Denmark is ready to step up its currency interventions to stamp out any lingering speculation the central bank may be unable to defend its euro peg.
“We have plenty of kroner,” Karsten Biltoft, head of communications at the central bank in Copenhagen, said in a phone interview. “We have the necessary tools in terms of interest-rate changes and interventions, and we have a sufficient supply of Danish kroner.”
The comments follow the central bank's second rate cut in less than a week, with Governor Lars Rohde lowering the benchmark deposit rate to a record minus 0.35 percent today. That was more than expected by most economists surveyed by Bloomberg and followed a 15 basis-point cut on Monday. The easing comes as the European Central Bank (ECB) unveils an historic bond-purchase program.
Since Switzerland abandoned its euro peg on Jan. 15, the Danes have fought back conjecture they'll be next after the krone rose to its strongest against the euro in two and a half years. Denmark sold a record 50 billion kroner (US$7.7 billion) from Jan. 15-20 to weaken the currency, Svenska Handelsbanken AB estimates. That's equivalent to more than 10 percent of foreign reserves as of the end of December.
Trade flows suggest the central bank was also active in currency markets today, according to Handelsbanken. Biltoft declined to comment on any changes in currency reserves. The official data are due to be released on Feb. 3.
Danske Bank A/S and other Nordic banks say they have fielded calls from hedge funds the past week seeking guidance on how likely Denmark's euro peg is to survive. The central bank's decision to deliver unprecedented monetary stimulus this week shows how much the speculation has disrupted currency markets.
“It highlights the extraordinary situation we're in and that the central bank had to ramp up the reply to protect the peg,” Jens Naervig Pedersen, an economist at Danske, said by phone. “There may be more speculation in the market for additional rate cuts as the ECB delivered a very large QE program today that will add pressure on the Danish central bank.”
President Mario Draghi today pledged the ECB would buy government bonds as part of an asset-purchase program worth about 1.1 trillion euros ($1.3 trillion). The ECB also reduced the cost of its long-term loans to banks.
According to Handelsbanken, Denmark may need to resort to its own bond-purchase program should rate cuts and currency interventions prove inadequate.
Biltoft said the bank can rely on “interest rate changes and interventions, and those tools remain in the box.”
Denmark's central bank, government, and business leaders have all argued that speculators who take on the krone would also need to bet against the ECB, which backs Denmark's euro peg. According to the ECB's agreement, efforts to support the peg should “in principle be automatic and unlimited.”
Rohde's 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 well within about 1 percent of the target. The krone fell earlier today to as low as 7.4474, its weakest against the euro since Jan. 2. After the rate cut, the krone traded at 7.4425 at 4:44 p.m. in Copenhagen.
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