• Danske Bank’s DKK EMPI indicates rising DKK appreciation pressure.
• We now forecast a 10bp DN CD rate cut before the end of Q1 – previously we expected the rate cut before the end of 2014.
• We maintain our EUR/DKK forecast of 7.4425 in 1M and 3M and 7.4390 in 6M and 12M.
Over the past couple of months, Danske Bank’s DKK Exchange Market Pressure Index (EMPI) has dropped further into negative territory, which indicates that appreciation pressure on DKK is rising.
This development suggests that a 10bp unilateral cut of the rate on certificates of deposits (CD rate) by Danmarks Nationalbank (DN) is drawing closer. In the period September- November, DN made FX intervention purchases for accumulated DKK6.9bn. Historically, around DKK10-20bn in intervention has triggered an independent rate cut.
The total level of FX intervention purchases is still below the level which historically has triggered a rate cut, and since the ECB failed to further weaken the EUR at its meeting yesterday, it seems unlikely that DN will cut the CD rate before year-end, which is what we previously forecasted.
ECB is expected to maintain its easing bias at the beginning of 2015, where we expect it will announce it will start purchasing corporate bonds. Furthermore, there is a risk that liquidity in the DKK money market will stay relatively tight at the beginning of next year, where the large tax payment on pension returns may further weigh on liquidity. Both factors will likely weigh on EUR/DKK and we thus stick to our overall view that a unilateral DN rate cut is imminent.
We now forecast DN to cut the CD rate by 10bp to minus 0.15% before the end of Q1. We maintain our current forecast for EUR/DKK and expect it to bounce to 7.4425 on 1M and 3M on the back of the rate cut, before moving lower to 7.4390 on 6M and 12M on further ECB easing.
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