11 Feb 2015
Short EUR/DKK as a hedge against Euro breakup? – Nomura
FXStreet (Barcelona) - The Research Team at Nomura comments on the DKK peg stability, and further adds that demand for short EUR/DKK is increasing as a hedge option against a probable euro break as Grexit risks loom.
Key Quotes
“Many investors missed the opportunity to make a sizeable gain on long CHF exposure in January, and they are afraid to make the same mistake around the DKK peg.”
“In addition, some view short EUR/DKK as a hedge against a Euro breakup, and such a hedge is in increasing demand given news from Greece.”
“At first glance, the circumstances in Switzerland and Denmark are similar. Both tried to peg their currencies to a depreciating Euro and tried to maintain the peg through a combination of negative interest rates and significant FX intervention.”
“However, the situations for the two countries are also significant in their differences. The peg in Denmark has widespread support, while the peg in Switzerland was politically more controversial. The peg in Switzerland was always meant to be a temporary measure, which exposed the SNB to eventual losses on the FX reserves.”
“In Denmark, the peg is a long-standing policy, and the Danish central bank never intends to realize any capital losses on the FX reserves.”
“In the end, Denmark has the political and economic setup needed to weather the storm better than Switzerland did, in our view.”
“It may be a tough fight, however, and large-scale intervention and additional rate cuts may be needed to maintain the fixed FX rate. Moreover, if very large inflows persist, there could eventually be financial stability issues arising.”
Key Quotes
“Many investors missed the opportunity to make a sizeable gain on long CHF exposure in January, and they are afraid to make the same mistake around the DKK peg.”
“In addition, some view short EUR/DKK as a hedge against a Euro breakup, and such a hedge is in increasing demand given news from Greece.”
“At first glance, the circumstances in Switzerland and Denmark are similar. Both tried to peg their currencies to a depreciating Euro and tried to maintain the peg through a combination of negative interest rates and significant FX intervention.”
“However, the situations for the two countries are also significant in their differences. The peg in Denmark has widespread support, while the peg in Switzerland was politically more controversial. The peg in Switzerland was always meant to be a temporary measure, which exposed the SNB to eventual losses on the FX reserves.”
“In Denmark, the peg is a long-standing policy, and the Danish central bank never intends to realize any capital losses on the FX reserves.”
“In the end, Denmark has the political and economic setup needed to weather the storm better than Switzerland did, in our view.”
“It may be a tough fight, however, and large-scale intervention and additional rate cuts may be needed to maintain the fixed FX rate. Moreover, if very large inflows persist, there could eventually be financial stability issues arising.”