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Danish foreign exchange reserves rise in February, DN likely to keep policy rate on hold

The Danish central bank published its February’s foreign exchange reserve and central balance sheet today. The FX reserve increased by DKK 3.1 billion to DKK 467 billion in February, but DN did not intervene in the foreign exchange interventions. Government deposits rose sharply to DKK 182 billion in February up from DKK 156 billion in January. The focus in this monthly release continues to be on the development in government deposits and less on the foreign exchange reserve. The latter has not moved since the Danmarks Nationalbank last intervened in FX markets in March 2017. The former has surged in 2018, possibly due to pension tax payments.

The implications of the increase in government deposits are twofold. In the short term, it might become a difficulty for DKK liquidity, which has been drained correspondingly. This might push short0term DKK rates and EUR/DKK FX forwards a bit higher in the months ahead. Over the remainder of this year, it might possibly have implications for DGB issuance.

“Concerning EUR/DKK, we forecast it to trade around 7.4450 on 1-6M and 7.4475 on 12M and for DN to keep the key policy rate, the rate of interest on certificates of deposit, unchanged at minus 0.65% on 12M”, noted Danske Bank in a research report.

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