Nordea Bets Denmark's Rate Spread to ECB to Be Halved by Yearend

Scandinavia’s biggest bank sees the spread between Danish and euro rates more than halving by the end of the year after Denmark’s central bank delivered closure on a speculative attack on the krone.

Having recently raised rates for the first time in more than 20 months, policy makers in Copenhagen will be looking to Thursday’s meeting by the European Central Bank for clues on how to preserve the currency peg during the course of 2016.

Nordea expects the spread between Danish and ECB benchmark rates narrowing from today’s 35 basis points to 15 before the year is over. Sydbank also sees the spread falling, but to only 25 basis points, while Danske anticipates no change.

Few fireworks are expected at this week’s meeting in Frankfurt, the first of 2016, meaning the pressure on kroner outflows is likely to continue. According to Nordea senior analyst Jan Stoerup Nielsen, the fact that ECB President Mario Draghi will announce neither a rate cut nor more quantitative easing "paves the way for the DCB to raise the rate.”

“The worst scenario for the Danish central bank will be if the ECB comes out on Thursday with the message they may soon intervene again," Nielsen said. "That will put the Danes in a difficult choice between acting and waiting.”

Nielsen notes that the timing of a Danish hike depends on how much the central bank has been forced to intervene on the currency markets.

According to Jens Naervig Pedersen, a senior analyst at Danske, “we need to see some DKK 10-20 billion ($1.5-3 billion) worth of Forex interventions before the central bank will move the rate.”

With reserves now back at less than 25 percent of gross domestic product, compared with 40 percent at the peak of last year’s speculative attack, Nielsen says the DCB may increase rates as soon as this week if it turns out that the bank has indeed been buying 2 to 3 billion kroner worth of foreign currency per day since January 13.

Sydbank’s chief economist, Jacob Graven, says his baseline scenario is "for a cut of 10 basis points by the ECB," which will in turn eliminate the need for a similarly-sized increase by the DCB.

In any case, "the deposit rate in Denmark will be significantly negative throughout 2016," Graven said.

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