Story
Danish Krone Weakness Driven by Capital Flows, Not Peg Concerns, BofA Says
Summary
Bank of America attributes the recent slide in the Danish krone to temporary flow pressures, not market fears over its euro peg. The firm believes the weakness will subside and that the currency's fixed exchange rate will hold.
The recent slide in the Danish krone is a result of temporary flow pressures rather than market speculation against its euro peg, according to analysts at Bank of America. In a research note, the investment bank stated it anticipates these pressures will subside and maintains that the currency's long-standing peg will remain intact.
Flow Pressures vs. Peg Stability
Bank of America analysts view the DKK's softness as a technical move driven by capital flows, not a fundamental challenge to its fixed exchange rate mechanism. The firm believes these pressures should recede and recommends investors consider "fading" the current weakness.
While BofA expressed confidence in the peg's durability, it noted that further currency interventions by Danmarks Nationalbank, Denmark's central bank, could not be ruled out if the weakness persists.
Analyzing Denmark's External Accounts
The bank's assessment is partly based on the strength of Denmark's underlying economic position. Analysts highlighted that while the country's primary income balance has narrowed, its overall external balance remains strong.
AdThe note clarifies this is not because Denmark has stopped generating income, but because more income generated domestically is being distributed to non-residents. This dynamic, according to BofA, explains the central bank's relatively calm response to the krone's recent depreciation, which the firm views as an appropriate reaction.
Implications for Corporates
Based on its analysis, Bank of America suggested the current exchange rate levels could present an opportunity for businesses with currency exposure.
The firm advised that corporates should consider hedging into the current weakness to lock in what it views as favorable rates.
Read next
More on Forex
Canadian Dollar Slips to One-Month Low as Hawkish Fed Fuels U.S. Dollar
The Canadian dollar weakened to its lowest level in a month against the U.S. dollar after the Federal Reserve raised interest rates and indicated another hike is likely this year, widening the policy divergence with the Bank of Canada.
UBS Forecasts EUR/CHF to Retest 0.96 as Swiss Franc Lags on Low Yield
Analysts at UBS project the euro could strengthen to 0.96 against the Swiss franc, citing the franc's low yield and the Swiss National Bank's expected dovish stance compared to other G10 central banks.
Pound Sterling Rally May Fade on UK Fiscal Concerns, Citi Says
Analysts at Citi suggest any near-term strength in the British pound following the Bank of England's meeting is unlikely to last, citing significant fiscal risks associated with the upcoming October budget.
Pound Sterling Declines as Fed Rate Hike Looms and UK Inflation Data Tempers BoE Bets
The British pound fell against the U.S. dollar on Wednesday as markets braced for an almost certain Federal Reserve interest rate increase. Domestically, a rise in UK headline inflation failed to sway expectations for a more aggressive Bank of England, adding to the currency's weakness.