COPENHAGEN Jan 14 The weakening Danish crown is approaching the level at which the central bank last took action to strengthen it, putting markets on intervention watch.
Current weakness is also so persistent that some analysts believe the bank, the Danmarks Nationalbank, may have to break from its goal of keeping interest rates in lock step with the European Central Bank and go for an independent rate hike.
The Danish crown has eased in the past few weeks from a level around 7.4582 to the euro in the early part of January to near 7.4625. It was at 7.4622 on Tuesday.
"When Danmarks Nationalbank last intervened in the market, intervention took place just above the current level for the crown," Danske Bank Markets wrote in a note to clients.
The currency intervention one year ago was subsequently followed by a rate hike of 10 basis points. The Nationalbank cut its main lending rate by 10 basis points to 0.20 percent in May last year without intervening first, in an effort to partly mirror the European Central Bank.
"I don't think the central bank wants the crown weaker than what we see now and because of that it is likely they will intervene," senior analyst Jan Storup Nielsen from Nordea Markets said.
European Union member Denmark's policy of holding the crown steady against the euro means the central bank shifts interest rates for the sole purpose of keeping the currency around its central parity of 7.46038 per euro.
"Back in late 2012 and early 2013 it was a weakening of the crown above the central parity that Danmarks Nationalbank reacted on by first intervention and later an independent Danish rate hike," Storup said.
The central bank is less active if the crown strengthens above the target.
Denmark's foreign exchange reserves stood at 485.9 billion Danish crowns ($88.9 billion) at end of December. It shows that the Nationalbank has not intervened in the market since December 2012. The central bank publishes new figures for the reserve February 4.
Danske Bank Markets analysts expect the central bank to intervene before a change lending rates.
"When intervention has reached 10 to 15 billion crowns rates would be hiked by 10 basis points," it said in the note. ($1 = 5.4656 Danish crowns)
(Editing by Jeremy Gaunt)