The Danish central bank intervened significantly in September to defend the fixed exchange regime between the Danish krone and the euro. It was the first intervention since December. Analysts at Danske Bank now expected the Danish central bank to hike 10bp less than the Europan Central Bank over the coming three months. They forecast the key policy rate at 1.80% by the end of the year and at 2.30% in February next year. 

Key Quotes: 

“Danmarks Nationalbank (DN) resumed FX intervention selling of DKK in September to floor EUR/DKK. DN intervened for DKK23bn - it has not intervened since December last year - and increased the FX reserve to DKK554bn. In our view, the downwards pressure on EUR/DKK is of persistent nature and warrants a widening of the spread to ECB's policy rate. We now expect DN to hike 10bp less than ECB over the coming 3M, i.e. to raise the deposit rate to 1.80% in December and further to 2.30% in February next year.”

“We think it is time for DN to make it more expensive to sell EUR/DKK and push it up towards the middle of the 7.43-7.47 trading range, which would end the need for intervening in the FX market. A 10bp widening of the policy rate spread should be enough, but DN may need to widen it an additional 10bp in our view.”

“We expect ECB to raise interest rates at the coming three meetings, i.e. in October, December and February, by a total of 175bp. We think it is most likely DN uses one of the upcoming two hikes as an opportunity to widen the spread to ECB's policy rate by raising its policy rate 10bp less, but it may also opt to cut its policy rate 10bp at any given Thursday at 17:00CET. DN may need to continue to sell DKK in FX intervention until it widens the policy rate spread.”