Comments from Danish economist lead to sell off in krone

Currency speculators had been circling the Danish krone like sharks for some weeks now, expecting the Danish Central Bank to give up its expensive peg to to the Euro much like the Swiss National Bank did earlier this month, but it hasn’t happened yet. After hearing news today that capital controls are on the table in defending the krone, traders have apparently decided the central bank means business. As a result, many are closing their positions, which is causing the currency to sell off on Friday.

Danish-krone

Danish krone: Statement from head of Denmark’s Economic Council moved markets

Hans Jorgen Whitta-Jacobsen, head of Denmark’s Economic Council, an advisory body, said the euro currency peg was a “holy policy” in an interview with Reuters Friday.

He said Denmark’s central bank “can use tools it has already used to an unimaginably higher degree” to defend the peg. He went on to say that if these measures failed, then the central bank could resort to buying Danish securities or even stronger methods to defend the peg “to the last drop of blood.” Some traders apparently took this as a not-so-veiled reference to capital controls.

Denmark next after Switzerland?

Of note, Danish Central Bank Governor Lars Rohde has reduced deposit rate four times already this year, with current rates standing at -0.75 percent. The Swiss Central Bank is offering depositors that same rate, but as reported earlier, the SNB decided to give up its peg to the euro just over a month ago. The situation has led to much speculation that Denmark may be next to give up its currency peg. Analysts note that pressure on the krone is likely to continue to grow as ECB stimulus devalues the euro.

Perspective from Nomura currency research director

Jens Nordvig, managing director of currency research at Nomura Holdings, commented although he doesn’t know how “credible” the report on capital controls is, “the mere news that this is something that might be considered has caused a big reversal and I think that in itself might impact the psychology a lot.”