Based on evidence from a model of the DKK real effective exchange rate and our MEVA model applied to the EUR/DKK bilateral exchange rate, we argue that fundamental, rather than speculative, factors explain the strong appreciation pressure on DKK at the beginning of the year.
Model results suggests that improvement of the terms of trade and a strengthened net foreign position at a time of monetary policy divergence in H1 15 led to the strongest appreciation pressure on DKK since 1982, when the current fixed exchange rate policy was adopted.
We forecast two minor hikes of the Danish key policy rate of 10bp in 3M and 6M to minus 0.55% and forecast EUR/DKK at 7.4610 in 1M and 7.4550 in 3M-12M. However, our model indicates that the appreciation pressure on DKK will prevail over the medium term forcing Danmarks Nationalbank (DN) to keep its key policy rate below that of the ECB.
We recommend Danish pension funds hedge EUR exposure in longer-dated FX forwards and Danish importers hedge EUR payables on a 6M-24M horizon.
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