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15 Jan 2015
Denmark next in line to cut after SNB move – Danske
FXStreet (Barcelona) - The Danske Bank Research Team notes that the SNB’s decision to cut its rate to -0.75% might inspire other central banks to follow suit, further adding that the SNB decision has created new FX inflow in Denmark from Switzerland as its rates and low volatility are now seen as more lucrative.
Key Quotes
“EUR/DKK fell to 7.4350 on the news from the SNB, which could potentially create new inflow to Denmark from Switzerland on the back of this decision, as Denmark offers a higher interest rate (the key policy rate in Denmark is currently minus 0.05% versus minus 0.75% in Switzerland) and low FX volatility.”
“This could give rise to increased downward pressure on EUR/DKK, which we have already seen, following the SNB announcement and thus put pressure on Danmarks Nationalbank (DN) to conduct FX intervention and potentially cut interest rates.”
“EUR/DKK is currently around the level that triggered intervention in Q4 last year. In the period September-November 2014, DN made FX intervention purchases for DKK6.9bn – it would probably take another DKK10-15bn to trigger an independent Danish rate cut.”
“Furthermore, the market could speculate that DN will also be forced to move the floor under EUR/DKK, which could add to the downward pressure. However, we expect DN to maintain a lower bound on EUR/DKK, which is probably around the level of 7.4300 that EUR/DKK reached in 2012 and not significantly lower than the historical low (since the current regime started in 1999) of 7.4234. Formally, DN is obliged to keep EUR/DKK above 7.29252 according to ERM II.”
“With the move today, SNB sets new standards for policy rates at minus 0.75%. The previous low in Denmark was minus 0.20% in 2012. The SNB experiment with a policy rate at minus 0.75% may serve as inspiration for other central banks, e.g. DN, to move policy rates deeper into negative territory if necessary.”
Key Quotes
“EUR/DKK fell to 7.4350 on the news from the SNB, which could potentially create new inflow to Denmark from Switzerland on the back of this decision, as Denmark offers a higher interest rate (the key policy rate in Denmark is currently minus 0.05% versus minus 0.75% in Switzerland) and low FX volatility.”
“This could give rise to increased downward pressure on EUR/DKK, which we have already seen, following the SNB announcement and thus put pressure on Danmarks Nationalbank (DN) to conduct FX intervention and potentially cut interest rates.”
“EUR/DKK is currently around the level that triggered intervention in Q4 last year. In the period September-November 2014, DN made FX intervention purchases for DKK6.9bn – it would probably take another DKK10-15bn to trigger an independent Danish rate cut.”
“Furthermore, the market could speculate that DN will also be forced to move the floor under EUR/DKK, which could add to the downward pressure. However, we expect DN to maintain a lower bound on EUR/DKK, which is probably around the level of 7.4300 that EUR/DKK reached in 2012 and not significantly lower than the historical low (since the current regime started in 1999) of 7.4234. Formally, DN is obliged to keep EUR/DKK above 7.29252 according to ERM II.”
“With the move today, SNB sets new standards for policy rates at minus 0.75%. The previous low in Denmark was minus 0.20% in 2012. The SNB experiment with a policy rate at minus 0.75% may serve as inspiration for other central banks, e.g. DN, to move policy rates deeper into negative territory if necessary.”