December 5, 2018 / 2:43 PM / 6 months ago

Danish central bank must act soon to bolster crown's euro peg - analysts

COPENHAGEN (Reuters) - Denmark’s central bank must begin purchases of the crown currency this month because it has weakened against the euro to its lowest level in almost three years, analysts said.

FILE PHOTO: The Danish central bank, also known as Danish Nationalbank, is seen in Copenhagen, January 22, 2015. REUTERS/Fabian Bimmer/File Photo

It would be the first intervention in the foreign exchange market since March last year but the Nationalbank may need to turn to even tougher measures to keep the crown within its target range of a narrow band to the euro.

“We believe the interventions will be the first tool the central bank will use. And then we forecast it will raise the rate independently in the spring,” chief economist at Handelsbanken Jes Asmussen told Reuters on Wednesday.

Denmark’s Nationalbank usually moves in lockstep with the European Central Bank (ECB), but Asmussen expects it to raise its key deposit rate independently to -0.55 from the current level of -0.65, one of the lowest in the world.

He said it would then move independently in the remainder of 2019 to bring the rate in line with ECB’s rate on bank overnight deposits, which currently stands at -0.40 percent.

Sydbank said the Nationalbank will raise its rate independently in the middle of 2019, while Nordea Bank notes that the market is starting to price in an independent Danish rate hike.

The crown’s weakening against the euro is partly due to a decreasing current account surplus, reduced yield on Danes’ investments abroad and less appetite for Danish assets.

Denmark has recently not seen the same degree of safe haven inflows from investors as during other periods of market turbulence. That may be a result of a major money laundering scandal at its largest lender Danske Bank.

When asked at an event for bankers on Monday if Denmark’s credit rating was threatened by the scandal, central bank governor Lars Rohde said it was a “mixed answer”.

He referred to the latest report from credit rating agency Standard & Poor’s in which it reiterated Denmark’s triple-A rating but also said it could come under pressure “if external financing comes under pressure due to reputational damage”.

“They’ll notice what we do and what we have done since this has been revealed. I think the political initiatives are crucial for foreign countries to continue to regard Denmark as a fairly civilised country,” Rohde said.

Danish lawmakers have tightened money laundering laws considerably, and the government has said it will strengthen the financial regulator.

Reporting by Teis Jensen

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