Even after delivering its third rate cut in 10 days, Denmark probably has not done enough to fight back investors eager to hold assets in the Scandinavian currency.
Svenska Handelsbanken AB, Danske Bank A/S and BNP Paribas SA all said the central bank in Copenhagen might need to continue cutting rates to defend its currency’s peg to the euro.
The bank said it has the scope to cut rates again and sell more kroner. “Those instruments remain in the toolbox to be used,” Karsten Biltoft, head of communications, said by telephone.
Denmark cut its deposit rate by 15 basis points on Thursday to minus-0.5 percent, the lowest in the country’s history. The bank, which does not hold scheduled meetings, said it took the step after selling kroner in the market. Handelsbanken estimates it might have sold as much as 100 billion kroner (US$15.3 billion) this month to weaken the currency in response to the sudden capital influx that followed the Swiss National Bank’s decision to abandon its Swiss franc cap against the euro on Jan. 15.
“It is difficult to put a label on where the flows are coming from,” Biltoft said. “It is both domestic and foreign.”
The central bank “is having to fight tooth and nail to defend the peg ever since the Swiss National Bank decided to abandon its peg with the euro,” Colin Bermingham, an economist at BNP Paribas SA in London, said in a note. “At this point, it is likely the deposit rate may need to go even further into negative territory.”
As well as releasing the franc into a free float, the Swiss National Bank cut its main rate to minus-0.75 percent from minus-0.25 percent on Jan. 15.
“This is a level that the Danish central bank may ultimately need to match, though not necessarily in one step,” Bermingham said. “The reserve data next week is taking on ever greater significance.”
The central bank is due to publish official reserve figures on Tuesday next week. Handelsbanken’s estimate suggests the bank conducted interventions of record proportions that would increase reserves to an all-time high.
Denmark’s central bank, government and business leaders have all argued that speculators who take on the krone would also need to bet against the European Central Bank (ECB), which backs Denmark’s euro peg. According to the ECB agreement, efforts to support the peg should “in principle be automatic and unlimited.”
Danmarks Nationalbank Governor Lars Rohde’s job is to target 7.46038 kroner per euro. While the bank’s official tolerance band is 2.25 percent, in practice it has stayed well within about 1 percent of the target.
“Further rate cuts are still looming as long as we don’t see any major impact on the krone,” Rasmus Gudum, an economist at Handelsbanken in Copenhagen, said by telephone. “Some investors are still looking at the Swiss and as long as Denmark hasn’t gone to the same level as the SNB [Swiss National Bank] there will still be some testing the waters.”
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