EUR/DKK has fallen below 7.45 - a level where we expect Danmark's Nationalbank (DN) to start to react in order to curb krone appreciation - amid speculation that the ECB might announce additional easing measures at its next meeting on 4 September.
We expect DN to cut the rate on certificates of deposits (CD) unilaterally by 10bp in three months time in order to curb krone appreciation and expect it to stay on hold thereafter.
In addition, we have revised down our EUR/DKK forecast slightly but still expect EUR/DKK to trade at a discount in the FX forward market for shorter dated maturities. However, the negative carry on short EUR/DKK positions is likely to decline.
We recommend Danish pension funds to hedge their EUR expsoures in the longer-dated FX forwards, i.e. from 4Y and beyond.
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