Our latest yield forecast included two rate cuts of 10 basis points (bp) in the coming year from Danmarks Nationalbank (DN). We got them and more last week, as DN cut the certificate of deposit rate twice by 15bp to minus 0.35% and the lending rate by 15bp to 0.05%. The rate cuts followed intervention in the currency market.
The reaction from DN follows in the wake of strong appreciation pressure on the Danish krone (DKK) triggered by, first, speculation on whether DN would follow the Swiss central bank (SNB) and abandon the fixed exchange rate policy and, second, the impact of the ECB's announcement of a massive asset purchase programme.
We do no assess the fixed exchange rate policy to be in danger. As EUR/DKK is on the strong side of the fluctuation band, DN has in theory unlimited opportunities to weaken the DKK via foreign currency purchases.
We expect DN to continue to defend EUR/DKK within the historically narrow fluctuation band, i.e. EUR/DKK above 7.42. In the immediate future, DN will probably actively support EUR/DKK around the 7.44 level to avoid fuelling speculation about the sustainability of the fixed exchange rate policy .
We now expect DN to cut the certificate of deposit rate by a further 10bp to minus 0.45% over the coming three months . As usual, predicting the precise timing of the rate cut is difficult. Speculation about the sustainability of the fixed exchange rate policy will presumably ease following DN's reaction last week and thus remove some of the upward pressure on DKK, though there will continue to be pressure from the ECB's asset purchase programme, which will be rolled out from March.
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