Denmark, Gold and the Euro.

The National Bank of Denmark Vows to Maintain the Krone Euro Peg.

Will Denmark Abandon the Krone Euro Peg?

“We have the necessary tools to defend the peg,” Karsten Biltoft, head of communications at the Danish National Bank.

The Swiss National Bank Cries “Uncle”.

Earlier this month, the Swiss National Bank (SNB) announced that it was ending its practice of maintaining a 1.2 to 1 Franc to Euro peg. The Swiss National Bank had maintained that peg by printing Francs in order to buy Euros. Since 2011, when the SNB began the practice, it has amassed hundreds of billions of Euros. The unexpected SNB announcement came just a week before the European Central Bank announced its highly anticipated first quantitative easing (QE) program.

The SNB knew that a European QE program would weaken the Euro further and would require the SNB to print even more Francs to maintain the peg, so it gave up. The SNB decision caused an immediate increase in the value of the Franc and corresponding immediate losses for those short the Swiss Franc. The full impact of the SNB decision to drop the Franc Euro peg has not yet been fully quantifiable or felt. (One small example of the collateral damage done by the SNB removing the peg: 60,000 Croatians who hold mortages indexed in Swiss Francs were crushed by the Franc’s surge and have been provided with government relief.)

It is certain, however, that defending the peg was an open ended project with open ended liabilities that had to end at some point.

Denmark – To Peg or Not To Peg?

Denmark is a member of the European Union but has not adopted the Euro as its currency. The Danish National Bank (DNB) continues to issue its own currency, the Krone. Like the SNB, the DNB has decided to peg its currency, the Krone to the Euro. The DNB has set the Kroner/Euro peg at about 7.46 to one.

Denmark faces the same dilemma the SNB faced earlier this month- how long can the peg be maintained? Supporting the Krone Euro peg just got more expensive with the SNB abandoning its Franc/Euro peg and the ECB announcing QE. According to Bloomberg, the DNB “may have sold as much as 100 billion kroner ($15.3 billion) in January to weaken the Krone.”

The Danish National Bank is putting on a brave face insisting that it can and will maintain the peg. Recall, however, just a week before the SNB abandoned the Franc Euro peg it was insisting that maintaining the peg was central to its policy and would continue.

“Enforcing the minimum exchange rate of 1.20 per euro is absolutely central to ensure adequate monetary conditions in Switzerland” was an oft repeated refrain of the SNB President, Thomas Jordan.

Denmark and Negative Interest Rates

In addition to selling Krone to weaken its currency, the DNB has been lowering its interest rate and taking it into negative territory. The DNB cut its benchmark rate three times in January. The deposit rate now stands at negative 0.5%.

Denmark is not Switzerland. Sure, it’s Not.

Will Denmark support the peg? The financial media insists that Denmark won’t pull a Switzerland -not that one would blame them if they did.

“The risk of the Danish central bank capitulating and letting the krone appreciate is very remote,” Andrew Kenningham, an economist at Capital Economics wrote in a research note.

Head of communications at the DNB Mr. Biltoft scoffed at the notion that the DNB might abandon the Krone/Euro peg. When asked if that was a possibility he responded: “Of course not.” “The comparison that is made between Denmark and Switzerland I think is somewhat off,” Biltoft said. “I don’t think you can make a comparison between the two cases.”

Mr Jordan’s assurances that maintaining the Franc Euro peg was absolutely essential are conjured when reading Mr. Biltoft’s assertion. After the SNB abandoned the Franc Euro peg, Mr. Jordan said “you can only end a policy like this by surprise. It is not something you can debate for weeks”.

As such, don’t expect the DNB to telegraph any policy change re the Kroner/Euro peg if they decide to abandon it.

Gold vs. the Danish Krone

Danish Gold Repatriation?

According to the DNB, they hold 66.5 tons of gold, most of it stored in London at the Bank of England. To date Denmark has not requested to have its gold returned to Copenhagen, but is content to keep it stored in England knowing there is a Bank of England app that allows them (and anyone else) to take a virtual tour of the bank’s vault to view their gold.

A Danish gold repatriation request may be the only signal provided should the DNB decide to abandon the Krone/Franc peg.