Danish krone likely to remain strong on Denmark’s large current account surplus

The large current account surplus of Denmark will narrow in near future as the rebound in economy takes hold; however, it will not go away completely. This will continue to keep upward pressure on the Danish krone's peg to the euro, highlighting the requirement of very loose monetary policy. Denmark's current account surplus was nearly 7% of GDP in 2015, twice its average between 1999 and 2007. However, the strengthening of the krone that stem from a continuous current account surplus has created problems for the central bank, which intends to keep trading krone in a tight range against the euro.

The broadening of current account surplus is partially due to cyclical factors, particularly weak domestic demand after the global financial crisis and bursting of the nation's housing bubble in 2008. Hence, the surplus will narrow as the economy rebounds. But, structural factors are expected to keep the current account in surplus.

Denmark intends to remain a net global creditor, resulting in a rise in its net international investment position. As this will increase the country's creditworthiness, investor demand for its assets is not expected to go away, maintaining the upward pressure on krone against the euro.

On the whole, since last summer, the krone has been trading weaker than the central rate against the euro, reflecting the euro's appreciation and Denmark's very loose monetary policy. This led to the Nationalbank reacting with FX intervention and ultimately a rise in deposit rate. A renewed upward pressure on the Danish Krone is expected given the current account surplus and the expectation of the ECB to further ease policy in March. The Nationalbank will be required to keep a very accommodative monetary policy in the next few years in order to protect the peg.