We expect the ECB to surprise the market at the meeting next week by cutting the refinancing (refi) rate and the deposit rate by 10bp, thereby introducing a negative deposit rate and in addition to that introduce a new 3Y LTRO - see ECB research No. 3: Expectations of easing but ECB will surprise the markets
We expect Danmarks Nationalbank (DN) to fully track the rate cut and lower the rate on certificates of deposits (CD) by 10bp to minus 0.05% - the lending rate would be left unchanged at 0.20%. We do not expect DN to introduce a new 3Y LTRO.
The currency reserve figures for May released on 2 June could prove deciding for DN's reaction. EUR/DKK was relatively close to April's intervention level in May amid high negative carry on short EUR/DKK positions in the FX forward market. If DN has intervened in May, it may decide not to fully track the ECB rate cut or even keep the CD rate unchanged.
In the following slides, we go through the details and likely market reaction in this scenario and DN's reaction to alternative scenarios for the ECB meeting.
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