Currency Flows Show Pressure Not Abating on Danish Euro Peg

The latest central bank data show pressure on Denmark’s euro peg isn’t abating as policy makers continue to dump kroner on the market at an unprecedented pace.

Net flow data published on Wednesday show the Danish central bank sold $2.7 billion in kroner in a single day, according to estimates provided by Svenska Handelsbanken AB. That follows Tuesday data, which showed the bank sold $2.1 billion in kroner.

“If we see the central bank continuing to sell kroner at this pace in the next few days, we will probably get a rate cut this week,” Rasmus Gudum, an economist at Handelsbanken in Copenhagen, said by phone.

The development follows signs earlier this week that demand for kroner was easing after central bank data suggested a small capital outflow. But the latest figures reveal that was likely to have been a temporary blip as Denmark remains under pressure to fight back speculators, according to Handelsbanken.

Governor Lars Rohde has cut Denmark’s deposit rate four times this year, bringing it to a record low of minus 0.75 percent. That matches the level in Switzerland, where a Jan. 15 decision to abandon ties to the euro fanned conjecture Denmark may be next. Pressure on the krone is also growing as record European Central Bank stimulus devalues the euro.

“If the Danish central bank uses the rate tool, we think they will want to send a clear message to the market and cut by as much as 25 basis points so we get a clean minus 1 percent deposit rate,” Gudum said.

Lost Cause

Rohde has dismissed bets against the Danish peg as a lost cause. He says abandoning the nation’s three-decades-old currency regime is “unthinkable” and has pledged to do whatever it takes to save it.

Besides record currency interventions and rate cuts, measures to date have included suspending government bond issuance. Rohde says he’s also ready to consider purchasing government and mortgage bonds to drive down yields and undermine the appeal of Danish assets.

Rohde didn’t deliver a rate cut last week that had been anticipated by some of Scandinavia’s biggest banks, prompting speculation the central bank was adjusting its policy to protect the financial industry from excessive negative rates. But according to Gudum at Handelsbanken, the minus 0.75 percent the deposit rate is at now doesn’t mark a lower limit for Rohde.

“We don’t think that the central bank will see the current level where it’s matching the Swiss rate as sacred,” he said.

Rohde’s Job

The Danish central bank’s sole mandate is to defend the krone’s peg to the euro. It targets a rate of 7.46038 kroner per euro inside a 2.25 percent band. In practice, it doesn’t allow swings greater than 0.5 percent. The bank can change rates at any time and doesn’t publish a schedule for meetings, though most rate changes have been announced on Thursdays at 4 p.m. local time.

Forward-rate contracts suggest some investors are betting Rohde may allow bigger moves inside the tolerance band. The 12-month EURDKK contract traded at 7.367 on Wednesday, more than 1 percent stronger than the target and stronger than any closing rate since 1999.

According to Nordea Bank AB, Denmark’s central bank will have little choice but to deliver more measures to help defend the euro peg. The central bank has indicated it may prefer currency interventions for now, but more rate cuts can’t be ruled out, according to Nordea senior analyst Jan Stoerup Nielsen.

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