Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20
China Recovered in Q2. Will the Red Dragon Sink Gold? - 23rd Jul 20
UK Covid19 MOT 6 Month Extensions Still Working Late July 2020? - 23rd Jul 20
How Did the Takeaway Apps Stocks Perform During the Lockdown? - 23rd Jul 20
US Stock Market Stalls Near A Double Peak - 23rd Jul 20
Parking at Lands End Car Park Cornwall - UK Holidays 2020 - 23rd Jul 20
Translating the Gold Index Signal into Gold Target - 23rd Jul 20
Weakness in commodity prices suggests a slowing economy - 23rd Jul 20
This Stock Market Stinks - But Not Why You May Think - 22nd Jul 20
Protracted G7 Economic Contraction – or Multiyear Global Depression - 22nd Jul 20
Gold and Oil: Be Aware of the "Spike" - 22nd Jul 20
US Online Casino Demographics: Who Plays Online For Money? - 22nd Jul 20
Machine Intelligence Quantum AI Stocks Mega-Trend Forecast 2020 to 2035! - 21st Jul 20
How to benefit from the big US Infrastructure push - 21st Jul 20
Gold and gold mining stocks are entering a strong seasonal phase - 21st Jul 20
Silver Eyes Key Breakout Levels as Inflation Heats Up - 21st Jul 20
Gold During Coronavirus Recession and Beyond - 21st Jul 20
US Election 2020: ‘A Major Bear Market of Political Decency’ - 21st Jul 20
Summertime Sizzle for Gold and Silver - 21st Jul 20
Overclockers UK Custom Built PC Review - Delivery and Unboxing (3) - 21st Jul 20
Will Coronavirus Vaccines Become a Bridge to Nowhere? - 20th Jul 20
Stock Market Time for Caution?  - 20th Jul 20
ClickTrades Review - The Importance of Dynamic Analysis and Educational Tools in Online Trading - 20th Jul 20
US Housing Market Collapse Second Phase Pending - 20th Jul 20
Capitalising on the AI Mega-trend - 20th Jul 20
Getting Started with Machine Learning - 20th Jul 20
Why Moores Law is NOT Dead! - 20th Jul 20
Help the Economy by Going Outside - 19th Jul 20
Stock Market Fantasy Finance: Follow the Money - 19th Jul 20
Did the Stock Market Bubble Just Pop? - 19th Jul 20
Quick Souring of the S&P 500 Stock Market Mood - 19th Jul 20
The Six-Year Jobs Recession - 19th Jul 20
Silver Demand Exploding! - 18th Jul 20
Tesco Scraps Covid Safe One Way Arrow Supermarket Shopping System - 18th Jul 20
The Rise of Online Pawnbroking - 17th Jul 20
Gold Rallies Together With U.S. Covid-19 Cases - 17th Jul 20
Gold & Silver Measured Moves - 17th Jul 20
The Bizarre Mathematics Of How Negative Interest Rates Create Stratospheric Profits - 17th Jul 20
From a Stocks Bull Market Far, Far Away, Virus Doomsday Scenerio! - 16th Jul 20
Fiscal Cliffs and the Self-destructing Treasury - 16th Jul 20
Dow Stock Market Crash Watch - Update - 16th Jul 20
Gold & Silver Gaining on US Dollar Weakness - 16th Jul 20
How to Find the Best Stocks to Invest In - 16th Jul 20
Overclockers UK Custom Build PC Review - 2. System Build Changes Communications - 16th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Danish Central Bank Stumbles with Its Currency Peg to the Euro

Currencies / Fiat Currency May 21, 2016 - 06:48 PM GMT

By: MISES

Currencies

Uffe Merrild writes: Denmark has been mentioned a few times during the American election campaign by Democrats who favor larger government and high redistribution of income, but also pundits like Paul Krugman have written about Denmark in his October 19th column at The New York Times. Fortunately most of his fiscal and general economic Keynesian points have been refuted in Episode 6 of Contra Krugman by Thomas Woods and Robert Murphy. But, some points regarding monetary policy need attention as well.


The Danish currency, the "krone," was initially pegged in 1982 to the powerful and relatively low-inflationary German deutsche mark. The reason to introduce the fixed exchange rate policy was to avoid high inflation, loose monetary policy and to restrain the Danish politicians who had by then brought the country near bankruptcy. The fixed exchange-rate policy earned such tremendous political success that it has been in effect for 34 years and even today no other policy option is seriously considered.

Since the creation of the ECB in 1999 and the end of the deutsche mark, the krone has been pegged to the ECB in charge of the euro.

Ever since the European debt crises of 2009 the ECB has held interest rates at record low levels, and for some years even negative interest rates. Thus when Professor Krugman claimed that Danish monetary policy is one of the problems with Denmark, he is correct, but for the wrong reasons. Interest rates have been massively suppressed since the financial crises of 2008 and especially since the debt crises the following year. Thus the Danish fixed exchange-rate policy today implements exactly the loose monetary policy which Denmark fled from in 1982. The image below shows the accumulation of foreign exchange-reserve and interest rate spread between Nationalbanken and ECB, which since 2010 has been negative.

Source here.

