We expect that Danmarks Nationalbank (DN) will allow the FX reserve to drop further before raising its key policy rate.
Record-high dividend payments and foreign investors net selling Danish shares contributed to the recent weakening of DKK.
We now expect DN to raise the rate of interest on certificates of deposits by 15bp on 3M (NYSE:MMM) and 10bp on 6M to minus 0.50% and forecast EUR/DKK at 7.4620 on a 1M-3M horizon and 7.4550 on a 6M-12M horizon.
In our view, Denmark's strong external position will continue to warrant a negative carry on short EUR/DKK.
We expect government bond issuance to resume in Q4 this year, independently of monetary policy, when government deposits have normalised.
We recommend Danish pension funds with a hedging mandate and EUR exposure to hedge EUR exposure in longer-dated FX forwards. Danish importers should hedge EUR payables on a 6M-24M horizon.
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