Just one week after Denmark said it resorted to currency interventions for the first time in 16 months, the krone is again trading at critically strong levels.
The culprit is Britain’s June 23 referendum on its European Union membership, with fears of a so-called Brexit driving investors into the safest markets, such as AAA-rated Denmark’s krone assets.
“The krone is now trading at levels that the central bank in the past has deemed too strong,” said Jan Stoerup Nielsen, senior analyst at Nordea Markets in Copenhagen. “As we get closer to the Brexit referendum, the central bank will rely on interventions to fight any krone strength.”
The krone traded at 7.4356 per euro at one point on Thursday, its strongest level since Jan. 21, 2015, according to closing prices.
The bank, whose sole mandate is to defend the krone’s peg to the euro, dumped the equivalent of $3.5 billion in kroner last month to weaken Denmark’s currency, marking the first such intervention since February 2015. Back then, the Danes were fighting a speculative attack against their peg after Switzerland’s decision to abandon its ties to the euro fed conjecture others may follow.
Efforts to break Denmark’s euro peg last year forced the central bank to resort to unprecedented monetary measures, including cutting its main rate to minus 0.75 percent, almost doubling foreign reserves to about 40 percent of gross domestic product and halting government bond sales. By March 2015, the speculators had been beaten back and Denmark focused on trying to normalize its monetary policy.
But despite a 10 basis point hike in January, Denmark has limited scope to fight capital inflows with more rate cuts. That means the central bank “will save the rate-cut tool until after a possible Brexit,” Nielsen said. Currency reserves, on the other hand, are down about 42 percent since a March 2015 high, so there’s still room for considerable interventions.
“We think the central bank will go as far as it can with the intervention tool,” Nielsen said.
But if Britain votes to leave the EU, then even interventions may not be enough. “That means a rate cut is likely, possibly also some quantitative easing,” Nielsen said.
Meanwhile, there are other signs that Denmark’s status as a safe haven is driving down interest rates across its bond markets. Mortgage banks may start offering 30-year bond-backed mortgages at a fixed rate of 2 percent, after the 2.5 percent bond started trading above par, according to Nordea Kredit. The last time mortgage rates were so low was 13 months ago.
“Falling rates can, among other things, be attributed to the looming vote on Britain’s membership in the EU,” said Lise Nytoft Bergmann, chief analyst at Nordea Kredit. “With polls showing almost a dead heat, lots of investors have shifted toward safer securities for fear of the consequences of a ‘No’.