Danish Krone Climbed as Stock Market Rout Resumed
The appeal of the Danish Krone has largely improved this week as a fresh rout of global stock markets and the ensuing boost in safe-haven demand drove up the value of the Euro. Despite the Lunar New Year seeing the temporary closure of a number of Asian stock markets, including the particularly volatile Shanghai Composite Index, investors struggled to shake off the shadow of global slowdown concerns. With traders seeking out the relative security of lower-yielding assets the Euro, and consequently the Krone, climbed higher against rivals throughout much of the week. Thus, although Monday’s Danish balance of trade showed an unexpected decline in the country’s trade surplus this failed to particularly dent the Krone.
A better-than-expected narrowing of the UK’s visible trade deficit helped the GBP/DKK exchange rate to rally somewhat on Tuesday, boding more strongly for the outlook of the domestic economy. However, as Bank of England (BoE) Deputy Governor proved less than bullish in comments regarding the rapid growth of credit within the UK, showing no indication that the central bank foresees interest rates rising in the near future, the Pound struggled to hold onto its gains. With some economists dialling back their forecasts for the timing of the BoE’s first move on monetary tightening as far as 2020 Sterling returned to a more muted form.
Weak UK Data Spurred GBP/DKK Exchange Rate Lower
Confidence in the Pound declined further on Wednesday as the latest Industrial Production data showed an unanticipated contraction in output. Defying expectations for a more positive uptick to 1.0% production declined on the year by -0.4%, appearing to indicate fresh weakness within the UK economy as demand falters. The ensuing slump was worsened when the latest NIESR GDP estimate equally came in below forecast at 0.4% rather than 0.6%. Altogether this offered little incentive for investors to buy back into the softening Pound, pushing the GBP/DKK exchange rate lower.
January’s Danish inflation rate also helped to support the Krone, as inflationary pressure increased from 0.4% to 0.6% on the year in line with forecasts. While this indicated more robust domestic economic conditions, however, the Krone was later pulled down by its peg to the Euro as comments from Fed Chair Janet Yellen prompted the single currency to weaken. Yellen’s failure to rule out further interest rate hikes in the coming year saw a surge in the US Dollar, with the possibility of increasing policy divergence between the Fed and other central banks provoking further market turmoil.
Surprise Riksbank Rate Cut Strongly Bolstered Danish Krone
Investors were generally caught off guard on Thursday by the Riksbank’s surprise move to cut interest rates further into negative territory, dropping the baseline rate from -0.35% to -0.50%. This aggressive move seemed to be a pre-emptive counter to the additional monetary loosening the European Central Bank is expected to announce in March. As a result of the decision both the Euro and the Krone jumped across the board, allowing the GBP/DKK currency pair to hit a twelve-month low of 9.4725.
After an improvement in the UK’s December Construction Output and largely disappointing Eurozone GDP results, though, the GDP/DKK exchange rate has recovered some ground ahead of the weekend.
In the next week the Pound may see fresh weakness as the European leaders summit is likely to provoke an increase in ‘Brexit’ speculation, as Prime Minister David Cameron attempts to secure a June referendum by achieving agreement on proposals to alter the terms of the UK’s membership in the EU. If Cameron fails to secure sufficient support, however, the extension of uncertainty is equally expected to weigh on Sterling.