EUR/DKK set jump above 7.44 on a rate cut by the DN – Danske Bank

FXStreet Team FXStreet

Economists at Danske Bank now forecast Danmarks Nationalbank (DN) to cut its key policy rates by 10bp in three months – the deposit rate to -0.60% and the repo rate to -0.45%. They expect one cut will be sufficient to restore negative carry on short EUR/DKK positions and lift EUR/DKK spot above 7.4400.

EUR/DKK is in the low end of the historic range

“EUR/DKK trades in the low end of the historic trading range and DN sold DKK0.4 B in FX intervention in February. Eventually FX intervention selling of DKK will reach a level that warrants a small rate cut – possibly already after DKK20 B. We therefore now forecast DN to cut its key policy rates 10bp in 3M, which leaves the deposit rates at -0.60% and the repo rate at -0.45%.”

“FX intervention selling of DKK will tend to push money market rates lower as it increases liquidity. When the deposit rate was -0.60% before the technical change, we expected DN to sell at least DKK50 B in FX intervention before making a rate cut due to this effect. We doubt it will make much of a difference now after the technical change and thus see a possibility of a rate cut already after DKK20 B in FX intervention selling.”

“High DKK interest rates have been the main factor behind the DKK appreciation seen the past year. Carry alone will not necessarily be enough to drive inflow to DKK in particular since EUR/DKK spot has reached an effective lower bound. However, on a longer-term horizon the high level of interest rates more than compensate for the low level of the spot.”

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