Danmarks Nationalbank on hold

Review

• Danmarks Nationalbank (DN) has delivered a series of four rate cuts to fend off the appreciation pressure on the DKK. This has fuelled a significant decline in Danish rates.

• Meanwhile, core bond yields have pushed higher. As we have projected, the move higher has been biggest in the US, while German Bund yields are still close to lows.

International rates

• The ECB is about to start its new QE programme in govvies. Despite significant buying and the boost to liquidity, we see only minor downside to German bund yields and only sub five years. Indeed, we expect 10Y rates to increase gradually as growth and inflation expectations rise and we expect a gradual steepening of the EUR swap curve, driven from the very long end.

• In the US, we still expect June 2015 to mark lift-off for the Fed Funds rate. This scenario is not priced into money market curves, which we expect to steepen. For the swap curve, we mainly see upside risks to the 2Y-5Y segment of the curve and we expect the 5Y/30Y slope to flatten in 2015

Scandi rates

• If the appreciation pressure on the Danish kroner continues, we do not expect it to lead to further rate cuts from Danmarks Nationalbank (DN). Instead, we expect FX purchases to be the preferred tool to fend off any potential inflow. However, we cannot fully rule out more unconventional measures such as FX swap arrangements and bond purchases are also available, although not that likely, in our view. We do not believe that the recent rise in EUR/DKK should lead to a rate hike from DN in the next year.

• The Riksbank has decided to cut the repo rate to minus 0.10% and announced bond purchases. In addition, the Riksbank has declared that unless inflation (and expectations) rise as projected, it is prepared to cut the repo rate more and expand bond purchases. In addition, from now on, additional policy measures – if necessary – can be announced at any time, not just after regular policy meetings. In our yield forecast, we have put in another 10bp repo rate cut over the coming six months.

• In Norway, we believe the market will continue to price in one or perhaps two more rate cuts after the March meeting but our view is that the expected March cut will be the last rate cut in this cycle, although risks are skewed on the downside