DKK40.2bn in FX intervention in July

• Danish FX reserves dropped DKK43.0bn to DKK583.2bn in July on the back of DKK40.2bn in FX intervention by Danmarks Nationalbank.

• Since April, FX intervention has totalled DKK142.6bn. We expect the outflow to continue before the key policy rate is hiked – we expect a 15bp hike within 3M and another 10bp within 6M to minus 0.50%.

• If the FX intervention continues in the next two months, a growing share of banks’ net position could be placed at the current account rate at 0% instead of -0.75% if the current account limits are not changed. This will tend to push DKK money market rates higher.

Danmarks Nationalbank (DN) has just published its FX reserves and balance sheet for July. FX reserves declined DKK43.0bn to DKK583.2bn. The decline was due to DN purchasing DKK. FX intervention totalled DKK40.2bn in July.

EUR/DKK continued to trade above the central rate of 7.46038 for most of July and the FX intervention thus reveals the efforts of DN to cap EUR/DKK topside. July marks the fourth consecutive month of DN purchasing DKK. Over this four-month span DN has purchased DKK for an accumulated DKK142.6bn. Despite the steep decline in the FX reserves, they remains large in a historical context. The FX intervention over the past four months has erased roughly half of the total increase in the FX reserves in January and February of DKK275bn.

The fact that DN has conducted a sizable FX intervention for a fourth month in a row without raising its policy rates indicates that its reaction function differs from its historical reaction function currently. This is likely because DN is targeting lower FX reserves on the back of the sharp rise at the beginning of the year.

Nevertheless, we expect the outflow from the FX reserves to continue in the coming months and that the DN will eventually hike the rate of interest on certificates of deposits by 15bp within 3M and another 10bp within 6M to minus 0.50%.

We have recently seen a move higher in short-dated money market rates as the market has been pricing in independent Danish rate hikes and as banks’ net position against the central bank (excess liquidity) has declined to DKK302bn from above DKK380bn in April. The latter means that a growing share of the liquidity can now be placed at 0% (the current account rate) instead of at -0.75% when certificates of deposits are purchased. The current account limit is currently DKK173.5bn. Banks’ net position is set to decline further over the next two months both due to likely continued FX intervention and a projected draw on the government’s account at the central bank.