Tips For Trading The USD/DKK Currency Pair

The USD/DKK currency pair has shown strong trends over the past decade. Between 2006 and the onset of the global financial crisis in 2008 the Danish Krone was appreciating relative to the US dollar. It moved from 6.1671 in January 2006 to 5.8585 to $1 by 2008, but since then it has featured in sharp depreciations over a relatively short timeframe. The support level for the currency pair appears to be just above DKK 4.5 to $1, and the resistance level over the past decade has been DKK6 to $1. The DKK consolidated in a tight trading range between 2010 and early 2015 where it consistently traded around DKK5.6 to the $1. That trend has given way to a sharp depreciation of the DKK as the dollar bulls have run rampant on the financial market since late 2014. This is clearly evident in the 1-year chart for the USD/DKK currency pair featured below.

 

 

Key Indicators for the Danish Market

Much like the rest of Europe, the Danish inflation rate has been declining since Q2, 2015. The last recorded inflation rate figure was 0.50% in August 2015. Prior to that, the inflation rate was 0.7% for June and July after inching upwards from 0.6% in May, and 0.5% in April. On 12 October 2015 the next inflation rate announcement will be made and analysts are forecasting 0.88% for the month of September. If this holds true, it will show that prices are increasing, which would be an important factor for the Danish central bank in determining whether to raise interest rates. The inflation CPI data will be released on Monday, 12 October at 3 AM. (UTC -5). As one would expect with declining inflation figures, the consumer price index also decreased between July and August from 131.5 to 131.1. The following upcoming announcements are important indicators of the performance of the Danish economy:
•    Friday, 9 October 2015 at 3 AM Balance of Trade – the forecast figure is DKK 6.2 billion
•    Monday, 12 October 2015 at 3 AM Inflation Rate Year-on-Year – the forecast figure is 0.88%
•    Thursday, 22 October 2015 at 3 AM retail sales month-on-month – a 0.2% increase is forecast for the month of September

 

Unlike Europe, the US and Canada where interest rates are above zero, the interest-rate in Denmark is -0.75%. From 1992 all the way through until 2015, Denmark's interest-rate averaged 3.27%, and it dropped below zero in January 2015. This is an important barometer of the overall health of the Danish currency, and the economy. It should be noted that this is not unique to Denmark, since in June of 2014 the ECB started paying -0.1% for all deposits that were held in the bank vault. Sweden followed next, and so did Denmark. The risk that Denmark runs by imposing negative interest-rate is that people will withdraw their savings from banks since there is no yield to be gained.

The reason for this is deflation.

This is a situation where prices are dropping and consumers are holding off on big-ticket purchases until prices drop further. The velocity flow of money in such cases is slow, and there is shrinkage in overall economic activity. Negative interest rates result in banks charging customers to store their money with the bank. This means that the likelihood of the USD being exchanged for DKK for the purposes of bank deposits, fixed interest-bearing deposits and the like is slim to none. In fact, Danish Krones are far more likely to be exchanged for US dollars where there is a greater likelihood of earning some interest on invested money. This will increase should the Fed decide to hike interest rates on October 27/28, or in December of 2015.

Remember: The trend is your friend in trading. Follow the general trend of the USD/DKK currency pair for now, especially given the likelihood of a Fed rate hike in 2015, or early in 2016. Put options on the Danish Krone and call options on the USD are warranted.