ECB Stimulus Pushes Denmark Toward Currency Steering Shift

The specter of more stimulus from the European Central Bank risks triggering a policy reversal in Denmark, forcing it to resume currency purchases in defense of its exchange-rate regime, according to Danske Bank.

That, in turn, may scupper plans by the Danish central bank to reduce its bloated stockpile of foreign currency reserves from its March peak of 40 percent of gross domestic product.

President Mario Draghi’s Oct. 22 message that the ECB is ready to ease policy further is proving a game-changer for central banks outside the euro zone. For AAA-rated Denmark, which pegs its krone to the euro, that means efforts to exit a period of extreme monetary stimulus are being confounded. Arne Lohmann Rasmussen, chief analyst at Danske, says Denmark may start dumping kroner on the market as soon as next month to defend the peg.

“The turnaround in intervention is likely in December or the first quarter, depending on how aggressively the ECB reacts and on what happens to Danish rates up to December,” Rasmussen said by phone on Monday.

What’s more, the Danish rate increase that some economists had seen coming this year is now totally off the radar, Rasmussen said. Instead, the benchmark deposit rate -- at minus 0.75 percent since February -- probably won’t be raised for the “foreseeable future,” he said.

The shift in direction serves as a timely reminder, if one was needed, of the ECB’s impact on central bankers operating on the euro zone periphery.

In the case of Denmark, which already has the lowest rates in Europe, it also affects efforts to manage its foreign currency reserves.

The Danish central bank decided to boost its trove of foreign currencies after the 2008 liquidity crunch, when it was caught unprepared as investors turned away from Denmark and put pressure on the krone.

The central bank was forced to buy huge amounts of foreign currency in January and February of this year, when speculators turned to the krone after sinking the Swiss franc’s peg to the euro. The result has been reserves well above what economists consider to be their "natural" level of around 450 billion kroner ($66 billion).

According to October data, the level of intervention on the currency markets was 10.1 billion kroner, way below its August peak of 48.1 billion kroner, leaving foreign currency reserves at 491.6 billion kroner.

Prior to Draghi’s latest announcement, the Danish central bank had been expected to continue buying kroner, as it has done since April. Now, it looks like it may have to start selling them again.

"The idea here is that if the ECB -- and we think it will -- expands its QE program, it will be difficult for the Danish central bank to follow suit," Rasmussen said. "Instead, they will solve the problem of keeping up with ECB easing by buying foreign currency and selling Danish kroner, just as they did in the first quarter."

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