Danmarks Nationalbank decided not to follow the ECB

Market Movers

• Today’s data calendar is very thin and the focus is still on markets digesting yesterday’s easing package from the ECB (see below).

• In the UK, trade balance and construction output figures are due. The releases will give us more insight into the state of the economy in the beginning of the year but these releases have in our view lost some importance on the back of ‘Brexit’ uncertainties. In Canada the labour market report is due for release.

Selected Market News

Yesterday, the ECB announced a large ‘package’ of easing measures. The package was more comprehensive than market expectations and initially received a very positive market reaction. This, however, suddenly changed when President Draghi during the Q&A session said that he does not expect more rate cuts.

The monetary policy announcement shows that the ECB's focus is shifting from the interest, currency channel to the bank-lending, credit channel. In our view, this is an important move, as the bank-lending channel plays a crucial role in the transmission of the monetary policy in the euro area where bank lending intermediated around 80% of credit flows. Based on this, we expect that the announced easing measures will support the recovery and that it has bought the ECB some time before additional easing will be required. From a longer-term perspective, it is still likely that the ECB will extend the QE purchases beyond March 2017, as inflation has not picked up sufficiently, partly due to our expectation of a gradually stronger effective EUR during 2016.

Danmarks Nationalbank decided not to follow the ECB and kept the interest rate unchanged at -65bp. Over the past week, EUR/DKK has dropped back below the central rate again and we do not expect that DN will allow EUR/DKK to fall below 7.45. If EUR/DKK depreciates further, DN will probably cut the interest rates on certificates of deposit to -0.75%, which is the lower bound on the policy rate, and step up FX interventions. DN can sell unlimited amounts of DKK when foreign exchange is flowing into Denmark.

In the US initial jobless claims fell to 259k from 277k. This is the lowest level since October and is another figure in the line showing that the US labour market continues to perform well. As we are past the ECB meeting the next key event is Wednesday’s Fed meeting.

In Zurich, Riksbank Governor Jochnick reiterated the Riksbank’s preparedness to fight off substantial SEK strength. The comments come amid speculations as to the continued willingness of the Riksbank to protect the SEK from strengthening too fast on the back of Skingsley’s comments Wednesday (see FX section).

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