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Monday, January 19, 2015 12:37 PM

Denmark Announces Currency Peg is "Secure"; 12 Denials in 1 Day; Deposit Rate Cut to -0.20%; More Rate Cuts Coming?

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Here's the quote of the day: Denmark's Finance Minister, Morten Oestergaard, says the Danish currency peg of the krone to the euro "is secure."

Banks Battle Speculation Denmark’s Euro Peg at Risk

Bloomberg reports Banks Battle Speculation Denmark’s Euro Peg at Risk

Quotes of the Day Synopsis

  1. The Danish currency peg “is secure,” Economy Minister Morten Oestergaard said.
  2. Carl Hammer, chief currency strategist at SEB in Stockholm, says he’s been trying to make clear to callers that it’s “highly unlikely” Denmark will alter its exchange-rate regime.
  3. “Obviously, we think it’s completely unrealistic” that Denmark will abandon its peg, Jan Stoerup Nielsen, an economist at Nordea Markets in Copenhagen, said by phone. “But that doesn’t seem to be stopping the speculation.”
  4. Central-bank GovernorLars Rohde said last month “there’s still some way to go” before Denmark tests the limit of its monetary tool box.
  5. “There’s no point in speculating that the currency peg will fall,” Arne Lohmann Rasmussen, head of fixed-income research at Danske in Copenhagen, said by phone.
  6. “There are always rumors in the market that have nothing to do with reality,” Klaus Rasmussen, chief economist at the Confederation of Danish Industry, said by phone. 
  7. Dropping the euro peg  would be “totally silly,” said Klaus.
  8. David Woo, of Bank of America Merrill Lynch, suggested that the DNB would now seek to defend the peg more strongly than before, “as markets potentially question the central bank’s commitment to maintaining it”. 

That's eight denials (or strong defense of the peg). Quote number eight is from a Telegraph article linked to below. (Four more coming from Danish Central bank below).

I have no way of measuring but I speculate this is some kind of record, at least as pertains to currencies.

Denmark Next?

The Telegraph asks Will Denmark be the next country to cause currency chaos?
Denmark is the last major economy to peg its currency - the krone - to the euro, and has conducted a fixed exchange rate policy since the 1930s.

Given that Thomas Jordan, the SNB’s chief, declared “you can only end a policy like this by surprise. It is not something you can debate for weeks”, traders are likely to be more wary of the DNB.

Traders were caught off guard by the SNB. The franc was viewed as incredibly stable until the moment of the announcement.

David Woo, of Bank of America Merrill Lynch, suggested that the DNB would now seek to defend the peg more strongly than before, “as markets potentially question the central bank’s commitment to maintaining it”.

“The Danish currency framework is much longer standing than the Swiss and the DNB has not had the reserve accumulation that the SNB had,” said Tina Mortensen, an analyst at Citi.

If the DNB does abandon the peg, it is unlikely to hit the markets as hard as the Swiss move. In 2013, the last year in which the Bank of International Settlements (BIS) published its last triennial central bank survey, krone trades represented just 0.4pc of global currency market turnover.

In the same year, the franc was involved in 2.6pc of trades. There is a risk that the Danish krone becomes as popular as Switzerland’s franc
Denmark Cuts Deposit Rate to -0.20%

Because of increase strength in the Krone and speculation Denmark would abandon its peg, Danish central Bank Slashes Rates to -20bps.
The central bank in Copenhagen lowered its deposit rate to minus 0.2 percent from minus 0.05 percent, according to a statement today. The lending rate was cut to 0.05 percent from 0.2 percent.

The move comes amid speculation that Denmark could be forced to follow Switzerland, which had spent the last three years struggling to buy enough euros to support its exchange-rate regime. Denmark has maintained its currency peg for three decades. Its foreign reserves rose to 446.8 billion kroner ($69.9 billion) last month, compared with a high of 514.4 billion kroner in 2012.

And one final reminder: Danish households debt 321% of disposable income – OECD.
More Denials

Here's four more denials, albeit three from the same person, Danish Central bank spokesman Karsten Biltoft, via Bloomberg.

  1. We have the necessary tools to defend the peg,”Karsten Biltoft, head of communications at the Copenhagen-based central bank, said by phone.
  2. Asked whether Denmark could ever consider abandoning its currency peg, he said, “Of course not.” 
  3. “The comparison that is made between Denmark and Switzerland I think is somewhat off,” Biltoft said. “I don’t think you can make a comparison between the two cases.” 
  4. It doesn’t make any sense to compare the short-term, one-sided Swiss currency peg with the long-term Danish fixed-rate regime, which has been in place since 1982 and is a bilateral agreement between Denmark and the euro area,” Economy Minister Morten Oestergaard said in a phone interview. 

More Rate Cuts Coming?

One final quote. Today’s cuts “underline the fact that the inflow has been pretty massive since they decided to move on a Monday,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank. “We should price in a probability of a new cut on Thursday, especially if the FX intervention continues.

In the race to debase currencies, which country will be the first to break the -1.0% interest rate barrier? At this juncture, Denmark is clearly in the lead.

Mike "Mish" Shedlock

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