EUR/DKK: Four reasons for a stronger krone – Nordea

Hedge ratios of foreign assets in Danish pension funds, relative liquidity in EUR vs. DKK, political risks in the Eurozone and global equities are the four reasons to put the pressure in EUR/DKK on the downside, according to analysts at Nordea.

Key quotes

“Hedge ratios of foreign assets in Danish pension funds remain subdued on the latest data we have from Nationalbanken. The hedge ratio of USD assets averages just above 70%, while the hedge ratio of EUR assets averages just above 15%. This is at least 5-10%-points below historical averages. If hedge ratios return to normal during 2020, it would likely lead to selling of foreign FX and buying of DKK in forward space to the magnitude of at least DKK 100 billion since the total amount of USD and EUR assets in the sector is just above DKK 2000 billion.”

“If the ECB prints a lot of EURs, EUR/DKK trades in the low part of the range, while the opposite is the case, when the ECB has had a less expansive monetary policy.”

“DKK liquidity will likely remain tighter than anticipated by the central bank, but it will likely still increase towards DKK 170-175bn. A tight DKK liquidity is a DKK spot positive story, which may ultimately force Nationalbanken into action.”

“We get a clear signal of downside risks in EUR/DKK spot, also even if we stress the model with a 20-25% setback in global equities. The liquidity effect from the flood of EUR liquidity is bigger than the equity market effect in the OLS-model.”