Speculators Can’t Force Denmark to Exit Peg, Callesen Says

The deputy governor of Denmark’s central bank, Per Callesen, said speculators won’t force the country to abandon its peg to the euro.

“We do not consider any exit from this path, irrespective of what currency speculators believe,” Callesen said at an event at the London School of Economics on Wednesday. “Speculative attacks have happened, they will go on” in the future, he said.

The comments follow signs that demand for the krone is building, forcing the central bank to accelerate record foreign-currency purchases in an effort to defend the peg. Net flow data published on Wednesday revealed the central bank sold $2.7 billion in kroner in a single day, according to estimates provided by Svenska Handelsbanken AB. That follows Tuesday data, which showed $2.1 billion in kroner were dumped on the market by the bank.

Governor Lars Rohde has cut Denmark’s deposit rate four times this year, bringing it to a record low of minus 0.75 percent. That matches the level in Switzerland, where a Jan. 15 decision to abandon ties to the euro fanned conjecture Denmark may be next. Pressure on the krone is also growing as record European Central Bank stimulus devalues the euro.

Reserves Tool

According to Danske Bank A/S, Denmark’s biggest lender, the central bank has probably ended its rate cutting cycle out of concern that further cuts would put too much of a strain on the financial industry. The main tool from now on is likely to be the foreign-currency reserves, Jens Naervig Pedersen, a senior analyst at Danske, said by phone.

Callesen said he’s “pretty sure” the deposit rate can be cut even lower. “We don’t know how low we can go,” he said.

The list of drawbacks, were Denmark to abandon its currency regime, is long, according to the central bank. A potential revaluation of the krone’s exchange rate that would follow an exit from the peg would open the door to a series of large fluctuations, Callesen said. Pressure on the peg is more likely to build at times when government policy creates imbalances, he said.

“We probably more frequently than most central banks point to fiscal policy needs and give advice,” Callesen said.

Rohde has dismissed bets against the Danish peg as a lost cause. He says abandoning the nation’s three-decades-old currency regime is “unthinkable” and has pledged to do whatever it takes to save it.

Carlsberg, ATP

The message is backed by some of Denmark’s biggest investors and its largest corporations. Pension fund ATP says it hasn’t bothered building a hedge in case the euro peg collapses because the scenario is so improbable. Carlsberg A/S Chief Financial Officer Joern P. Jensen says the same.

“We have a very clear expectation that Denmark will maintain its very successful fixed-rate policy toward the euro,” Jensen said in an interview. “We would struggle to see the point of dropping it.”

Besides record currency interventions and rate cuts, measures to date to save the peg have included suspending government bond issuance. Rohde says he’s also ready to consider purchasing government and mortgage bonds to drive down yields and undermine the appeal of Danish assets.

Callesen said on Wednesday there’s little likelihood the bank will embark on a quantitative easing program. Yields are “extremely low already,” he said. Pedersen said Danske Bank also sees a Danish QE scenario as unlikely.

Tolerance Band

The central bank’s sole mandate is to defend the krone’s peg to the euro. It targets a rate of 7.46038 kroner per euro inside a 2.25 percent band. In practice, it doesn’t allow swings greater than 0.5 percent. The bank can change rates at any time and doesn’t publish a schedule for meetings, though most rate changes have been announced on Thursdays at 4 p.m. local time.

Forward-rate contracts suggest some investors are betting Rohde may allow bigger moves inside the tolerance band. The 12-month EURDKK contract traded at 7.367 on Wednesday, more than 1 percent stronger than the target and stronger than any closing rate since 1999.

The central bank is “extremely reluctant” to use more of the tolerance band, Callesen said. Doing so would only “invite speculation,” he said.

Before it's here, it's on the Bloomberg Terminal.