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(Bloomberg) -- LNG Capital exited a bet that the krone will appreciate as investors try to assess Denmark’s chances of ending speculation against its euro peg.
“We don’t have any currency bets against the krone currently, but we had until a week and a half ago, when we sold and got out with a profit,” Louis Gargour, chief executive officer and head of investment at LNG in London, said in a phone interview on Tuesday.
LNG’s decision to sell isn’t a sign Denmark has won its battle against speculators, Gargour said. The central bank in Copenhagen still faces the shocks of a potential Greek default and unprecedented stimulus from the European Central Bank. Both developments would drive down the euro and put more pressure on the krone than Denmark has the tools to withstand, he said.
“How this ends is really out of the hands of the Danish central bank,” Gargour said. “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. Switzerland is a good example of market forces outweighing central bank resources.”
Gauging the temperature of Denmark’s currency market is proving more difficult after five weeks of historic measures designed to deter investors from hoarding kroner. Though the krone ended last week lower, Nordea Bank AB says it’s too early to judge the battle is over.
Central bank efforts to prevent the krone strengthening beyond the limits of its peg to the euro have forced it to cut interest rates four times this year and deliver record currency- market interventions.
The key deposit rate is minus 0.75 percent, matching Switzerland’s, and foreign reserves are equivalent to more than 35 percent of gross domestic product. Yields on government bonds as long as five years are negative and Denmark has suspended debt auctions to reduce supply and keep investors out.
Demand for AAA-rated krone assets soared after the Swiss National Bank on Jan. 15 abandoned the franc’s cap to the euro. That move fanned conjecture Denmark’s ties to the euro may also be unsustainable.
Nordea estimates currency-market interventions to weaken the krone since the middle of January have exceeded 275 billion kroner ($42 billion). Rohde said in a Feb. 5 interview he will do whatever it takes to defend the peg, including limitless interventions and rate cuts. More recent data suggest pressure is abating, with daily central-bank net-flow figures published on Tuesday showing no interventions.
Rohde’s historic package of measures has driven down yields on Danish bonds, which are now the lowest in the developed world, after Switzerland. Denmark’s 10-year yield was about 0.3 percent on Tuesday, its five-year yield was minus 0.3 percent and its two-year yield was minus 0.6 percent, according to data compiled by Bloomberg.
The return on krone-denominated assets is now so low that Denmark’s biggest commercial fund no longer finds them attractive.
“Danish assets have been so suppressed that the only other place that provides an equally poor return would be Switzerland,” Poul Kobberup, chief investment officer at PFA Pension A/S, said in a phone interview. “There are other markets with steeper rate curves that provide much more attractive returns. One such place would be the U.S., another the U.K. and even Sweden.”
PFA’s liabilities are krone-denominated, and the fund isn’t free to shift its investments in a way that would create a mismatch between the currencies of its assets and liabilities. At the end of 2013, PFA had assets under management worth about 400 billion kroner ($60 billion).
“We keep a stable currency exposure so there’s a limit to how much we can move around,” Kobberup said. “We can only shift about a couple of percent of our portfolio.”
Yet at LNG, longer-dated Danish government bonds are still attractive. The fund holds 10-year bonds, betting that yields will go even lower, Gargour said.
As to the state of play in the battle between currency speculators and policy makers in Copenhagen, Gargour says he thinks “the Danish central bank bought themselves some time.” But the upshot is that the “ECB’s QE program will be a major force in deciding how the Danish krone battle plays out along with whether Greece stays in or leaves the euro area,” he said.
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