Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Short-term Stock Market Trend Analysis - 6th Mar 21
Intel Rocket Lake EXPLODE on Launch - 11th Gen CPU's RUN VERY HOT Bad Cinebench R20 Scores - 6th Mar 21
US & UK Head for Post Coronavirus Pandemic Lockdown Inflationary Economic BOOM - 6th Mar 21
FED Balance Sheet Current State - 5th Mar 21
The Global Vaccine Race Against Time and Variants - 5th Mar 21
US Treasury Yields Rally May Trigger A Crazy Ivan Event (Again) In Stock Market - 5th Mar 21
After Gold’s Slide, What Happens to Miners? - 5th Mar 21
Racism Pandemic Why UK Black and Asians NOT Getting Vaccinated - NHS Covid-19 BAME - 5th Mar 21
Get Ready for Inflation Mega-trend to Surge 2021 - 4th Mar 21
Stocks, Gold – Rebound or Dead Cat Bounce? - 4th Mar 21
The Top Technologies That Are Transforming the Casino Industry - 4th Mar 21
How to Get RICH Crypto Mining Bitcoin, Ethereum With NiceHash - 4th Mar 21
Coronavirus Pandemic Vaccines Indicator Current State - 3rd Mar 21
AI Tech Stocks Investing 2021 Buy Ratings, Levels and Valuations Explained - 3rd Mar 21
Stock Market Bull Trend in Jeopardy - 3rd Mar 21
New Global Reserve Currency? - 3rd Mar 21
Gold To Monetary Base Ratio Says No Hyperinflation - 3rd Mar 21
US Fed Grilled about Its Unsound Currency, Digital Currency Schemes - 3rd Mar 21
The Case Against Inflation - 3rd Mar 21
How to Start Crypto Mining Bitcoins, Ethereum with Your Desktop PC, Laptop with NiceHash - 3rd Mar 21
AI Tech Stocks Investing Portfolio Buying Levels and Valuations 2021 Explained - 2nd Mar 21
There’s A “Chip” Shortage: And TSMC Holds All The Cards - 2nd Mar 21
Why now might be a good time to buy gold and gold juniors - 2nd Mar 21
Silver Is Close To Something Big - 2nd Mar 21
Bitcoin: Let's Put 2 Heart-Pounding Price Drops into Perspective - 2nd Mar 21
Gold Stocks Spring Rally 2021 - 2nd Mar 21
US Housing Market Trend Forecast 2021 - 2nd Mar 21
Covid-19 Vaccinations US House Prices Trend Indicator 2021 - 2nd Mar 21
How blockchain technology will change the online casino - 2nd Mar 21
How Much PC RAM Memory is Good in 2021, 16gb, 32gb or 64gb? - 2nd Mar 21
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Danish Central Bank Stumbles with Its Currency Peg to the Euro

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



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.


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: (

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.

© 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 - 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