Brexit Threat to AAA World Has Funds Reviewing Danish Peg Hedges

  • PFA is hedging against Brexit’s fallout on the Danish euro peg
  • Danish central bank says any bets against the peg will fail

The man overseeing about $83 billion in Danish pension savings says the threat of a British exit from the European Union is now simply too big to ignore.

Christian Lage, chief investment officer at PFA in Copenhagen, says Denmark’s biggest commercial pension fund is using similar currency hedges to guard against the krone fallout of a so-called Brexit to those used when Switzerland jettisoned its euro cap.

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Though Denmark, unlike Switzerland, was able to defend its euro peg after resorting to extreme monetary measures, the experience was existential enough to alter the way institutional investors view the sanctity of the country’s currency regime. Denmark now faces a repeat of that crisis as Britain’s June 23 vote on EU membership looms, Lage said.

“If the vote and subsequent talks lead to a very negative outcome, we could see a massive inflow into Danish kroner,” Lage said in an interview. “And we need to manage our risk accordingly.”

Brexit Polling

Bloomberg’s latest poll of polls shows the "leave" and "remain" camps tied at 41 percent, but calculates a 77.7 percent probability that the U.K. will still be an EU member after the June referendum.

QuickTake Will Britain Leave the EU?

Banks in Denmark have started advising investors on how to position themselves for a possible Brexit. According to Nykredit, a British exit “could force another Danish rate cut.”

“In the short run, the risk remains that the upward pressure on the krone could become so great that the central bank would have to respond to cutting the deposit rate” back down to minus 0.75 percent, representing a reversal of a 10 basis point January rate increase.

But confidence in Denmark’s peg is currently “sky high,” so the risks of an extreme scenario are limited, according to Tore Stramer, an economist at Nykredit in Copenhagen.

More Negative?

At Handelsbanken, Copenhagen-based chief economist Jes Asmussen has warned that a Brexit would potentially force Denmark to go lower than minus 0.75 percent. Though that isn’t his main scenario, it would mark a step into a no-man’s land of monetary policy that even the Swiss haven’t explored. Nordea’s chief economist for Denmark, Helge Pedersen, says an obvious scenario in the event of a British exit from the EU would be a mass retreat by investors into so-called safe haven assets such as the krone.

While a Brexit is not PFA’s main assumption, the tail risk is significant enough to make the hedge worthwhile, Lage said. The Danish krone’s peg to the euro will probably hold, “but the entire system will be tested just like the Swiss did,” he said. What’s more, the hedge is cheap, adding to its appeal in the face of the risk, he said.

But the step remains controversial as Denmark’s central bank explicitly warns funds betting against the peg that they’re on the wrong side of a losing trade. The bank made about 2 billion kroner ($305 million) fighting speculators, it said in March.

Other funds have been persuaded by the central bank’s guarantee. At Sampension, which oversees about $38 billion in Danish pension savings, the head of fixed income, Kasper Ullegaard, says there’s no plan to put in place a krone hedge.

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