Denmark: Abundant FX reserves despite another large draw

• Danmarks Nationalbank (DN) purchased DKK48bn in FX intervention to cap EUR/DKK upside in August.

• Following DKK190bn of FX intervention to support DKK since April, the FX reserve is still DKK90bn above the level in December last year.

• We forecast a 15bp rate hike in 3M and 10bp in 6M to minus 0.50% and forecast EUR/DKK at 7.4610 in 1M and 7.4550 in 3-12M.

DN has just published August’s FX reserve and balance sheet. In August, the FX reserve declined to DKK536 from DKK583bn in July. DKK48bn of the fall was due to DN purchasing DKK in FX intervention. DN has intervened in the FX market to support DKK – EUR/DKK traded above the central rate of 7.46038 during August.

Since April, DN has purchased DKK190bn in FX intervention to cap EUR/DKK upside, which has brought the FX reserve markedly down since the peak in March at DKK737bn. Nevertheless, the FX reserve is still roughly DKK90bn above the level from December last year, i.e. DN has ample room to continue its current approach of solely using FX intervention to maintain DKK tightly pegged to EUR for another two to three months at the current pace of intervention.

The recent market turmoil and subsequent beginning of speculation about further monetary easing from the European Central Bank (ECB) in the near term provides a good argument for DN to continue using the more flexible instrument of FX intervention and thus draw further on the FX reserve to support DKK if needed rather than raising rates.

We forecast a 15bp unilateral hike in the rate of interest on certificates of deposit in 3M and an additional 10bp hike in 6M to minus 0.50%. We forecast EUR/DKK at 7.4610 in 1M and at 7.4550 in 3-12M on the back of DN starting to hike its key policy rate.

Deposits on the government’s account at the central bank rose DKK4bn in August to DKK175bn, more or less in line with the budget taking into account that it fell less than projected in July. Over the rest of the year, the government’s deposits are set to fall DKK80-100bn, depending on the level of DGB issuance this year. We expect liquidity in the DKK money market to rise by a similar amount over coming months.