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(Bloomberg) -- Banks in Scandinavia are joining the Danish government in trying to persuade offshore investors that the Nordic country isn’t about to copy Switzerland and drop its euro peg.
SEB AB, the Nordic region’s largest currency trader, said it’s been fielding calls from hedge funds wondering whether Denmark might be next after the Swiss National Bank shocked markets by exiting a three-year-old euro cap on Jan. 15. Economy Minister Morten Oestergaard a day later sought to silence doubts surrounding Denmark’s currency peg, which he said remains “secure.”
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. The nation’s central bank said today it has the “necessary tools” to defend the peg after policy makers cut its deposit rate to minus 0.2 percent, from minus 0.05 percent.
Speculation Denmark will follow the SNB in scrapping its euro cap 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 urged to consider 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 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.”
The day the SNB jettisoned a cap that had prevented the franc strengthening beyond 1.20 to the euro -- a system that was presented as temporary back in 2011 -- the Swiss currency’s value surged by about 20 percent. Denmark’s 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. It was at 7.4341 as of 3:45 p.m. in London.
Today’s rate cuts follow reductions to Danish borrowing costs back in September. Denmark lowered its benchmark deposit rate to minus 0.05 percent that month, 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 ($80 billion) set 2 1/2 years ago. 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,” Arne Lohmann Rasmussen, head of fixed-income research at Danske in Copenhagen, said by phone. 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. Before today’s announcement, he said he advised them to prepare for cuts.
Karsten Biltoft, a spokesman at the Danish central bank, declined to comment. The bank doesn’t 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,” Klaus Rasmussen, chief economist at the Confederation of Danish Industry, said by phone. However, dropping the euro peg “would be totally silly,” he said.
--With assistance from Frances Schwartzkopff in Copenhagen and Niklas Magnusson in Stockholm.
To contact the reporters on this story: Peter Levring in Copenhagen at email@example.com; Love Liman in Stockholm at firstname.lastname@example.org To contact the editors responsible for this story: Tasneem Hanfi Brogger at email@example.com Jonas Bergman