When Mario Draghi “disappointed” markets in December by “only” cutting the depo rate by 10 bps and “merely” extending PSPP by six months while electing not to expand monthly asset purchases, the Riksbank, the Nationalbank, the Norges Bank, and the SNB all breathed heavy sighs of relief.
Essentially, Denmark, Sweden, Switzerland, and Norway are beholden to Mario Draghi. When the ECB eases, those countries’ central banks must ease as well or risk falling behind in the global currency wars.
This beggar thy neighbor race to the Keynesian bottom has resulted in negative rates for all of the central banks mentioned above with the exception of the Norges Bank and you can bet that when slumping crude proves incapable of bringing about sufficient NOK weakness, Norway will take the NIRP plunge as well.
While we doubt the ECB is done when it comes to going "full-Krugman" (as it were), Mario Draghi’s “hawkish” ease did buy his counterparts some breathing room. Case in point: Denmark just hiked.
- DANISH CENTRAL BANK RAISES DEPOSIT RATE TO -0.65% FROM -0.75%
Earlier this week, Handelsbanken predicted the move, noting that strengthening pressure on DKK vs EUR has eased, while Danish FX reserves may have fallen to DKK415b by the end of December, "which would be below level before attack on DKK peg began almost one year ago."
As Dow Jones reminds us, Denmark has "sold huge amounts of its own currency and suspended bond auctions to limit the inflow of foreign currency into the country." On Tuesday, the central bank published figures showing currency reserves are now back at levels last seen at the end of 2014," Bloomberg said, earlier this week, adding that FX reserves are now roughly where they were "just before hedge funds and other short-term investors started betting the krone’s peg to the euro wouldn’t last."
Of course no one should think this marks some kind of epochal shift in European monetary policy. "While the ECB didn’t deliver as much QE in December as expected, there’s no guarantee it won’t come up with more later and the Danish central bank needs to take that into consideration," Nordea's Jan Stoerup Nielsen says. Here's a bit more color from Realkredit Danmark's Christian Heinig:
- Increase largely expected given falling foreign currency reserves, especially after central bank last month sold FX for about DKK50b to support krone
- Market expected bank to raise rate when reserves reached level maintained before last year’s attack on the krone, and reserves, at DKK434.9b, now largely there
- Rate increase unlikely to have a big impact on mortgage rates especially since it was expected
- Rate increase shrinks negative spread to ECB to minus 0.35%; no reason, however, to expect it to normalize above zero any time soon
And here's more from Nielsen:
- Whether today’s rate hike will be followed by further tightening will fully depend on the krone exchange rate versus the euro
- Nordea’s baseline scenario doesn’t assume any further rises until into the autumn; see CD rate at -0.5% by yr-end while ECB is expected to keep its deposit rate unchanged at -0.3%
- Danish central bank tightening is a fine-tuning of its key policy rate vs euro area; comes after a long period of pressure for a weaker krone, which has reduced currency reserves by more than DKK300b
- The bank has for quite a while been normalizing monetary policy after the extraordinary measures introduced early 2015; last step in this process is a gradual narrowing of the interest-rate differential vs euro area
In other words, at the slightest sign that Mario Draghi is set to either cut the depo rate or expand PSPP to include other "assets" (because the supply of purchase-eligible EGBs is running dangerously low), you can expect Denmark to do a quick about-face as the market will once again put to DKK peg to the test. Or, as WSJ puts it, "the slightest sign of a weaker euro against the krone will have the Danes stamping on the brake and even shifting into reverse if necessary."
And on cue:
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