Funds Who Speculated Against Danish Currency Told to Drop Hedgesby
Danish business minister says euro peg is non-negotiable
Governor Lars Rohde says flows into krone market will persist
Denmark’s government is warning its pension funds never to bet against their own currency regime again.
“There’s no need to speculate against the krone, not even for the purposes of risk management,” Business Minister Troels Lund Poulsen said Thursday in an e-mailed response to questions. The krone’s peg to the euro “is not up for discussion.”
Denmark’s fixed currency regime was attacked in January, after Switzerland’s decision to send its franc into a free float spurred conjecture the krone might be next. Unlike their Swiss counterparts, Danish policy makers prevailed and hedge funds and other speculators were beaten back. The government in Copenhagen said any continued bets against the krone peg would end in losses while the International Monetary Fund praised Denmark for its victory over markets.
But much of the pressure against AAA-rated Denmark’s currency regime came from within its borders, as pension funds with assets that far exceed the country’s gross domestic product built up hedges, just in case the peg collapsed.
While ATP, Denmark’s biggest pension fund, publicly asserted its decision not to hedge against the euro peg, commercial funds in the country said they couldn’t afford not to, given the risk of a sudden krone appreciation.
So far, the cost of those hedges has proved a waste of money. Central bank Governor Lars Rohde says currency markets are now normalizing and he’s adjusting monetary policy to match that shift. Most analysts tracking the bank anticipate it will raise its benchmark deposit rate from minus 0.75 percent before the end of the year.
“Presumably, a number of pension funds have learned their lesson,” Poulsen said.
But the very fact that Denmark’s three-decades-old currency peg could be exposed to an existential threat like the one it went through in January risks altering the way the country’s exchange-rate regime is viewed. Meanwhile, a bulging current-account surplus and growing pension savings pouring into kroner assets will continue to put pressure on the peg.
Rohde says we can expect capital flows into Danish kroner to continue. He also says he’s “aware” markets are anticipating negative policy rates through 2017.
“We will probably trend toward a smaller rate spread, or even negative spread, compared with rates outside Denmark,” Rohde told Bloomberg on Thursday.