• Danish Central Bank intervenes in FX market for first time in 20 months in December

    Source: FxWire Pro - Commentary / 03 Jan 2019 13:25:56   America/New_York

    Danish central bank, Dankmarks Nationalbank, published the December FX reserve data today. The foreign exchange reserve fell in the month to DKK 457 billion, owing to the intervention buying of DKK 12 billion by the central bank. The DN bought DKK in the currency market to offset a weakening of the krone against the euro. This is the first time in 20 months that the DN intervened in the FX market to keep the EUR/DKK cross in the wanted range. The purchase by the DN in December marks the tentative culmination of a longer period with a gradual softer DKK against the euro.

    “We think the reason for the current weakening of the DKK is twofold: first, monetary policy in the Euro area has been tightened relative to the Danish central bank’s policy line and second, the structural appreciation pressure on the DKK has diminished”, said Nordea Bank in the research report.

    In the past 15 years, first quarter has usually set off a softening of DKK against the euro. If this pattern repeats itself, further intervention might take place. Based on the DN’s response pattern in December, the bank is expected to intervene if EUR/DKK moves above 7.467. Given the bank’s historical response pattern, the DN might purchase Danish kroner in the market for an equivalent amount of DKK 15-20 billion before sanctioning any independent rate hike.

    “Given the relatively large intervention in December and if the intervention continues in January, we therefore find it very likely that it will trigger an independent Danish rate hike of 10bp”, added Nordea Bank.

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