Currency Battle-Front Reset as Danes Seek Euro Peg Normalization

  • Central bank governor Rohde says ECB rate spread will narrow
  • Denmark's deposit rate is not at normal level, Rohde says

While Denmark won its battle against currency speculators earlier this year, there’s still far to go before the central bank can consider a “normalization” of its monetary policy.

Governor Lars Rohde says Denmark’s benchmark interest rate will over time be closer to the European Central Bank’s. The Danish deposit rate is now minus 0.75 percent, and the ECB’s is minus 0.3 percent. Denmark pegs its krone to the euro in a tight band, forcing the central bank to track ECB policy closely.

QuickTake Currency Pegs

“One might ask if minus 0.75 percent as a marginal rate is normal, and the answer is that it’s probably not and neither is minus 0.3 percent at the ECB,” Rohde said on Monday in an interview in Copenhagen.

How soon Denmark acts to reduce that spread “will largely depend” on the actions of the ECB. President Mario Draghi’s decision last week to deliver a smaller-than-expected stimulus package certainly provided relief to the Danish central bank. “It turned out to be very easy not to do anything,” Rohde said.

The ECB on Dec. 3 cut its deposit rate less than some traders and investors expected. It also extended, but didn’t raise, its bond-purchase program. The news sent the euro more than 3 percent higher against the dollar and took pressure off a number of central banks across Europe that had previously struggled to prevent their currencies from strengthening against the euro.

“The projected krone appreciation pressure is unlikely to intensify materially after the ECB left the big easing bazooka at home,” Danske Bank analysts said in a note on Tuesday. The Danish central bank “effectively delivered a small rate hike by not shadowing the ECB last week.”

Nykredit, Denmark’s biggest mortgage bank, says Denmark is now set to raise rates twice next year, following the “soft” package unveiled by Draghi last week.

The development also prompted most analysts to jettison their estimates for more easing from Denmark and to instead start considering the timing of rate increases.

“The central bank had a notion that it was likely that the ECB would respond as it did,” Rohde said, speaking on the sidelines of a meeting hosted by the Danish Bankers Association.

Denmark, which has defended its fixed-exchange-rate regime for more than three decades, doesn’t hold scheduled meetings and only adjusts rates to defend the krone’s peg to the euro. The bank targets a rate of 7.46038 kroner per euro.

In January and February, Rohde cut the deposit rate four times to protect the peg as investors speculated Denmark might be forced to follow Switzerland and drop its currency regime. But the Danish central bank’s defense mechanism, which also included record high currency interventions, “worked as it was supposed to and we have no plans to alter it,” Rohde said.

“It’s our conclusion that it has worked according to its purpose and that all the impacts were there,” he said. “There was a complete transmission mechanism from the deposit rate to the foreign currency market.”

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