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Money Market Abandons Logic in Denmark After Currency Sinks

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The Danish krone is close to its weakest in 14 years and money-market traders are predicting the central bank will need to raise rates in 2015 to defend its euro peg.

It all looks like a stunning reversal for the krone. Just three months ago, its strength forced Denmark to embark on an historic set of steps to keep investors out, including cutting the main deposit rate to minus 0.75 percent and suspending bond sales.

But things aren’t what they seem. Anyone only looking at money markets as an indicator for what might happen with Danish rates may be in for a surprise. That’s according to Nordea Bank AB, Scandinavia’s biggest bank, SEB AB, the region’s biggest currency-trading bank, and Danske Bank A/S, Denmark’s largest lender.

“Short rates have gone up too fast,” Anders Aalund, chief analyst at Nordea in Copenhagen, said by phone. “Expectations about a rate hike have been too aggressive.”

What money markets aren’t capturing is that the sudden outflow of kroner starting in March covers dividend payments by companies including A.P. Moeller-Maersk A/S, Novo Nordisk A/S and Danske. According to data compiled by Sydbank A/S, those payments total about 91 billion kroner ($13 billion) and about half the shareholders live outside Denmark.

“That’s the highest amount ever,” Bjoern Schwarz, chief stock analyst at Sydbank, said by phone.

Watching Greece

Jens Naervig Pedersen, senior analyst at Danske, says it’s the dividend flows that explain the krone’s weakness, and not some fundamental reversal of demand for the currency that would affect the central bank’s defense of the euro peg.

“In our base case, we do not expect a rate hike in the coming 12 months,” Pedersen said. “There are still a number of factors which could push the krone higher,” including quantitative easing by the European Central Bank and persistent uncertainty over Greece’s membership in the euro area.

The krone traded at 7.4705 against the euro as of 10:18 a.m. in Copenhagen on Tuesday, compared with as strong as 7.4327 two months ago. Denmark’s so-called tomorrow/next interest rate, which covers uncollateralized day-to-day money-market lending, was set at 0.05 percent on Monday after plunging as low as minus 1.7 percent earlier this month.

Pressure on the krone’s peg to the euro is also coming from inside the Danish economy. The AAA-rated nation’s current-account surplus will reach about 7 percent of gross domestic product this year, the central bank estimates. Demand for krone assets from Denmark’s 2.9 trillion-krone pension industry is also adding to the equation.

Swiss Precedent

Since Switzerland’s Jan. 15 decision to drop its ties to the euro triggered conjecture Denmark may be next, the central bank has bought about $39 billion in reserves to weaken the krone and defend its euro peg. That’s about three times the amount paid in Danish dividends since last month.

The central bank probably won’t raise rates before capital outflows match inflows from earlier this year, Thomas Thygesen, chief economist at SEB in Copenhagen, said by phone. That means the 25 basis-point rate increase priced into money markets within in the next six months is unlikely to come, he said.

According to Aalund at Nordea, the next development to watch out for is a resumption of government bond sales, which the central bank halted in January to keep out investors and prevent the krone appreciating.

“They have really started to make liquidity poor and that won’t come back until they start selling again,” he said.

Poul Kobberup, chief investment officer at PFA Pension A/S, says the lack of liquidity means investors “are just sitting on their positions,” and that “could be one reason why the currency is so stable now: No one wants to trade.”

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