A fourth Danish interest rate cut in three weeks is unlikely to ease the upward pressure on the crown, with some investors still betting the central bank won't be able to defend the three-decade-old peg to the euro. The impact on the crown from Thursday's 25 basis point cut, which took the deposit rate to -0.75 percent, the same as Switzerland's, was fleeting, as were verbal interventions by central bank Governor Lars Rohde. Having eased to around 7.4485 per euro immediately after the cut, the crown was back at 7.4442 to the euro on Friday.
"Whether the latest rate cut is enough, or not, is debatable," said Jens Petersen, senior analyst at Danske Markets, Copenhagen. "Once the European Central Bank starts its large-scale asset purchases in March, we will see downward pressure on the euro and the crown pushing higher."
The ECB will launch a 1.1 trillion euro quantitative easing programme in March, which is likely to weaken the euro. That has already prompted the Swiss National Bank to abandon a three-year-old cap on the Swiss franc and driven Denmark's central bank to intervene in record amounts last month.
Denmark's National Bank has upped the ante as currency inflows have picked up in recent weeks on speculation it may also abandon the crown's peg.
Under the Exchange Rate Mechanism (ERM2), Denmark agreed to keep the crown in a corridor of 2.25 percent either side of a central parity rate of 7.46038 to the euro. In practice, it has kept it in a range of 0.50 percent either side.
The bank is determined to keep the peg, which has been the cornerstone of economic policy since 1982. Governor Rohde borrowed a phrase that ECB chief Mario Draghi used to calm panic over the euro in 2012, telling Reuters on Friday that Denmark would do "whatever it takes" to protect its fixed currency policy.
But speculators and some domestic Danish investors appear unconvinced.
Swedish bank SEB said in a note that part of the latest flows were connected to FX hedging by domestic investors and the government had to convince Danes the "peg will hold".
"There is a lot of talk about this right now," said Anthony Lawler, head of portfolio management at GAM International Management, when asked whether funds were targeting the peg. He added, though, he was yet to see "massive positions building up by specific hedge funds".
Barclays analyst Marvin Bath said there was a risk of failure by the Danish central bank given the rate cuts so far have been rather small with little impact on capital inflows. He said deeper negative rates were needed to deter foreign inflows.
"By not demonstrating its resolve to market participants, the DNB may be encouraging further speculation, undermining its efforts," he said. He added that an eventual move away from the DNB's peg was possible, though at this point those risks were low.