For the first time in more than a year, Denmark’s central bank is close to purchasing kroner in an effort to defend its peg to the euro, according to Danske Bank A/S and Svenska Handelsbanken AB.
The intervention would bring Denmark one step closer to exiting the negative interest rate regime that’s anchored money markets since July 2012. It also follows a depreciation of the krone that’s deeper than in January 2013, when the bank last raised rates.
“With the krone this weak, we have to see interventions soon,” Jes Asmussen, chief economist at Handelsbanken in Copenhagen, said by phone. “The krone is already down past a level where the central bank tends to act.”
Asmussen predicts the central bank will follow its krone purchases with a rate increase later this quarter. That would end an unprecedented 20-month stint of negative rates, which the central bank resorted to when investors fleeing Europe’s debt crisis flocked to AAA-rated Denmark.
The central bank’s policy has driven money market rates below zero. The yield on Denmark’s three-month Treasury bill was minus 0.14 percent on Friday, compared with 0.08 percent on equivalent notes sold by Germany.
The krone traded at 7.4637 at per euro on Friday, its weakest since October 2008. That compares with 7.4625 before the March 6 European Central Bank meeting, in which President Mario Draghi said inflation will rise gradually, damping bets policy makers will extend stimulus. The euro has gained about 1 percent against the dollar in 2014 and is enjoying its best start to a year versus the greenback since 2011.
“The krone has been on a weakening trend and in recent days it has weakened further,” Jens Naervig Pedersen, an economist at Danske, said by phone. “We’ve seen the Danish krone not being able to entirely keep track with the euro after Draghi’s press conference.”
Both Handelsbanken and Danske say they expect the Danish central bank to increase the deposit rate to zero from minus 0.1 percent, and to raise the lending rate to 0.3 percent from 0.2 percent within the next three months.
“There’s a high likelihood that the central bank is about to start intervening in the currency market and that it will follow up with an interest rate increase,” Pedersen said. “Denmark seems to be done with negative rates for this round.”
Denmark’s central bank last intervened in currency markets in January 2013, when it bought about 11.9 billion kroner ($2.21 billion) to support the peg. The bank on Jan. 24, 2013, then raised its deposit rate by 10 basis points from minus 0.2 percent. It’s due to report March reserves data on April 2.
The central bank in Copenhagen targets a krone rate of 7.46038 per euro. Though its official tolerance band is 2.25 percent, in practice the bank has acted to keep the exchange rate within about 1 percent of its target. The euro-krone cross has averaged 7.4496 in the last five years, according to prices compiled by Bloomberg.
Still, Denmark’s record current account surplus helps support the krone and means the central bank won’t need to embark on a cycle of rate increases, Danske’s Pedersen said.
“The coming interest rate hike won’t be followed up by a series of additional increases,” he said.