With a host of upcoming monetary policy decisions that could prove game changers, the Danes are looking on nervously as interest rate shifts in other leading economies add to the complexities of its current negative rate policies.  Neighboring the European Monetary Union, Denmark’s desires to prevent against speculative inflows and keep the Krone weak have seen the implementation of increasingly aggressive accommodative policies in order to offset the ECB’s actions.However, this is a costly endeavor and may have to end with the Danish Central Bank abandoning the currency peg in order to stay viable should conditions change in the near-future.

Pressure on the Peg

Denmark finds itself squarely being two opposing forces.On the one hand, the United States is preparing to raise interest rates, a bullish policy change from the standpoint of the USDDKK pair where the Euro Area is rapidly approaching further accommodation.This accommodation is likely to put the longstanding EURDKK peg under renewed pressure, akin to what was seen earlier in the year after the Swiss National Bank removed their own peg to the Euro. With the US dollar continuing to ascend, it is also pressuring the Euro lower which is having a knock-on effect in the EURDKK pair. While the Danish Central Bank has not seen its balance sheet hit the epic levels witnessed in Switzerland thanks in part to its more regional than global status, a weaker Euro will make this endeavor much more costly over time.

With the potential for the European Central Bank to venture even deeper into negative interest rate policies in its upcoming meeting, the Danes might be forced to echo this policy move with a rate cut of their own. Since reducing interest rates to -0.75% in February, the DKK pair has been able to continue weakening versus peers and although still higher than one year ago, the Central Bank balance sheet has actually shrunk over 32% since hitting highs back in March. Nevertheless, with the anticipated upcoming monetary policy adjustments from across the globe, the Danish Central Bank will be forced to do more to insulate the economy from external developments, especially to maintain positive inflation.

Across the ocean, the United States has seen the probability of an interest rate hike rise above 70% despite the fact that any movement on rates might tip the economy into a recession. The path to normalization will not be easy, but it will certainly mean further upside for the USDDKK pair as the policy divergence between the two nations grows ever wider over time. Recent multi-year highs are likely to be just the beginning for the US dollar which will continue to benefit from the more hawkish bias of the Federal Reserve while other nations do all they can to protect domestic growth and inflation.

The Technical Take

Due to the nature of the EURDKK peg, it is imperative to understand the relationships with EURUSD and USDDKK to get a fuller picture. A careful analysis of the correlation between EURUSD and USDDKK shows a strong inverse correlation.This is owing to the fact that EURDKK has stayed relatively flat because of the existing peg. In many ways the chart of EURUSD and USDDKK prominently displays this special relationship with moves lower in EURUSD mirrored by moves higher in the USDDKK pair.  Traders looking for an advantage in trading USDDKK should pay close attention to the developments in EURUSD for hints on policy, especially with EURDKK trading unchanged for months on end.

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Obviously, more upside is in store for USDDKK, namely in response to major upcoming policy shifts. However, timing the move will be critical considering the current potential for a breakout or conversely a better entry point on a Call position during a brief selloff and dip. Knowing that monetary policy decisions are coming, the potential for a fake breakout is high, so prudence is warranted in judging the proper entry point.

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The horizontal trend intact for the better part of the year is currently seeing USDDKK trend near resistance at 7.0380.Should USDDKK manage to close above this level on a daily candlestick chart, it would be a very bullish indication implying Call positions towards 7.1260 and beyond. However, should key resistance continue to hold off an advance, it will be prudent to wait for a better enter point nearer to the key support level at 6.5150.While prices might retreat and pullback from recent gains, awaiting a better entry price is a wise move considering the upcoming volatility.

Conclusion

The combination of divergent monetary policies and the Danish Central Bank's willingness to act will continue to pressure the USDDKK pair to the upside with the bullish bias remaining largely intact.The one risk factor is the abandonment of the peg by the Danes. However, should the United States also move to raise rates, this could offset the strength in the Krone and push the pair demonstrably higher towards multi-year highs last seen in the early 2000s. Should the EURDKK peg break though, it could send the USDDKK pair tumbling before resuming its general upward trend as the US moves to normalize policy while the Europeans trek deeper into negative rate territory. With this in mind ideal call positions taken near resistance or on a pullback are key to taking advantage of both technical and fundamental trends.