(Bloomberg) -- First it was the Swiss, then the Czech Republic. Who's next?
In Denmark, the country's biggest bank says Thursday's decision to abandon the cap on the Czech koruna is putting more pressure on the Danish krone, which is pegged to the euro in a tight band.
“It shows that countries with strong balances will continue to have a hard time keeping their currencies weak against the euro,” Arne Lohmann Rasmussen, head of fixed income research at Danske Bank A/S in Copenhagen, said by phone. “This will add to the upward pressure on the Danish krone.”
Read more: Czechs end Swiss-style currency cap
The krone rose again on Friday, reaching its strongest against the euro since March 20, according to closing-price data. One euro cost 7.4351 kroner as of 9:14 a.m. in Copenhagen. The central bank targets 7.46038 within a 2.25 percent band. In practice, it has tended to keep swings within 0.1 percent.
Though not as cataclysmic a shock to currency markets as Switzerland's decision in January 2015 to abandon its euro cap, the Czech Republic's move is a reminder that fighting market forces remains an uphill battle.
In Denmark's favor are:
- A history of winning against speculators every time the central bank is tested
- The central bank's declaration it's willing to print an unlimited amount of kroner to flood the market and drive speculators away
- Denmark's currency regime is a bilateral peg agreed with the ECB
Working against Denmark are:
- Its large and growing current-account surplus, which is approaching 10 percent of GDP
- A huge pension industry that dwarfs GDP, creating demand for krone assets in order to cover its krone-denominated liabilities
- Bouts of aggressive market opportunism
“First Switzerland dropped its ties to the euro, now the Czechs and it leaves Denmark as one of a few countries left with a pegged currency,” Rasmussen at Danske Bank said.
Read more: Foreign investors flood into Danish mortgage bonds
The economist doesn't expect this to unleash a new speculative attack against Denmark's currency regime like the one that followed Switzerland's free float two years ago.
But “there will be more investors who are now looking at Denmark as a AAA-rated country where you get a bit more interest on your long-dated papers than in the euro zone and at the same time, you buy a Black Swan hedge in case the French election ends up hurting the euro zone,” he said.
To contact the reporter on this story: Christian Wienberg in Copenhagen at cwienberg@bloomberg.net.
To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
