Banks battle speculation Denmark's euro peg at risk

[COPENHAGEN] Banks in Scandinavia are joining the Danish government in trying to persuade offshore investors that the Nordic country isn't about to copy Switzerland and drop its euro peg.

SEB AB, the Nordic region's largest currency trader, said it's been fielding calls from hedge funds wondering whether Denmark might be next after the Swiss National Bank shocked markets by exiting a three-year-old euro cap on Jan. 15. Economy Minister Morten Oestergaard a day later sought to silence doubts surrounding Denmark's currency peg, which he said remains "secure." Carl Hammer, chief currency strategist at SEB in Stockholm, says he's been trying to make clear to callers that it's "highly unlikely" Denmark will alter its exchange-rate regime.

Speculation Denmark will follow the SNB has forced bankers across Scandinavia to provide offshore investors with a crash course in Danish monetary policy. Hedge funds calling SEB, Danske Bank A/S and other Nordic banks have been urged to consider that Denmark's peg has existed for more than three decades and is backed by the European Central Bank, unlike the SNB's former system.

"Obviously, we think it's completely unrealistic" that Denmark will abandon its peg, Jan Stoerup Nielsen, an economist at Nordea Markets in Copenhagen, said by phone. "But that doesn't seem to be stopping the speculation." More Ammunition The day the SNB jettisoned a cap that had prevented the franc strengthening beyond 1.20 to the euro - a system that was presented as temporary back in 2011 - the Swiss currency's value surged by about 20 per cent. Denmark's krone, which is tied to the euro in a 2.25 per cent band around a target of 7.46038, appreciated to its strongest level since June 2012, based on closing prices. It was at 7.4310 at 12:15 p.m. today in Tokyo.

Denmark cut its benchmark deposit rate to minus 0.05 percent in September, compared with a low of minus 0.2 per cent at the height of Europe's debt crisis in July 2012. The nation's currency reserves are about 13 per cent below their peak of 514.4 billion kroner (US$80 billion) set 2 1/2 years ago. Central-bank Governor Lars Rohde said last month "there's still some way to go" before Denmark tests the limit of its monetary tool box.

"There's no point in speculating that the currency peg will fall," Arne Lohmann Rasmussen, head of fixed-income research at Danske in Copenhagen, said by phone. Denmark's biggest bank has also received calls from hedge funds seeking to profit from Danish interest-rate bets following the SNB's decision, he said. He's advising them to prepare for cuts.

Danske and Nordea both predict the central bank will lower borrowing costs on Jan. 22, after the ECB unveils the details of its bond-purchase program. Danske sees more easing after that, with the deposit rate dropping as low as minus 0.25 per cent.

Karsten Biltoft, a spokesman at the Danish central bank, declined to comment. The bank doesn't hold scheduled meetings and only adjusts reserves and rates to defend its euro peg.

"There are always rumors in the market that have nothing to do with reality," Klaus Rasmussen, chief economist at the Confederation of Danish Industry, said by phone. However, dropping the euro peg "would be totally silly," he said.

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