[COPENHAGEN] The Danish central bank might be forced to cut its deposit rate to stop the crown appreciating after the Swiss National Bank (SNB) shocked markets by scrapping the franc's cap against the euro on Thursday, analysts said.
They said Denmark's higher interest rate was likely to draw investment from Switzerland, risking an unwanted strengthening of the Danish crown. As it removed the upper limit on the currency, the SNB also sought to dissuade new flows into Swiss francs by lowering a key interest rate, which was already negative, by 0.5 percentage points to -0.75 per cent.
"Some people in the market speculate about a cut already today but I don't expect it to happen today," Nordea analyst Jan Storup Nielsen said.
He expects the central bank to wait for next week's meeting of the European Central Bank, at which the ECB is widely expected to announce it will start buying government bonds with new money, then act within the next three months.
With Denmark's key policy rate at minus 0.05 percent compared with minus 0.75 percent in Switzerland, and the crown seen as a low risk currency, appetite for Danish assets is expected to increase. "EUR/DKK is currently around the level which triggered intervention in fourth quarter last year," Danske senior analyst Jens Naervig Pedersen said in a note to clients.
In September to November last year, Denmark's central bank, the Nationalbanken, purchased 6.9 billion Danish crowns (US$1.1 billion) in the market to keep the crown stable. Intervention is typically the central bank's first step before a rate move.
The central bank aims to keep the crown within a narrow band of 7.29252 to 7.62824 per euro. On Thursday, it traded at around 7.4350 per euro, its strongest level since June 2012 and some distance from the central parity rate of 7.46038.
Mr Pedersen said markets were speculating that the Nationalbank would be forced to move the floor under the crown, which could add to the downwards pressure. "However, we expect Nationalbank will maintain a lower bound on EUR/DKK, which is probably around the level of 7.4300," he added.
That level was reached in 2012, when the crown hit a historic low of 7.4234 per euro.
The central bank cut its certificates of deposit rate to minus 0.05 per cent on Sept 4, meaning it effectively charges banks to park money securely for one week, after the ECB cut its overnight deposit rate to minus 0.2 per cent.