Danish Rates To Come Under Pressure

With a host of upcoming monetary policy decisions that could prove game changers, the Danes are looking on nervously as interest rate shifts in other leading economies add to the complexities of its current negative rate policies.  Neighboring the European Monetary Union, Denmark’s desires to prevent against speculative inflows and keep the Krone weak have seen the implementation of increasingly aggressive accommodative policies in order to offset the ECB’s actions.However, this is a costly endeavor and may have to end with the Danish Central Bank abandoning the currency peg in order to stay viable should conditions change in the near-future.

Pressure on the Peg

Denmark finds itself squarely being two opposing forces.On the one hand, the United States is preparing to raise interest rates, a bullish policy change from the standpoint of the USDDKK pair where the Euro Area is rapidly approaching further accommodation.This accommodation is likely to put the longstanding EURDKK peg under renewed pressure, akin to what was seen earlier in the year after the Swiss National Bank removed their own peg to the Euro. With the US dollar continuing to ascend, it is also pressuring the Euro lower which is having a knock-on effect in the EURDKK pair. While the Danish Central Bank has not seen its balance sheet hit the epic levels witnessed in Switzerland thanks in part to its more regional than global status, a weaker Euro will make this endeavor much more costly over time.

With the potential for the European Central Bank to venture even deeper into negative interest rate policies in its upcoming meeting, the Danes might be forced to echo this policy move with a rate cut of their own. Since reducing interest rates to -0.75% in February, the DKK pair has been able to continue weakening versus peers and although still higher than one year ago, the Central Bank balance sheet has actually shrunk over 32% since hitting highs back in March. Nevertheless, with the anticipated upcoming monetary policy adjustments from across the globe, the Danish Central Bank will be forced to do more to insulate the economy from external developments, especially to maintain positive inflation.