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Danish crown slips as investors gear for second rate cut in a week
January 22, 2015 / 9:37 AM / 3 years ago

Danish crown slips as investors gear for second rate cut in a week

LONDON, Jan 22 (Reuters) - The Danish crown eased against the euro on Thursday, as investors positioned for a second interest rate cut this week from Denmark’s central bank as it steps up its fight to ward off upward pressure on the currency.

Danish monetary policy moves in sync with the European Central Bank. The ECB is likely to announce a quantitative easing programme later on Thursday, which in turn could prompt Denmark’s central bank to cut the deposit rate by 10 basis points and take it deeper into negative territory of -0.30 percent.

In early London trade, the Danish crown slipped to 7.4375 crowns per euro, having hit 7.43 crowns per euro on Monday, it highest since mid-2012, when markets were betting Greece would leave the euro.

“Investors are alert for a possible rate cut in Denmark,” said Niels Christensen, FX strategist at Nordea, Copenhagen. “A lot depends on how the euro will react to the ECB action and how much upward pressure is exerted on the Danish crown.”

Denmark is the sole remaining member of the ERM2 European exchange rate mechanism, in which a number of EU countries once kept their currencies within bands against the euro. Under the Danish peg, the crown can fluctuate by up to 2.25 percent around a central exchange rate of 7.46038.

If the crown appreciates to its upper limit, both the Danish National Bank and the European Central Bank are obliged to defend the band. But so far, this has not been put to test.

Expectations the peg will come under attack have risen since Switzerland’s surprise move last Thursday to abandon its three-year-old cap of 1.20 francs per euro. It also cut the interest rate on some cash deposits at the central bank to -0.75 percent.

Like the franc, the crown, backed by top-notch ratings, is considered a safe haven in Europe, but to a lesser degree.

As a result, inflows have picked up in recent days and traders said the Danish central bank was intervening this week, after buying 6.9 billion crowns ($1.1 billion) in the market between September and November 2014. An intervention is often seen as a precursor to a rate cut in Denmark.

“We forecast the Danish central bank to cut the CD rate by 10 basis points to minus 0.30 percent at 1500 GMT,” said Danske Bank in a note.

“We recommend clients to be positioned for further rate cuts and we further recommend Danish real-money funds with hedging mandate to hedge euro foreign exchange exposure due to prevailing downside risk in euro/Danish crown.” (Editing by Susan Fenton, Ralph Boulton)

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