Danish Krone Drops After Bets on Euro Peg Breaking Are Reversed

The Danish krone weakened as traders scaled back bets the nation would need to abandon its peg to the euro.

The currency slid after a report by Reuters said the central bank was willing to use capital controls if necessary to defend the peg, citing Hans Joergen Whitta-Jacobsen, the head of the Economic Council, an independent body of academics known as the “Wise Men.” In a follow up interview with Bloomberg, Whitta-Jacobsen said he has never advised the government or the central bank to impose capital controls.

The central bank would never unilaterally break the rules that Denmark abides by inside the European Union, he said. The earlier comment to other media was “a way of expressing that the central bank would go very far and do whatever it takes” to save the peg, he said.

The central bank, which has said it will do what is necessary to defend its currency regime, declined to comment on the initial report by Reuters.

“I won’t comment on the comments of others,” Karsten Biltoft, the bank’s head of communications, said. “They have to be responsible for their own words. When we say we will do whatever it takes to defend the krone’s peg to the euro, then that is obviously within the boundaries of what is legal.”

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 speculation Denmark may be next. Pressure on the krone is also growing as record European Central Bank stimulus devalues the euro.

Reversing Bets

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

Traders may be paring speculation the peg would fail, Carl Hammer, the chief foreign-exchange strategist at SEB AB, said by phone on Friday. “We have seen clients starting to express interest to take their bet the other way,” he said.

Danske Bank A/S, Denmark’s biggest lender, sees it as very unlikely the central bank would impose capital controls, according to Jens Naervig Pedersen, a senior analyst at the bank. As a member of the European Union the country can’t legally impose controls and restrictions are usually used to block funds from flowing out of the country, he said. Denmark is trying to stop capital flowing in.

The krone weakened 0.13 percent to 7.4543 per euro as of 3:46 p.m. in Copenhagen.

Jens Nordvig, managing director of currency research at Nomura Holdings Inc., said while he doesn’t know how “credible” the report on capital controls is “the mere news that this is something that might be considered has caused a big reversal and I think that in itself might impact the psychology a lot.”

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