Danske Bank Clients Told to Scale Back Hedges on Pegged Krone

Denmark’s biggest bank is telling pension fund clients there’s now less need to hedge for an appreciation in the krone after a series of verbal and market interventions by the central bank showed that the country’s euro peg is unassailable.

Britain’s vote to exit the European Union didn’t have the shock effect on Denmark’s currency regime that some had feared. Though the central bank was forced to intervene in the market, repeated warnings from Governor Lars Rohde that currency speculation is futile appear to have worked, according to Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank A/S in Copenhagen.

“In the spring, ahead of the referendum, we clearly had an overweight hedging recommendation given the event risk,” Rasmussen told Bloomberg. “Today, the event risk is gone and the spot-level for EURDKK is lower. Hence, we now recommend a more neutral stance according to the benchmark of the hedger.”

Denmark’s pension and investment savings industry represents about $600 billion in funds, which is roughly twice the country’s gross domestic product. In the past, krone hedges inside the industry have put pressure on the peg, prompting warnings from the central bank.

Danske says the security pension funds get from a krone hedge is now “less necessary." The central bank has already demonstrated its ability to prevail against a speculative attack. Unlike Switzerland, Denmark held on to its euro peg at the beginning of last year. ATP, the country’s biggest pension fund, has also emerged as a powerful ally by questioning the sense of betting against a peg that’s proven its staying power through multiple crises.

Rohde has described any bets against Denmark’s peg as a losing trade, after the central bank’s accounts showed it made money while speculators and funds placing hedges lost out last year.

“They probably learnt their lesson, or they just saw a clear signal from the central bank” that betting against it “was not a good idea,” Rasmussen said.

But with the so-called Brexit "event risk" now over, investors wondering how to hedge should watch “the underlying flows and long-term effects" of continued stimulus from the European Central Bank, he said. The broader monetary policy context and Denmark’s substantial current account surplus mean demand for kroner is likely to continue.

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