In June the head of Denmark’s Central Bank, Nils Bernstein, issued a warning regarding the Danish krone. He vocalised fears that the Danish currency was coming under extreme pressure due to investors searching for a safe haven in Europe, further warning that negative interest could result if the problem continued. Due to Denmark’s attractively narrow budget deficit investors discharged money into Danish bonds, which left the country struggling to maintain it’s narrow peg with the euro. Bernstein stated that ‘we like to keep the krone within a narrow band, half a percentage point or less. I think we have to tools to continue to do that, and if it is necessary to move into negative interest rate territory we will be ready for that’.
Despite this, it appears today that the appeal of the Danish krone hasn’t abated, appreciating to 7.4380 against the euro yesterday. It appears that not even German assets can rival the hedge against a euro-zone break up which Danish securities seem to provide.
Despite the July 5th rate cut, which saw the krone fall to its weakest value this year, it has strengthened once more, returning to almost the same level as before the Central Bank’s cuts. Yesterday saw 147 billion kroner deposited, and it has since been reported by Bloomberg that ‘The krone bet is making it harder for Denmark, which defends a peg to the euro, to fight off a capital influx as investors flee the euro zone’s deepening debt crisis […] Denmark is one of a small group of havens left in which investors feel safe. That may put unprecedented pressure on the currency peg as more investors pile in.’
Last month the debt management department of the central bank raised its 2012 debt sale target to 100 billion kroner, a rise of 33%, in order to take advantage of falling yields. This action may make the krone-bond market appeal more to investors which would further increase the pressure on the Danish currency.