First Post-Brexit Currency Intervention Draws Denmark’s Red Line

  • Danish central bank sells kroner for first time since June
  • Nordea sees key rate at current negative level till end 2018

The world-record holder in negative rates conducted its first currency interventions since June, when Denmark was fighting back a flight to safety triggered by Britain’s vote to leave the European Union.

The Danish central bank’s decision to weaken its currency by selling 700 million kroner ($100 million) in direct interventions is, though small in size, “a clear signal to the market that it can go this far and no further” in driving up the value of the krone, Tore Stramer, chief economist at Nykredit in Copenhagen, told clients in a note.

With the December interventions, Danish foreign reserves reached 451.6 billion kroner at the end of last year. That’s still well below the record in March 2015, when Denmark’s foreign currency stockpiles hit 737 billion kroner.

The latest central bank action shows that policy makers will rely on currency interventions rather than rate changes to defend Denmark’s euro peg, Jan Storup Nielsen, senior analyst at Nordea Markets in Copenhagen, said in an e-mail to clients.

“Seen in that light, we expect that the deposit rate will be kept at its current level of minus 0.65 percent at least until the end of 2018,” Nielsen said.

Both Brexit and Switzerland’s decision to abandon its euro peg fueled demand for assets denominated in the krone of AAA-rated Denmark. But the fallout of the U.S. election, and Donald Trump’s surprise win, has been less straightforward. The haven demand wasn’t as pronounced and Danske Bank says there’s no speculative attack to speak of.

Instead, pressure on the krone stems from Denmark’s pension industry. Danske estimates that about one-third of Danish pension foreign holdings are in American stocks and a rally in U.S. equities since November has driven up the value of those assets. Converting those dollar-denominated investments into kroner is putting pressure on the peg, Danske says.

Back in early 2015, after Switzerland sent its franc into a free float, Denmark cut its benchmark deposit rate well below zero, almost doubled its foreign reserves -- to about 40 percent of GDP -- and halted government bond sales. Denmark’s benchmark deposit has been mostly negative since mid-2012, marking a longer period below zero than any other country on earth.

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