Denmark’s central bank might set a world record in negative rates this week as policymakers try to flush out speculators still betting against the krone’s peg to the euro.
The central bank was expected to cut its benchmark deposit rate by a quarter of a percentage point to minus-1 percent yesterday, according to Nordea Bank AB, Scandinavia’s largest lender.
There was even a chance Nationalbanken director Lars Rohde could go as low as minus-1.25 percent to send a clear signal, Nordea said.
Danske Bank A/S also predicted a 25 basis-point cut.
The move would follow record currency-market interventions. The central bank has dumped about $30 billion kroner (US$4.57 billion) this year to weaken the currency and defend the peg, bringing its reserves to 35 percent of GDP.
Rohde last week said that there is no limit to how high reserves can grow or how low rates can go to prevent the “unthinkable” prospect that Denmark might lose its euro peg.
“The central bank really wants to stamp this out now,” Jan Stoerup Nielsen, a senior analyst at Nordea Markets in Copenhagen, said by telephone on Wednesday. “They may be ready to throw their heavy artillery at the market and that’s why I think a 50 basis-point rate cut is a possibility.”
The list of unprecedented events in Denmark’s currency and fixed-income markets has grown since last month, when Switzerland’s decision to abandon its ties to the euro fueled speculation Denmark may be next.
Policymakers in Copenhagen have sought to dismiss the conjecture, arguing their three-decades-old currency regime can not be compared with the temporary framework the Swiss National Bank put in place in 2011.
Rohde’s job is to target 7.46038 per euro inside a 2.25 percent tolerance band. In practice, the bank does not allow swings greater than 0.5 percent. The currency regime is backed by the European Central Bank (ECB), which is obliged to provide “automatic and unlimited” support should the official tolerance band be breached.
Twelve-month forward-rate contracts traded at 7.36 on Wednesday. That was stronger than any closing price on record and more than 1 percent above the Danish central bank’s target.
“The central bank is usually able to stabilize the currency market situation a lot quicker, but nothing is normal these days,” Nielsen said. “It’s difficult to know exactly where the flows are coming from.”
Rohde has already embarked on a form of quantitative easing (QE) to drive down yields and deter investors from buying kroner by asking the Danish government to halt bond sales until further notice. On Wednesday, the debt office rejected all bids received in a Treasury bill auction.
The yield on the June bill traded at minus-1.4 percent after the bids were rejected.
Nordea estimates bids would have had to be below minus-1.35 percent at the auction to make it worth the central bank’s while to sell.
The extreme monetary measures have sent yields below zero across government-debt maturities as long as five years. Mortgage-bond yields as long as three years are also negative.
“The central bank will probably want to go down the path of shocking markets,” Danske Bank head of fixed-income research Arne Lohmann Rasmussen said by telephone about Nationalbanken’s possible move. “It’s important for the central bank to stop this before the ECB starts its QE program in March.”
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