In order to maintain the currency peg it is imperative that Nationalbanken is considered by market participants as trustworthy and predictable, and every move in the rate of interest at ECB is usually promptly followed by announcements the same day from Nationalbanken. As long as the policy is trustworthy any deviation from the politically fixed central exchange rate will be suppressed partly by market participants in expectation that larger deviations will prompt Nationalbanken to intervene in the currency market.

Nationalbanken has a 34 year history of maintaining the currency peg. Thus they are convinced that their trustworthiness is excellent. However, at the introduction of the quantitative easing program of the ECB the Danish central bank stumbled.

Problems began 15th of January 2015, at 9.00 in the morning when the Swiss National Bank (SNB) announced an immediate discontinuation of the Swiss currency peg to the euro. SNB also cut the interest rate by 0.5pct from -0.25pct to -0.75pct. Within the first hour of the announcement, the Swiss franc soared more than 30pct but settled at 19pct increase in total at the end of the day.

Four days later, 19th of January, Nationalbanken cut its certificate of deposit rate by 0.15pct to -0.20 after days of intervention in the currency market. In the press release, nothing was mentioned of the actions of the SNB.

22th of January, one week after the action of the SNB, the ECB president, Mario Draghi, announced the €1.100 billion quantitative easing program.

The eyes of the market participants now turned to Denmark — the last currency still pegged to the euro. What would Nationalbanken do to mimic the new ECB policy?

Nationalbanken reduced its certificate of deposit rate of interest by merely 0.15pct, to -0.35pct. In the press release Nationalbanken mentioned only currency market intervention as the reason for the rate adjustment; it gave no indication of responding to the ECB program. On the 29th of January rates were cut again by 0.15pct. Still the press release mentioned nothing of the quantitative easing program or the action of the SNB. Currency market interventions were the only explanation for the rate adjustment.

During the month of January the foreign exchange-rate reserve held at Nationalbanken increased at a record pace of 106 billion DKK for that month (the former record was reached during the financial crises of 39.9 billion DKK during december 2008).

What turned out to be the last rate reduction was announced 5th of February as the rate was cut by 0.25pct reaching the final rate of -0.75pct (the same as SNB had originally moved to in a single announcement). This time around Nationalbanken finally mentioned the action of the SNB and the quantitative easing program of the ECB. In other words, it would take no less than 14 days before Nationalbanken would match the policy change by ECB, and 21 days if you count the shock which SNB had created.

In February the foreign exchange-rate reserve hit another record of 172 billion DKK in one month. The months which followed showed a slow decrease of the foreign exchange-reserve.

With January and February combined, a whopping 278 billion was added to the foreign exchange-reserve of Nationalbanken and the interest rate was kept at -0.75pct for the remainder of 2015 in order to reduce the foreign exchange-reserve to the pre-2015 level. The interest rate was not increased until 8th of January 2016 by a mere 0.1pct to -0.65pct.

Source: http://www.nationalbanken.dk/da/presse/Valutareserve%202%20bankdag/Foreign-exchange%20reserve.png

Starting from middle of 2014, Danish manufacturing industries for exports experienced a boom, which was amplified by the credit expansion following the QE program. The economy was growing so fast that it was believed that finally the effect of the financial crises was over. In fact, during May 2015 the government issued press releases saying that the recovery is on its way . This, however, turned into bust already during autumn of 2015 when the revised GDP figure for the third quarter revealed a shocking 0.4pct drop on its first revision. The second revision in March 2016 revised it down to -0.6. The 4th quarter showed a growth rate of 0.1pct after its first revision from originally 0.2, and if this number is revised further down in the next revision, Denmark could technically be back in recession. Throughout 2015 Nationalbanken released quarterly messages warning about the dangers of the low interest rate, calling for fiscal restraint and higher taxation to curtail the overall impact on the Danish economy.

Danish media has since dubbed the period as "the crises of the krone," the narrative being that Nationalbanken fought courageously against evil speculators. Internal investigations, however, revealed that two thirds of the demand for Danish currency had been driven by domestic market participants, among others Danish pension funds who were alarmed of the risk of losing a share of their investments in euros. This shows that even the Danes themselves lost confidence in Nationalbanken.

Source: (http://www.nationalbanken.dk/Lists/HarmonikaLibrary/Renteudvikling_EN.png)

The head of Nationalbanken, Lars Rohde, at his speech 25th of March revealed the reactionary stance taken by Nationalbanken. It did not even attempt to drive the expectations of the market in light of the unusual events during January 2015. Thus losses which could have been prevented by more prudent intervention by Nationalbanken — such as a larger initial rate cut — were instead amplified by the bank's use of the printing press.

This reminds me of what Hayek wrote in his 1976 "Choice in Currency":

It seems to me that if we could prevent governments from meddling with money, we would do more good than any government has ever done in this regard.

This episode is another example why governments and central banks do not act as they are alleged to do — their bureaucratic task was that of stabilizing the business cycle. Instead the recent actions of Nationalbanken caused greater fluctuations rather than suppressing them.

Uffe Merrild

Uffe Merrild has a master of science in electronics engineering from Aalborg University in Denmark. He has also written articles for the Danish newspaper Borsen.

http://mises.org

© 2016 Copyright Uffe Merrild - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules