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Speculation Battle Royale: Will Denmark Depeg From The Euro?

Published: February 6, 2015
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Source: CNBC

Editor's Note: Germany's Die Welt says: "Detachment of the Danish crown would be blow to euro"

"They've thrown the proverbial policy toolkit at defending the euro-danish peg," Kamal Sharma, a foreign currency strategist at Bank of America Merrill Lynch, told CNBC Thursday. "They will continue to intervene with the possibility of further rate cuts, even the tail risk of the recalibration of the trading range."

Bets that the krone will rise are building. Some of the flows have headed for Denmark's stock market, with Danish-focused mutual funds and exchange-traded fund (ETFs) seeing $230 million in inflows over the past six weeks, according to data from Jefferies.

Slings and arrows

Barclays analysts called it "the slings and arrows of market speculation."

It bears similarities to the speculative attacks that led Thailand to abandon the baht's peg to the dollar in the late 1990s -- the "Lehman-moment" of the Asian Financial Crisis. Denmark's peg is set for the krone to trade within a 2.25 percent band of 7.46038 to the euro, although it has been holding it in a 0.5 percent band. Although the euro has recovered somewhat this week, it has fallen around 17 percent against the greenback since the beginning of 2014.

There are clear differences with the attack on the baht. Thailand, faced with massive speculative bets that the baht would fall, nearly depleted its foreign exchange reserves trying to support its currency. AAA-rated Denmark, however, is trying to weaken, not strengthen, the krone, meaning it will be printing money and amassing foreign reserves.

Of course, just because there's a speculative attack on a currency doesn't mean it will succeed.
Counterattack

Denmark's policy makers certainly aren't rolling over for the market.

"We have an unlimited supply of our own currency, the kroner. And we are going to do whatever it takes to defend the peg," Lars Rohde, Denmark's central bank governor, told CNBC. 

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