Wed, Mar 11, 2015 - Page 15 News List

Denmark beats krone speculators

Bloomberg

The Danish government sees its latest currency flow data as evidence that speculators have been beaten back in their efforts to break the krone’s peg to the euro.

“The tsunami warning is off,” Danish Minister for Economic and Interior Affairs Morten Oestergaard said in an interview in Copenhagen on Monday.

Policymakers in Denmark are “very confident that we have the upper hand in this little bout” of exchange-rate turbulence, he added.

Denmark has spent the past eight weeks fighting back conjecture that it would follow the Swiss and abandon its ties to the euro. The attack against the Danish currency regime has provoked an unprecedented package of measures designed to deter investors from hoarding “AAA”-rated krone assets.

The main deposit rate is now minus-0.75 percent and reserves have soared two-thirds to about 40 percent of GDP.

Danish central bank Governor Lars Rohde in a Feb. 5 said interview that there was no limit to how far he was willing to cut interest rates or raise reserves to defend the peg. He had also agreed with the Danish government to suspend debt sales to drive down longer-dated yields and reduce the supply of krone assets that speculators could buy.

The measures look to be succeeding. Denmark’s biggest commercial pension fund, PFA A/S, said last month that the appeal of holding kroner is waning. London-based hedge fund LNG Capital meanwhile said that it had abandoned its bet against the peg. Denmark’s biggest fund, ATP, says it has not bothered putting up any hedges against the peg because the scenario of the regime failing is unthinkable.

The latest central bank reserve data suggest it “has not had to intervene as much” to prevent the krone strengthening, Oestergaard said.

The ministry has also cut back on the number of meetings it holds with the central bank as the situation normalizes, he said.

When Switzerland sent its franc into a free float on Jan. 15, Oestergaard was in New York to meet with Standard & Poor’s and discuss the “AAA” rating that has attracted so many investors to Danish assets. He sees Denmark’s status as a haven for investors as something positive that economic policy should seek to support.

Hedge funds must understand the context in which the krone peg exists, Oestergaard said.

The cap Switzerland imposed on the franc in 2011 was always intended to be temporary, whereas Denmark’s regime has existed for more than three decades, first against the Deutsche mark.

The Danish central bank’s only job is to target 7.46038 kroner against the euro in a 2.25 percent official tolerance band. In practice, it allows only swings of 0.5 percent.

One euro cost 7.4507 kroner as of 9:06am yesterday in Copenhagen. That compares with as strong as 7.4327 on Jan. 15.

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