Denmark is trying to silence currency speculators as the government and central bank insist the Nordic country won’t follow Switzerland in severing its euro ties.
“Circumstances significantly different from Denmark’s” were behind the Swiss National Bank’s decision, Danish Economy Minister Morten Oestergaard said in a phone interview. “Any comparison between Denmark and Switzerland is impossible,” Bloomberg reported Tuesday.
The comments followed yesterday’s surprise decision by the Danish central bank to cut its deposit rate by 15 basis points to minus 0.2 percent, matching a record low last seen during the darkest hours of Europe’s debt crisis in 2012. Like the Swiss, the Danes lowered rates after interventions in the market proved insufficient.
Denmark will probably deliver another rate cut on Jan. 22 as krone “appreciation pressure prevails” with the European Central Bank set to present details of its bond-purchase program, Danske Bank A/S reiterated today.
Danske, Denmark’s biggest bank, says it’s been inundated by calls from offshore investors and several hedge funds seeking advice on how to profit from the latest developments in currency markets. SEB AB, Scandinavia’s largest currency trader, says it’s fielded similar calls. Their response has been to tell investors that Denmark’s three-decades-old peg is backed by the ECB, unlike the SNB’s former currency regime.
According to the exchange-rate agreement between Denmark and the ECB, currency interventions to defend the peg will “in principle be automatic and unlimited.”
Necessary Tools
Denmark has “a long-lasting and politically firmly anchored fixed-currency policy,” Oestergaard said. “This situation should not be overly dramatized.”
To underline the point, the central bank Monday sought to reassure investors that its monetary policy arsenal is big enough should speculators try to test its resolve.
“We have the necessary tools” to defend the peg, Karsten Biltoft, head of communications at the central bank, said by phone. Asked whether Denmark could ever consider abandoning its currency peg, he said, “Of course not.”
Biltoft described as “somewhat off” any attempt to draw parallels between the Danish and Swiss currency pegs. “I don’t think you can make a comparison between the two cases,” he said.
Yet the speculation is proving hard to put to rest. Defending Denmark’s euro peg “might be easier said than done in the current environment,” Ken Wattret, an economist at BNP Paribas, said in a note. “The next test will of course be the upcoming ECB policy announcement on Thursday.” Given BNP’s estimate that the ECB will purchase 600 billion euros ($697 billion) in sovereign bonds, “further upward pressure on the DKK is likely,” he said.
