Banks bet speculators to be shamed as Denmark weakens krone

[COPENHAGEN] Denmark's biggest banks predict Governor Lars Rohde will cut the benchmark deposit rate far enough below zero on Thursday to drive the krone down and speculators away.

After a week of fielding calls from hedge funds asking whether Denmark will follow Switzerland and abandon its euro peg, economists at Danske Bank A/S, Nordea Bank AB, Jyske Bank A/S and Svenska Handelsbanken AB, Sydbank A/S all say the central bank's actions today will probably put a stop to the noise.

"Things are likely to settle down," Peter Bojsen Jakobsen, an economist at Sydbank, said by phone. "I won't rule out further action from the Danish central bank during the quarter, but I'm not expecting it."

Since the Swiss abandoned their peg on Jan 15, Denmark has fought back speculation it will be next after its krone rose to the strongest against the euro in 2 1/2 years.

The central bank, government and business executives have all delivered a similar message, arguing that speculators who take on the krone would also need to bet against the European Central Bank, which backs Denmark's peg.

Guarding Peg The ECB's Executive Board has proposed buying 50 billion euros (US$58 billion) of bonds a month through the end of 2016, according to two euro-area central-bank officials who have seen the document.

After delivering a surprise 15 basis point rate cut on Monday, Denmark is set to lower its benchmark deposit rate by another 10 basis points on Thursday, bringing it to minus 0.3 per cent, Danske, Handelsbanken, Nordea, Sydbank and Jyske say.

"They need to show they're guarding the peg," Jens Naervig Pedersen, an economist at Danske Bank, said by phone. "If the Swiss National Bank hadn't moved, they could have delayed cutting the rate a bit, but now they'll need to show they're protecting the peg."

Mr Rohde's job is to target 7.46038 kroner per euro. While the bank's official tolerance band is 2.25 per cent, in practice it has stayed within about 1 per cent of the target.

Mr Rohde's spokesman, Karsten Biltoft, said on Monday the central bank has "the necessary tools" to defend the peg.

Asked whether Denmark could ever consider abandoning its currency regime, he said, "Of course not."

BLOOMBERG