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(Bloomberg) -- As investors and traders work out how to adjust their portfolios after the Swiss National Bank jettisoned its euro cap yesterday, interest is turning to another country with a euro peg.
Danske Bank A/S says it has received several requests from hedge funds and offshore investors seeking to profit from the new climate through bets on Denmark. Though it’s a lost cause to speculate the Danes may abandon their euro peg, according to Danske, the bank is advising clients to gird for rate cuts into unprecedented negative territory.
“We’re experiencing an increase in interest from foreign investors, hedge funds, looking into whether there’s a play on Danish rate cuts, which we think there is,” Arne Lohmann Rasmussen, the Copenhagen-based head of fixed-income research at Denmark’s biggest bank, said today by phone.
Since the SNB’s surprise decision yesterday, which included a cut in its main rate to minus 0.75 percent from minus 0.25 percent, economists across Scandinavia have sent out notes predicting a response from the Danish central bank. Most see at least one rate cut this quarter as policy makers try to prevent the currency appreciating.
The Danish krone rose yesterday to its strongest against the euro since June 2012. By July of that year, the central bank had made its first foray ever into negative rates in an effort to fight off a capital influx into Denmark’s AAA-rated markets.
There are enough key differences between monetary policy in Denmark and Switzerland to quash any speculation the Nordic country might consider exiting its currency regime, Danske’s Rasmussen said.
The Swiss National Bank made clear back in September 2011 its euro cap was a temporary measure to deal with intense demand for the franc at the height of Europe’s debt crisis. Denmark’s euro peg, which is based on an accord with the European Central Bank, has existed in one form or another for more than three decades.
While there’s no point speculating against Denmark’s peg, Danske is advising clients to brace themselves for a series of rate cuts that will bring the central bank’s deposit rate as low as minus 0.25 percent from today’s minus 0.05 percent. The first cut, probably 10 basis points, is likely to come on Jan. 22, when the ECB is set to unveil the details of its bond-purchase program, Rasmussen said.
“It’s quite similar to back in 2012, when investors were looking to get out of the euro area,” he said.
Governor Lars Rohde said late last year Danish rates are under pressure as the ECB prepares to start its program of quantitative easing. His job is to target 7.46038 kroner per euro. While the bank’s official tolerance band is 2.25 percent, in practice it has stayed within about 1 percent of the target.
Rohde said in December that “there’s still some way to go” before Denmark tests the limit of its monetary tool box.
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