Hedges Against Danish Currency Event Persist Despite Warnings

One month after Denmark told its pension funds not to speculate against the krone, one of the industry’s biggest representatives says it has a hedge in place to ensure it doesn’t get caught on the wrong side of a currency market event.

PFA Pension, which has about $80 billion in assets under management, says it is better prepared for a sudden surge in the value of the krone now than it was in mid-January. Back then, Switzerland’s decision to abandon its currency cap drove the franc up about 20 percent. It also triggered a speculative attack on AAA-rated Denmark’s euro peg that lasted more than two months.

“For us it’s important to be able to handle such a Swiss franc event,” Chief Financial Officer Anders Damgaard said in a telephone interview. The fund’s interest rate exposure in kroner and euros is now “at a dosage so that we can handle any latent Swiss franc risk.”

Unlike Switzerland, Denmark fought back the speculators and kept its peg, winning praise from the International Monetary Fund in the process. But it wasn’t just offshore hedge funds doing the speculating. A lot of the pressure was coming from inside Denmark, more specifically, from its pension industry.

Last month, Business Minister Troels Lund Poulsen warned Denmark’s pension funds against maintaining hedges that would protect them should the nation’s euro peg collapse. “There’s no need to speculate against the krone, not even for the purposes of risk management,” he said in an interview. Poulsen said hedging was pointless because Denmark’s euro peg is “not up for discussion.”

While ATP, Denmark’s biggest pension fund, has publicly asserted its decision not to hedge against the euro peg, commercial funds in the country say they can’t afford not to, given the potential cost of a sudden krone appreciation.

Damgaard at PFA says the hedges ultimately protect pension savers. “We’ve done what we feel is necessary and therefore don’t need to build up a bigger krone position, should upward pressure on the krone resume,” he said.

The Copenhagen-based fund reported on Monday it lost about 100 million kroner ($15 million) on investments in the third quarter. PFA’s bond portfolio, worth more than 250 billion kroner, probably won’t provide much return in the next 12 months as rates are likely to remain unchanged, Damgaard said.

Economists say the prospect of more euro-zone stimulus means pressure on Denmark’s euro peg may grow again. Danske Bank says there’s now no chance Denmark will raise its benchmark deposit rate from minus 0.75 percent in the “foreseeable future” and even sees the central bank potentially resuming krone sales to defend the peg.

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