EUR/DKK has firmed above the 7.4400 level in recent weeks, as DKK liquidity has eased and the negative carry on short EUR/DKK positions has increased.
In particular, DKK liquidity has eased and DKK money market rates declined on the back of steady rising supply of DKK HQLA.
We forecast EUR/DKK at 7.4400 in 1-3M and 7.4450 in 6-12M with downside risk to the latter owing to risk of tighter DKK liquidity in Q1 18 and the Italian election.
Danish pension funds should hedge in FX forwards beyond 5Y and Danish corporations with EUR payables should use a dip in EUR/DKK to hedge on 1-4Y.
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