Denmark Seen Shelving Independent Rate Cuts Amid Krone Weakness

Denmark’s central bank probably will shelve independent interest rate cuts and only track European Central Bank moves after a sell-off of Scandinavian currencies weakened the krone, Danske Bank A/S said.

Nationalbanken in Copenhagen, which defends the krone’s peg to the euro, lowered its benchmark lending rate in May to 0.2 percent following a rate cut from the ECB to 0.5 percent. Policy makers in the Danish capital kept their deposit rate at minus 0.1 percent. The rate has been below zero since July last year. The krone weakened to 7.4592 against the euro today and traded at 7.4590 as of 11:35 a.m. local time. The central bank targets a rate of 7.46038 against Europe’s single currency inside a 2.25 percent band.

“It has become more costly being short EUR/DKK,” Arne Lohmann Rasmussen, chief foreign exchange analyst at Danske, said today in a note to investors. “We do not see as the main scenario as one where the Nationalbanken delivers an independent rate hike over the coming months.”

Scandinavian markets led by Norway’s krone and Sweden’s krona suffered a sell-off last month after the U.S. Federal Reserve signaled it was preparing to scale back stimulus. The comments drove investors out of Scandinavia’s AAA rated securities in search of more liquid markets.

The yield on Denmark’s 10-year government bond rose to its highest last month since March 2012. The difference in yield relative to similar-maturity German bunds widened to 15 basis points today from 10.5 basis points before the Fed’s June 19 signal it may scale back stimulus.

Favorable Entry

The Danish central bank is due to sell 2.5 percent notes due 2016 and 1.5 percent bonds due 2023 tomorrow.

“The entry point looks favorable,” Rasmussen said. “However, the demand for the front end could be modest given the recent weakening of the krone versus the euro. The demand for the long end could also be modest among domestic investors even though the yield level” for the 10-year bond “is attractive, but with the recent rise in yields and thus increase in duration in the Danish mortgage market, demand for 10Y risk could be modest as we have seen in the past,” he said.

Central Bank Governor Lars Rohde said last month there’s no limit to how far below zero the deposit rate could fall to defend the krone’s peg to the euro.

Before it's here, it's on the Bloomberg Terminal.