Denmark: FX intervention continued in May

• Danmarks Nationalbank (DN) purchased DKK in FX intervention for DKK35bn in May leaving the FX reserve at DKK658.9bn and accumulated intervention since the beginning of April at DKK68.9bn.

• We expect it to take a substantial outflow on top of the intervention conducted in April and May to trigger a unilateral rate increase and forecast DN will hike the key policy rate by 15bp on 3M and 10bp on 6M to minus 0.50%.

• Government deposits declined by DKK10bn in May to DKK225bn – issuance of government bonds is not likely to be resumed before government deposits have fallen below DKK100bn, which may not happen before H1 16.

DN has just published May’s FX reserve and balance sheet figures. The FX reserve declined by DKK46.6bn in May to DKK658.9bn. The bulk of the decline was due to DN purchasing DKK in FX intervention to cap EUR/DKK topside – in May, DN purchased DKK in FX intervention for DKK35bn. DKK10.6bn was due to repayment of government foreign debt. May’s balance sheet further shows that government deposits declined DKK10bn to DKK225bn in May.

Since the beginning of April, DN has made FX intervention for an accumulated DKK68.9bn, while leaving its policy rates unchanged. Hence, so far, DN has been willing to allow the FX reserve to decline more than it would under more normal circumstances without touching policy rates. This change in reaction function should be seen as a consequence of the significant inflow into DKK in January and February.

EUR/DKK has fallen below the central rate as the uncertain prospect of a solution to Greece’s fiscal situation is weighing on the cross and is likely to have put DN intervention on hold. We expect it to take a substantial outflow on top of the intervention conducted in April and May to trigger a unilateral rate increase – in our view, this is not likely to happen before a firm deal is struck on Greece’s fiscal situation. This we expect to happen in the coming months though. Thus, we forecast DN will hike the rate of interest on certificates of deposit by 15bp on 3M and an additional 10bp on 6M to minus 0.50%.

The normalisation of government deposits is more or -less on track following the decline in May. Issuance of government bonds is not likely to be resumed before the government’s deposits have fallen below DKK100bn, alleviating the government from paying a negative interest rate on its deposits at the central bank. In its recent budget overview, the Danish Finance Ministry projects the government’s deposits will fall to DKK103.5bn by year-end. Therefore, it is uncertain whether issuance of government bonds will be resumed this year or whether the current suspension will be upheld until sometime in H1 16.