Denmark Conducts First FX Intervention Since January to Prop Up Peg

(Bloomberg) --

Denmark’s central bank has intervened in foreign-currency markets for the first time in nine months, buying up kroner to support the nation’s euro peg.

In a statement on Monday, the Copenhagen-based bank said it sold 0.4 billion kroner ($60 million) worth of foreign currency, marking its first such intervention since January.

“It’s a small amount,” said Las Olsen, chief economist at Danske Bank. “But it’s a good signal that there’ll be more in November, seeing as the krone’s a bit weaker than it was in October.”

Denmark boasts the longest period of negative interest rates in the world, after the central bank first cut its main deposit rate below zero in mid-2012 to defend the euro peg. Back then, the bank was struggling to stop investors hoarding kroner. But more recently, Denmark’s currency has fallen, and is trading at an historically weak level.

The Euro Peg -

Denmark’s central bank has an agreement with the European Central Bank to keep the krone within a 2.25% band around a rate of 7.46038 per euro, although in practice it sticks to a much tighter range. It last lowered its main rate in September, bringing it to minus 0.75%.

“It’s clear that if the krone weakness continues, we’ll get, at some point, an independent rate hike in Denmark,” Olsen said. “But that would only follow a considerable increase in interventions. And there’s plenty of room for the bank to do that, given the size of its current reserves.”

The krone’s depreciation isn’t a sign of weakness or a lack of confidence in Denmark’s economy, according to Olsen. “But we have somewhat lower rates than in the euro zone and that’s part of the context in which one should view the development.”

To contact the reporter on this story: Nick Rigillo in Copenhagen at nrigillo@bloomberg.net

To contact the editors responsible for this story: Christian Wienberg at cwienberg@bloomberg.net, Tasneem Hanfi Brögger

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