Danish krone is the national currency of Denmark. The country, although included in the eurozone, has refused to use a common currency. This makes the EUR/DCK pair an interesting financial instrument.
The Danish National Bank does not monitor inflation in the country since the currency is pegged to the euro. Accordingly, there is no direct relationship between DKK and the interest rate.
This happened because Denmark signed the ERM-2 agreement, which assumes that the euro and the Danish krone are fixed at a ratio of 1 EUR = 7.46 DKK. At the same time, a possible corridor of exchange rate fluctuations should not exceed 2.5%.
The history of the agreement dates back to 1979 when only the first negotiations were held on the creation of a single economic space. Later, in 1999, when the euro came into use, Denmark re-signed the agreement and reserved the right to the national currency. This decision was voted by 56.5% of the population.
In this regard, for traders, there is no special need to calculate all economic indicators and factors influencing the exchange rate. The Danish bank seeks to maintain the maximum deviation from the value fixed in ERM-2 at 1%.
Since ERM II also guarantees unlimited support from the ECB in the event of a serious imbalance in the foreign exchange market, the Danish currency will almost certainly retain its value.
Traders have long been using the fluctuations and volatility in the EUR/DKK pair, and at least in the last ten years, there has not been a single case that would make one to seriously think about the reliability of the agreements between the ECB and the National Bank of Denmark.
This indicates that the Danes will join the euro at some point in time, but before that, novice traders can practice their skills with this simple and easy to trade pair. It does not promise a high margin, but the risks are minimized.
What is noteworthy, the pair is interesting both for those who want to learn scalping and those who are interested in medium and long-term trading. The main advantage of EUR/DKK in terms of training is complete predictability.
There are no fundamental difficulties in trading EUR/DKK, as already noted. It is enough for traders to use technical analysis tools and apply indicators.
Due to the narrow corridor, the exchange rate is strictly cyclical, after periods of growth there will necessarily be a decline. This trend is relevant on any timeframe and does not depend on any circumstances.
At the same time, do not forget that both the euro and the Danish krone are national currencies that are subject to pressure from the international economy.
The euro exchange rate is determined by the European Central Bank. This is done indirectly through the establishment of interest rates. With their decrease, the price of the currency falls, with an increase – increases.
In the case of the Danish krone, the situation is much simpler; the central bank practices a policy of negative rates. As a result, borrowers receive compensation from banks for taking loans.
This instrument is used by financiers to weaken the currency and stimulate the economy. Traders need to understand that as long as this situation is relevant, this means a significant superiority of the Danish krone over the euro.
To keep the corridor at 2.5%, banks are forced to artificially reduce the liquidity of the currency. Paired with an increase in the euro interest rate, this means that EUR/DKK quotes will go up, while with lowering of interest rates – down.
The effect of this mechanism can be observed every 6 weeks when the ECB announces the current interest rates for the upcoming period. At this time, the pair is the most volatile and provides real opportunities for earnings. In other periods, the fluctuations are not too significant.
As for trending tendencies, when EUR/DKK rises or falls over several months, this is because the ECB does not change the interest rate, or these changes are insignificant.
There are no other real factors that could significantly affect the pair since they are excluded by ERM-2. In this regard, traders need to clearly understand the grounds on which the ECB will decide on an interest rate. These primarily include mortgages, GDP, and employment data.