Tue, Jan 20, 2015 page15

• Banks deny Denmark’s euro peg at risk

  ‘COMPLETELY UNREALISTIC’: Despite the reassurances of Nordic banks, investors are speculating that the Danish krone might see a surge, the same way the Swiss franc did

  • Bloomberg
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  Banks in Scandinavia are joining the Danish government in trying to persuade offshore investors that the Nordic nation is not about to copy Switzerland and drop its peg to the euro.

  SEB AB, the Nordic region’s largest currency trader, said it has been fielding calls from hedge funds inquiring whether Denmark might be next, following the shock decision by the Swiss National Bank (SNB) to end a three-year-old euro cap on Wednesday last week. On Thursday, Denmark’s Minister for Economic and Interior Affairs Morten Oestergaard sought to silence doubts surrounding Denmark’s currency peg, which he said remains “secure.”

  SEB chief currency strategist Carl Hammer said he’s been trying to make clear to callers that it’s “highly unlikely” Denmark would alter its exchange-rate regime.

  Speculation Denmark would follow the SNB has forced bankers across Scandinavia to provide offshore investors with a crash course in Danish monetary policy. Hedge funds calling SEB, Danske Bank A/S and other Nordic banks have been told that Denmark’s peg has existed for more than three decades and is backed by the European Central Bank, unlike the SNB’s former system.

  “Obviously, we think it’s completely unrealistic [that Denmark would abandon its peg],” Nordea Markets Copenhagen-based economist Jan Stoerup Nielsen said by telephone. “But that doesn’t seem to be stopping the speculation.”

  The day the SNB lifted a cap that had prevented the Swiss franc strengthening beyond SF1.20 against the euro — a system that was presented as temporary when it was introduced in 2011 — the value of the Swiss franc surged by about 20 percent.

  The Danish krone, which is tied to the euro in a 2.25 percent band around a target of 7.46038, appreciated to its strongest level since June 2012, based on closing prices.

  Denmark cut its benchmark deposit rate to minus 0.05 percent in September last year, compared with a low of minus-0.2 percent at the height of Europe’s debt crisis in July 2012.

  The nation’s currency reserves are about 13 percent below their peak of 514.4 billion kroner (US$79.98 billion) set two-and-a-half years ago. Danish central bank Governor Lars Rohde said last month “there’s still some way to go” before Denmark tests the limit of its monetary tool box.

  “There’s no point in speculating that the currency peg will fall,” Danske Bank A/S Copenhagen-based head of fixed-income research Arne Lohmann Rasmussen said by telephone. Denmark’s biggest bank has also received calls from hedge funds seeking to profit from Danish interest-rate bets following the SNB’s decision, he said. He is advising them to prepare for cuts.

  Danske and Nordea both predict the Danish central bank will lower borrowing costs on Jan. 22, after the European Central Bank unveils the details of its bond-purchase program. Danske sees more easing after that, with the deposit rate dropping as low as minus-0.25 percent.

  Danish central bank spokesman Karsten Biltoft declined to comment. The bank does not hold scheduled meetings and only adjusts reserves and rates to defend its euro peg.

  “There are always rumors in the market that have nothing to do with reality,” Confederation of Danish Industry chief economist Klaus Rasmussen said by telephone, adding that dropping the euro peg “would be totally silly.”
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