Currency Speculation Feeds Doubts on Timing of Danish Rate Hike

  • Some banks see Danish rate increase as early as Thursday
  • Swedish intervention risk seen possibly delaying Danish move

Denmark has reached a milestone in putting a speculative attack against its currency peg behind it.

On Tuesday, the central bank published figures showing currency reserves are now back at levels last seen at the end of 2014, just before hedge funds and other short-term investors started betting the krone’s peg to the euro wouldn’t last. The demand for AAA-rated krone assets that drove reserves to a record 40 percent of gross domestic product in March has fizzled, and reserves are now below 25 percent of GDP. Offshore investors’ holdings of government bonds are down, falling 64 billion kroner ($9.2 billion) in November to 34 percent of the total.

But with flows reversing -- December data showed the biggest decline in reserves on record -- everyone’s wondering when the Danish central bank will take the next step and raise the benchmark deposit rate from minus 0.75 percent.

Here’s what economists tracking the central bank say:

Jacob Graven, chief economist at Sydbank:

  • “Now that the top of the Danish currency reserve mountain has been chopped off, we’re approaching the time for a slight increase in the benchmark central bank rate after it was cut to extraordinarily low levels at the beginning of 2015 to make it costly for investors to buy kroner.”
  • A rate rise could come as early as Thursday.

Jan Stoerup Nielsen, senior analyst at Nordea:

  • The December currency interventions “were bigger than I had expected” and “all things being equal, this raises the likelihood of a Danish rate hike.”
  • The main source of uncertainty is “what the ECB will do. While the ECB didn’t deliver as much QE in December as expected, there’s no guarantee it won’t come up with more later and the Danish central bank needs to take that into consideration.”
  • The ECB’s next rate meeting is Jan. 21. If it “closes the door on more easing we could see a Danish rate hike in January.”

Jes Asmussen, chief economist at Handelsbanken:

  • Sweden’s recent declaration of readiness to intervene to weaken the krona may feed into Denmark’s exchange rate and potentially delay a rate increase.
  • “Money markets have started to price in some expectations of a rate increase, but we’re not sure if it will happen right now.”

Jens Naervig Pedersen, senior analyst at Danske Bank:

  • “If the krone weakens against the euro and they continue interventions, a rate hike won’t be far away.”
  • “The central bank still has a small space to intervene.”

Las Olsen, chief economist at Danske Bank:

  • The central bank will probably raise its deposit rate by 10 basis points to minus 0.65 percent “within a few months.”
  • But the upshot is that we’re looking at a “marginal adjustment and we would still have extremely low rates.
  • There’s no prospect of the ECB raising rates before well into 2017 at the earliest, and there’s no reason for Denmark to have higher rates than the ECB.”
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