Denmark’s currency is reaching the end of its worst year since 2012.
Back then, the central bank delivered a series of interest rate cuts to weaken the krone and defend its peg to the euro. Now, the picture is more mixed.
At Nordea, the biggest Nordic bank, analyst Jan Storup Nielsen says this year’s “remarkable” decline is the product of several moving parts. Perhaps most importantly, it suggests that policymakers in Copenhagen have started to tolerate a weaker exchange rate as part of their defense of the euro peg.
The Danish central bank’s mandate is to ensure that the krone doesn’t swing more than 2.25 percent around a target rate against the euro. In practice, it has tended to tolerate no more than 0.1 percent swings. But in 2018, the krone lost about 0.3 percent.
“We’ve only been there two or three times since the introduction of the euro,” Nielsen said. “Could it be that we’re looking at the beginning of a new strategy by the central bank?”
Not that long ago, the krone was being treated as a safe haven, forcing Governor Lars Rohde to push rates well below zero and build up record currency reserves. Now, less monetary stimulus in the rest of the world has undercut the appeal of a market that’s had negative interest rates longer than any other place on Earth, and where liquidity is limited.
As a result, analysts who track the Danish central bank have been expecting a possible intervention in currency markets, in the form of krone purchases to prevent further weakening. But that intervention hasn’t come, which has economists theorizing as to why.
Since fighting back a speculative attack in 2015, in which investors hoarded kroner, the Danish central bank has been more concerned about the risk of appreciation than more weakness, Storup said.
Data going back to the euro’s introduction in 1999 show the central bank intervened 40 percent of the time after the krone slipped to where it is now, according to Danske Bank.
“We haven’t been at this level for a long time,” Danske Bank senior analyst Jens Naervig Pedersen said. “In the past, we would consider 7.4630 or 7.4650 good levels to anticipate interventions,” but “the market is developing.” The krone traded at 7.4675 on Dec. 18.
Tore Stramer, chief economist at Nykredit, said the Danish central bank “convinced everyone of its credibility” in 2015. That gives them a bit more freedom to save their ammunition.
Now “nobody in the market doubts that they will intervene to defend the currency policy.”
By Nick Rigillo & Peter Levring