[COPENHAGEN] SEB AB, Scandinavia's biggest foreign-currency trader, says its analysis suggests the Danish krone would ultimately be more likely to drop in value than surge should its peg to the euro break.
The bank's model shows the Danish krone's fair value is closer to 8 against the euro than the 7.46038 the central bank targets.
Though Denmark's trade and current account surpluses would normally support the view that its currency is undervalued, other factors speak against that conclusion, Johan Javeus, chief FX strategist at SEB in Stockholm, said in a note.
"Exactly the same is true for Sweden and yet the freely floating krona has the same exchange rate against the euro today as it has averaged over the past 20 years."
Sweden's krona traded at 9.4115 to the euro as of 2:42pm local time, compared with 7.4440 for Denmark's krone.
Since the Swiss National Bank abandoned its euro cap on Jan 15, Denmark has fought back conjecture its currency peg to the euro would be next to break.
Policy makers have argued comparisons between the two economies' monetary regimes make little sense: Switzerland made clear in September 2011 its cap was temporary, while Denmark's three-decades-old peg is backed by the European Central Bank.
Denmark's efforts to defend its euro peg and stop investors buying kroner have driven its benchmark deposit rate to minus 0.5 per cent, its foreign reserves to the highest on record and its five-year government yield below zero.
"The Danish FX peg to the euro is under serious attack," Mr Javeus said.
The central bank has "ample scope to increase interventions" and it can't be ruled out that the deposit rate may be cut below minus one per cent, he said.
To counter flows into its markets, the central bank has sold off kroner. Nykredit Realkredit A/S estimates the bank sold as much as 120 billion kroner (US$18.3 billion) in January to weaken the currency. Official reserve data are due to be published at 4pm in Copenhagen on Tuesday.