FX Strategy - Update On DKK Net Position

Yesterday, Danmarks Nationalbank (DN) published updated monthly forecasts for government net payments based on the agreed budget for 2019. As a follow-up on our analysis from earlier this week FX Edge DKK liquidity flood, 17 January, we provide an update on our forecast for the net position the rest of 2019 based on the new numbers, the DMO’s strategy for 2019 and our own assumptions about DGB buybacks this year. We have assumed that DN will not intervene in FX markets for the rest of the year.

Chart 1 below illustrates the forecast. There are no big changes to the projection for H1 compared to our previous analysis. The main points here remain (1) that we will not see a very low net position during March as in previous years due to low tax payments on pension returns. (2) Liquidity will be plentiful around Q1 and Q2 turns. (3) The market could face another test in April. We now see potential for the net position to rise to around DKK240- 245bn in April. In H2, the market will be put to the test already in July when the net position will rise above DKK250bn and temporarily above DKK270bn in August. It will finish the year above DKK260bn. See Chart 2 for comparison with previous years.

Note, though, that visibility in H2 is not good at this time of year. A persistent high net position will keep downward pressure on EUR/DKK FX forwards through a wide EURDKK XCCY basis. In Chart 3, we have illustrated the relationship between the net position and 3M (NYSE:MMM) EURDKK XCCY basis. The big question for 2019 is whether a net position in the region of DKK250-260bn is sustainable or whether it will lead to upward pressure on EUR/DKK and force DN to sterilise the liquidity injection via FX intervention. See our piece from last year for further details on these dynamics, DKK FX/FI Strategy The new Danish budget could be a big deal for DKK in 2019, 30 August 2018.