK100bn following its recent cut of the key policy rate to minus 0.75%. DN may want to shrink the FX reserve by a similar amount before raising its policy rates. This view is further supported by the experience from Q4 08, where DN allowed inflow of around DKK30-50bn before cutting rates following the significant loss of FX reserves of DKK60bn in October 2008.
Government deposits fell around DKK26bn to DKK235bn, which was in line with DN’s projection for government payments in April including net issuance. Hence, we still expect the government to resume bond sales in Q4 this year, when its deposits at the central bank are likely to dip below the DKK100bn mark
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