Danish bonds rally as currency interventions fuel discussions on rate cuts

LONDON, Jan. 5 (Reuters) – Denmark’s short-term borrowing costs fell on Wednesday, as news of massive foreign exchange interventions aimed at weakening the Danish krone fueled speculation that the central bank would soon resort to lowering interest rates.

According to data released on Tuesday, Denmark’s central bank last month sold 47 billion Danish kroner, worth more than $ 7 billion, to defend its currency’s peg against the euro.

As it sells crowns to stabilize its strengthening of the currency since March 2021, December marked the biggest monthly intervention since early 2020. read more

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These purchases brought Denmark’s foreign exchange reserves to the highest since 2015, to nearly 530 billion Danish kroner ($ 81 billion).

Denmark’s foreign exchange reserves

But economists say the authorities may need to follow up on these interventions by cutting interest rates.

Denmark’s central bank does not hold regular monetary policy meetings, but the Governing Council meets whenever necessary. It usually announces pricing decisions on a Thursday at 5 p.m. local time.

Another reduction would soon follow a move in September, which came after months of currency intervention not weakening the krone enough.

The sole mandate of the Danish central bank is to keep the peg and keep the krone in a range of 7.29252 to 7.62824 kroner per euro.

Speculation on lower rates is now playing out in bond markets where yields have fallen sharply, suggesting that investors are starting to position themselves for such a move.

The Danish three-year bond yield fell almost 7 basis points (bps) on Wednesday to -0.50%.

Five-year bond yields fell 3 basis points to -0.34%.

“They have shown a longstanding willingness to defend the peg in the exchange rate and that will not change anytime soon,” said David Oxley, senior European economist at Capital Economics, referring to policymakers at the Danish central bank.

“In September, the rate cut was a logical solution to the upward pressure on the ankle, so if the crown is under pressure again, it will do whatever it takes to hold the ankle in place.”

While money market futures so far suggest only a 20% chance of a 10 basis point rate cut in February, speculation is strengthening.

Nordea analysts said another rate cut could be imminent while Soren Kristensen, Sydbank’s chief economist, saw a possible 10-15 basis point move in the first quarter.

Oxley of Capital Economics said Denmark could cut rates to -0.75% without opening too much of a spread to the European Central Bank’s key rate of -0.50%.

At -0.60%, the Danish key interest rate is already among the lowest in the world and a rate cut would contrast with the policy of most other developed economies, where central banks are cutting stimulus and lifting borrowing costs to ultra-low levels as inflation picks up.

Not everyone sees a rate cut as a deal. Danske Bank noted that the upward pressure on the krone is now fading, meaning that currency intervention could be considered sufficient.

Claus Hvidegaard, head of bond research in Denmark at SEB, said the rise in currency interventions was more a reflection of the central bank’s willingness to increase excess liquidity and keep money market rates stable relative to the eurozone.

“We see this as more of a liquidity exercise, so we believe they will need to intervene more in the forex markets to increase liquidity before considering another rate cut.”

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Danish interest rate cut speculation on the rise

Reporting by Dhara Ranasinghe in London and Nikolaj Skydsgaard in Copenhagen; Editing by Sujata Rao, Mark Potter and Hugh Lawson

Our Standards: Thomson Reuters Trust Principles.

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