Thursday, January 20

Danish bonds rally as FX interventions stoke rate cut talk – Reuters

LONDON, Jan 5 (Reuters) – Denmark’s short-dated borrowing costs fell on Wednesday, as news of heavy currency market interventions to weaken the Danish crown stoked speculation that the central bank would soon resort to an interest rate cut.

According to data released on Tuesday, Denmark’s central bank last month sold 47 billion Danish crowns, worth more than $7 billion, to defend its currency’s peg against the euro.

While it has been selling crowns to stabilise its strengthening currency since March 2021, December marked the biggest monthly intervention since early 2020. read more

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Those purchases have taken Denmark’s foreign exchange reserves to the highest since 2015, at almost 530 billion Danish crowns ($81 bln).

Denmark's foreign currency reserves
Denmark’s foreign currency reserves

But economists reckon authorities may have to follow up those interventions by cutting interest rates.

Denmark’s central bank does not have regular monetary policy meetings but the board of governors convenes whenever necessary. It usually announces rate decisions on a Thursday at 5pm local time.

Another cut soon would follow a September move, which came after months of currency interventions failed to sufficiently weaken the crown.

The Danish central bank’s sole mandate is to maintain the peg and keep the crown within a band of 7.29252 to 7.62824 crowns per euro .

The rate cut speculation, is now playing out in bond markets where yields fell sharply, suggesting investors are starting to position for such a move.

The yield on Denmark’s three-year bond was down almost 7 basis points (bps) on Wednesday at -0.50% .

Five-year bond yields were down 3 bps at -0.34% .

“They have shown a long-standing willingness to defend the exchange rate peg and that won’t change anytime soon,” said David Oxley, a senior European economist at Capital Economics, referring to Danish central bank policy makers.

“In September, the rate cut was a logical solution to the upward pressure on the peg so if the crown is under pressure again that they will do what it takes to maintain the peg.”

While money market futures so far suggest only a 20% chance of a 10 bps rate cut in February , speculation is building.

Nordea analysts said another rate cut could be imminent while Soren Kristensen, chief economist at Sydbank, saw a possible 10-15 bps move during the first quarter.

Oxley at Capital Economics said Denmark could cut rates to as low as -0.75% without opening up too much of a gap with the European Central Bank’s key rate at -0.50%.

At -0.60%, the key Danish interest rate is already among the lowest in the world and a rate cut would contrast with policy in most other developed economies, where central banks are scaling back stimulus and lifting borrowing costs from ultra-low levels as inflation picks up.

Not all see a rate cut as a done deal. Danske Bank noted upward crown pressure was now receding, meaning currency interventions might be considered sufficient.

Claus Hvidegaard, head of fixed income research Denmark, at SEB, says higher currency intervention were more of a reflection of the central bank’s wish to boost excess liquidity, and keep money market rates stable versus the euro area.

“We see it as much more of a liquidity exercise, so we think they will have to intervene more in currency markets to boost liquidity before they consider another rate cut.”

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Danish rate cut speculation on the rise
Danish rate cut speculation on the rise

Reporting by Dhara Ranasinghe in London and Nikolaj Skydsgaard in Copenhagen; Editing by Sujata Rao, Mark Potter and Hugh Lawson

Our Standards: The Thomson Reuters Trust Principles.

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