Currencies in AAA Scandinavia Torn Apart as Brexit Now a Reality

Brexit: Winners and Losers

The currencies of Norway and Sweden sank while Denmark’s krone gained as traders struggled to grasp the consequences of the U.K.’s decision to exit the European Union.

With the “Leave” camp getting the most votes, Sweden’s krona lost more than 3 percent against the euro at one point. Norway’s krone sank as much as 3.3 percent, tracking movements in Brent crude, which fell more than 6 percent.

“That Denmark isn’t experiencing the same downward pressure is mainly due to the fixed-exchange rate policy,” said Soeren V. Kristensen, an economist at Sydbank. “The krone has been kept in check through a long period of upward pressure. This means many investors still think it’s at an attractive level, regardless of the fact that you run a slightly higher risk because of the low liquidity. It’s also, ultimately, an insurance against the scenario that will unfold if the whole euro-area explodes.”

Though all three Scandinavian countries carry AAA ratings, their currencies were treated very differently as results of the referendum became known. Denmark’s krone, which is pegged to the euro, gained the most since 2005 at one point.

Danish central bank Governor Lars Rohde said on Friday he will “do what is necessary to keep the exchange rate stable.”

“There are no reasons why the British decision to leave the EU should affect the exchange rate of the Danish krone against the euro,” he said in a statement. The central bank has “the tools we need.”

The bank is probably already intervening to fight krone demand by dumping Denmark’s currency on the market, according to Jacob Graven, the chief economist at Sydbank. The exchange rate movements suggest that the bank intervened through the night and it will probably continue to do so through the day, he said. The central bank of Switzerland, which abandoned its franc cap at the beginning of last year, has already said it intervened in its currency market.

In Denmark, “there’s an extra need for the central bank to signal that it’s in the market and ready to act swiftly,” Graven said. If interventions prove inadequate, the bank may follow up with a rate cut, bringing its benchmark deposit rate to minus 0.75 percent within the coming weeks, he said.

“Importantly, the market will turn its focus to the risk for the euro zone,” said Jens Naervig Pedersen, senior analyst at Danske Bank in Copenhagen. Danish pension funds still have a “significant” amount in un-hedged euro exposures, he said. “Uncertainty about the future of the euro zone may lead to a near-term surge in euro hedging by this sector. It may also spur a rise in foreign safe-haven demand for the krone.” Both factors will put pressure on the exchange rate, he said.

In Sweden, the initial selloff of the krona looks like an over-reaction, according to Nordea. But Britain’s decision to leave the EU has opened the door to a new set of risk scenarios, it said.

The Swedish currency, which traded as weak as 9.5902 against the euro during the night, will probably move back to 9.20 on a three-month horizon, and will “continue strengthening thereafter,” Nordea economists Andreas Wallstroem and Mikael Sarwe said in a note. “There is, however, a risk scenario where markets start speculating in Sweden being the next country to enter an exit discussion.” Though Nordea doesn’t expect this to happen, “it might still make sense” to hold Norwegian kroner instead of Swedish kronor, the analysts said.

“This is a midsummer’s nightmare,” said Maria Rankka, the head of Stockholm’s Chamber of Commerce. “Brexit is going to have far-reaching political, economic and security ramifications and create turmoil.”

Britain’s departure from the EU also opens the door to a degree of opportunism. Rankka said the government and Stockholm should “take advantage” of the situation to try to attract more businesses to the Swedish capital.

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