The lack of action from Danmarks Nationalbank over the recent period of krone weakening could be a subtle indication that the reaction function of Danmarks Nationalbank has changed under the new governor Lars Rohde.
In an article about its reaction function in its Q1 quarterly review, Danmarks Nationalbank emphasised the need for a certain level of vagueness in the reaction function.
This may contribute to explaining why Danmarks Nationalbank has stayed on the sideline in Rohde's first 13 months as governor - a remarkable record given the historical frequency of central bank intervention - on average his two predecessors intervened more often than every second month during their terms.
Hence, so far, Rohde has relied on the market to determine the EUR/DKK exchange rate freely and, therefore, presented himself as a less activist central bank governor than his predecessors.
One important argument for the absence of intervention even though EUR/DKK is at the highest level in many years, and thus an argument for vagueness in the reaction function, is the current strong support the krone is getting from the large external surplus, which puts appreciation pressure on the krone.
In addition to this, the large currency reserve, currently above DKK475bn or 26% of GDP, provides the central bank with substantially more ammunition to stabilise the krone on the weak side of the central rate. Hence, EUR/DKK above the central rate may be less worrisome to Danmarks Nationalbank now than it was previously.
To Read the Entire Report Please Click on the pdf File Below