Speculator Mania for Danish Krone Makes No Sense, OECD Says

Updated on

The obsession with holding kroner that has gripped speculators since mid-January is hard to explain given the state of Denmark’s economy.

That’s according to the Organization for Economic Cooperation and Development.

“It’s actually strange that there’s such a pressure for appreciation,” Catherine Mann, the Paris-based group’s chief economist, said in an interview in Copenhagen. “The economy isn’t that strong, it’s not very different from the euro area, so demand for appreciation shouldn’t be that strong.”

Denmark has spent the past 6 1/2 weeks fighting a capital influx that’s threatened to drive up the krone beyond the confines of its peg to the euro. Central bank Governor Lars Rohde has responded by pledging limitless resources to defend Denmark’s currency regime, which has been under pressure since Switzerland abandoned its ties to the euro on Jan. 15.

But coveting the currency of AAA-rated Denmark the way investors do the Swiss franc makes little sense, according to the OECD. The Danish economy is still 3 percent smaller than it was in 2007, the year before its property bubble burst and a recession started that stifled consumer demand in the half-decade that followed.

“It leaves you wondering how markets approach such a situation,” Mann said. “Whether they’re just trying to get as much from it as they can.”

Strong Krone?

It’s not the first time questions have been raised about the sense of assuming Denmark’s krone would soar if it weren’t pegged to the euro. SEB AB, Scandinavia’s biggest currency trader, said in early February the Danish krone should trade closer to 8 against the euro than the 7.46038 the central bank targets.

SEB argues that, while Denmark has current-account and trade surpluses, there’s little else to explain its stronger exchange rate against the euro than Sweden’s. One euro bought about 9.35 Swedish kronor and about 7.46 Danish kroner as of 10:41 a.m. local time. On Jan. 15, the Danish krone closed at about 7.43 to the euro.

There are some signs that Rohde’s efforts to deter investors are working. Four cuts this year have brought the benchmark deposit rate to a record low of minus 0.75 percent. Nordea Bank AB estimates the central bank dumped a record $26 billion in kroner in February alone, and Denmark has suspended government bond sales to stop investors hoarding krone assets. And though Treasury bill auctions haven’t officially been shelved, all bids since February have been rejected.

Pressure Easing

PFA A/S, Denmark’s biggest commercial pension fund, said last week that the measures have undermined the appeal of krone-denominated assets. A day later, London-based hedge fund LNG Capital said it had exited its bet against the krone’s peg to the euro.

“All in all, it looks like Danish rates will stay at historically low levels for some time yet,” Rasmus Pilegaard, senior strategist at PFA in Copenhagen, said on Friday. “There are indications that pressure on the Danish krone has eased somewhat.”