Danish central bank has speculators on retreat

Denmark’s central bank, Nationalbanken, appears to have beaten back international speculators – for now, at least – in its efforts to defend the Danish krone's peg to the euro.

Danish central bank has speculators on retreat
Nationalbanken's Lars Rohde appears to have won the first battle, though not necessarily the war. Photo: Thomas Lekfeldt/Scanpix
After moving aggressively to defend the krone’s peg to the euro by cutting deposit interest rate four times in a span of less than three weeks, Nationalbanken bank now has speculators retreating from their aggressive efforts to get Denmark to abandon its euro peg. 
According to various reports, a large number of international speculators have now given up on buying out the krone and thus increasing its value against the euro after being convinced that Nationalbanken director Lars Rohde will follow through on his repeated vows to do whatever it takes to defend the peg. 
After Nationalbanken cut its deposit interest rate to -0.75 on February 5th, Rohde said there was “no upper limit” to the bank’s currency interventions. 
"The fixed exchange rate policy is an indispensable element of economic policy in Denmark… Danmarks Nationalbank has the necessary instruments to defend the fixed exchange rate policy for as long as it takes," Rohde said earlier this month.
"There is no upper limit to the size of the foreign exchange reserve. The sole purpose of the monetary policy instruments is maintaining a stable krone exchange rate against the euro," he added.
Last week, Rohde was backed by Hans Jorgen Whitta-Jacobsen, the head of Denmark's Economic Council, who told Reuters that Denmark would defend the euro peg at all costs. 
Whitta-Jacobesen’s comments led to the krone’s biggest slide versus the euro since 1999 and seemed to convince speculators that Denmark will not follow Switzerland’s lead in dropping the euro peg. 
The head of LNG Capital, one of the hedge funds speculating against the krone, told Bloomberg that although his firm has sold out of its bet against the krone, the currency war isn’t necessarily over yet.  
“How this ends is really out of the hands of the Danish central bank,” LNG CEO Louis Gargour told Bloomberg. “They do control the currency and its peg, however the external forces at work are significantly greater than the resources of any individual central bank, including the Danish central bank.”
As of Thursday morning, the krone was trading at 7.466 per euro, whereas last week it was at 7.445.

Member comments

Log in here to leave a comment.
Become a Member to leave a comment.


Danish central bank says speculators boosted profit

Denmark's central bank (Nationalbanken) on Wednesday said a big chunk of its profits last year came from battling speculators who bet it would abandon the krone's peg to the euro.

Danish central bank says speculators boosted profit
Lars Rohde presented the central bank's 2015 results on Wednesday. Photo: Nikolaj Linares/Scanpix
The central bank said it made a profit of 3.6 billion kroner last year ($534 million, €483 million), out of which 2.2 billion kroner came from “the pressure on the krone in early 2015”.
The Scandinavian country adopted a fixed exchange rate to the Deutsche Mark in 1982, and adopted a similar policy towards the euro since the creation of the single currency in 1999.
When Switzerland unpegged the Swiss franc from the euro on January 15th, 2015, prompting it to soar in value, speculators believed Denmark would follow suit with the krone.
But when their interest faded, the central bank bought back the currency at a slightly lower exchange rate than at which it was sold.
“To this should be added substantial interest income resulting from the reduction of deposit rates to -0.75 percent,” the central bank wrote in its annual report.
Sydbank analyst Jacob Graven said the result was a sign of “hysteria among investors.”
“There was no reason to believe that the central bank would lose the krone war, because (its) coffers are inexhaustible,” he wrote in a note to investors, referring to the central bank's capacity to create unlimited amounts of kroner to keep a lid on the currency's appreciation.
A quarter of the total profit, which included income from investments, was transferred to the government.
On a more sombre note, the central bank lowered its Danish growth forecast for this year by half a percentage point to 1.3 percent.