Macro Exposure

Denmark was always a safe haven, but one with nice safeness as there was limited downside (unless the peg was broken) making it very interesting if one wanted to bet against the eurozone. Switzerland was another.

Now, with the EUR/CHF is moving higher, one might ask if the Danish central bank (“Nationalbanken”) is considering raising the deposit rate to zero or its lending rate further. It’s currently -0.20 for the deposit rate and 0.20 for the lending rate. For background see this post from when Nationalbanken introduced the negative deposit rates.

The EUR/DKK has recently traded in the upper bound of the range:

This gives them room to move. If one looks at the ‘Foreign Exchange and Liquidity and Monthly Balance Sheet, December 2012‘ one can see that:

In December 2012 the foreign-exchange reserve decreased by kr. 8.0 billion to kr. 504.0 billion. The decrease reflects Danmarks Nationalbank’s net sale of foreign exchange for kr. 5.4 billion, and the central government’s net repayment of foreign debt for kr. 2.7 billion, cf. table 1. No value adjustment has been made. In December, Danmarks Nationalbank’s net sale of foreign exchange due to intervention in the foreign-exchange market amounted to kr. 2.6 billion.

Not huge numbers (Nationalbanken’s balance sheet for reference, page 3).

Here’s Nordea with a bit more background:

The combination of rising risk appetite in financial markets and a sidelined ECB has put the Danish central bank in a dilemma. Over the past four months the central bank has been buying Danish kroner to keep the DKK stable versus the EUR. During this perod the bank has spent a total of DKK 5.2bn of its currency reserves to defend the krone.

But even so the DKK has continued to weaken against the EUR, and over the past few days the EUR/DKK rate has risen beyond 7.462. This means that the DKK is trading at levels above the central parity at 7.46038, which has been the level around which the Danish central bank has previously carried out unilateral rate hikes, see chart.

We had initially expected the Danish central bank to counter the significant krone depreciation by hiking rates. We think the main reason why the central bank has not hiked its policy rates is fears of embarking on a zigzag course. This could happen if the bank after an independent rate hike was forced to make an opposite move to match a possible rate cut by the ECB. Also, it cannot be ruled out that the central bank will choose to continue to drain its exceptionally large currency reserves partly to buy time and partly to embark on a slow normalisation of monetary policy

Despite the many uncertainties we stick to our forecast of an independent Danish rate hike in Q1, initially raising the lending and CD rates by 10 bp each.

However, I think Nordea leave out a few things:

1) They focus on the lending rate, whereas I believe the exodus of money is in large part driven by the negative deposit rate. I think that Nationalbanken would like to move by raising the deposit rate independently of the ECB rather than increasing its lending rate. Given unemployment, a deposit rate hike makes more sense and I’d take it to 0.00, not just 10 bps up.

2) We have no idea what the new Governor (Lars Rohde), who starts in the job on February 1, thinks. At all. It’s unlikely that Nils Bernstein will do anything now, thus not leaving room for Lars Rohde to change things.

Nationalbanken certainly has room to move, and lots of banks would — I presume — like to see the negative deposit rate go. Others too. It never made much sense unless as a “take-your-money-elsewhere” anyway, and with that problem out of the way, they should feel free to raise it.