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.

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Central bank upgrades Danish growth outlook

Denmark’s central bank, Nationalbanken, has surprisingly upgraded its expectations for economic growth and revealed that the majority of the pressure on the Danish krone came from domestic investors.

Central bank upgrades Danish growth outlook
Nationalbanken's (L-R) Per Callesen, Lars Rhode and Hugo Frey Jensen presented the new forecast Wednesday. Photo: Jeppe Bjørn Vejlø/Scanpix
Nationalbanken said on Wednesday that it is now predicting Denmark’s GDP to grow by 2.0 percent this year, a 0.3 percent increase over its projections from December. The growth forecast for 2016 meanwhile was marginally upgraded to 2.1 percent. 
“Growth is stimulated by the continued fall in oil prices, lower interest rates and a weaker effective krone rate. Each of these three factors contributes to boosting the economy,” a statement from the bank read. 
Nationalbanken said that the drop in oil prices would not lead to deflation in Denmark, despite the concerns raised when consumer prices dropped in January for the first time since 1954.
“The falls in oil prices seen in previous months will not lead to actual deflation in Denmark, i.e. to general and sustained price falls. While the lower oil prices do curb inflation here and now, the overall effect will be positive for the Danish economy,” Nationalbanken wrote. 
In its statement, the central bank also revealed that the massive pressure applied to the krone in mid-January largely came from domestic sources. 
“Danmarks Nationalbank’s compilation shows that almost two thirds of the inflow of foreign capital – and the resultant purchases of Danish kroner in both January and February – came from domestic institutional investors, including pension and insurance companies, while non-resident investors accounted for just over one third,” the bank wrote. 
After Switzerland decided to abandon its ties to the euro in mid-January, speculators aggressively turned their attention to the Danish krone. In response, Nationalbanken cut interest rates four times in a span of less than three weeks.  
The approach seems to have put the speculators on retreat, as several said that they have given up on buying out the krone. 
In its statement Wednesday, the bank once again stressed that Denmark would not follow Switzerland’s lead. 
“There is one very significant difference between Denmark and Switzerland: the Swiss National Bankcentral bank had has made it clear that the ceiling vis-à-vis the euro was a temporary measure. In contrast, Denmark has conducted a fixed exchange rate policy for decades, first against the D-mark, then against the euro. This policy enjoys broad support in the Danish society and from political parties across the Folketing (parliament),” the bank wrote.