Why The Danish Krone Is Falling

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Includes: GLD
by: Andrew Sachais

Summary

The Danish National Bank cut both its lending and deposit rates aggressively this week in retaliation to the ECB stimulus program.

Inflation measures and economic activity in Denmark remain weak.

As Danish policymakers look poised to intervene to keep its currency value stable, the krone should further depreciate against stronger assets such as the U.S. dollar and gold.

The Danish krone continues to decline as its central bank cut its deposit rate on Thursday to deter capital inflows after the European Central Bank enacted a new form of stimulus. Since May, the Danish krone depreciated against the U.S. dollar by over 18%, as is seen in the chart below.

Data provided by Trading View

On Thursday, the Central Bank of Denmark slashed its deposit rate to deter capital inflows, after cutting both its deposit and lending rates earlier in the week. Similar to the euro area, Danish inflation measures and economic activity have been stuck at tepid growth rates the last few years, further complicated by rising currency prices. In preparation for ECB stimulus earlier in the month, the Swiss National Bank cut benchmark rates, followed by Denmark currently.

"The Danish central bank lowered its deposit rate to minus 0.35% from minus 0.2% after cutting from minus 0.05% on Monday. It left its other main interest rates unchanged," according to the Wall Street Journal.

Meanwhile, the Danish lending rate, shown below, has been slashed from near 6% prior to the financial crisis, to now barely above 0%, and was lowered earlier in the week to 0.05% from 0.2%.

Data provided by Trading Economics

The Danish inflation rate has steadily declined the last few years as economic activity in the area, as well as energy prices have slowed. In December, the annual pace of inflation came in at 0.3%, below the previous month's reading of 0.5%, but exceeding estimates for 0.1%. Since 2012, the pace of inflation fell from near 3% annually, to now slightly above 0%, as is seen in the chart below.

With disinflation showing signs of both structural and transitory pressures in the Danish economy, cutting interest rates is the only way to deter capital inflows, which would cause a divergence between the value of its currency, and the true health of the economy.

Data provided by Trading Economics

Moreover, the Danish 10-year government bond yield has drastically declined, alongside falling inflation and its lending rate. Since 2007, the 10-year yield fell from near 4%, to now 0.53%, as is seen in the chart below, with a large drop coming after the Danish central bank cutting rates earlier in the week.

Data provided by Trading Economics

Similarly, with recent rate cuts, the price of the krone has greatly depreciated against gold. The chart below is of SPDR Gold Shares (NYSEARCA:GLD) over the Danish krone. Since the start of the year, the Danish krone has depreciated nearly 17% against the price of gold. Gold has now moved to multi-year highs priced in krone terms.

With the Danish National Bank set on intervening as often as necessary to deter capital inflows as the ECB pushes forward with its stimulus program, the krone should remain weak. As the economy moves closer to deflation, gold should continue to outperform the currency, while the krone could also fall much further against the U.S. dollar in coming months.

Data provided by Trading View

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.