20 Mar 2015
Will the Danish peg survive? – Goldman Sachs
FXStreet (Barcelona) - With the Danish peg under severe pressure since mid-January 2015, the Goldman Sachs Team believe that the Danish central bank might continue to vigorously defend its DKK peg.
Key Quotes
“To prevent DKK appreciation, the Danish central bank made FX interventions in January/February amounting in total to 15% of Danish GDP. This increased the central bank’s FX reserves to 40% of GDP. To discourage capital inflows, the bank cut its deposit rate by 70bp to -0.75%.”
“We take the view that the Danish central bank will continue to vigorously defend the peg. There is no question that it is operationally capable of doing so: It could cut its deposit rate (more deeply into negative territory), if necessary.”
“And, more importantly, FX interventions by the Danish central bank can, at least in principle, be infinite as: (i) the FX interventions are profitable (central bank FX reserves earn a higher return than the DKK deposits issued to fund the purchase of those reserves), and (ii) the DKK peg is permanent in nature, rendering potential revaluation-loss considerations by the central bank of little relevance.”
“Ultimately, we see the Danish central bank’s willingness to take on balance sheet risk in the defence of the peg as high, owing to the peg’s fundamental political support.”
Key Quotes
“To prevent DKK appreciation, the Danish central bank made FX interventions in January/February amounting in total to 15% of Danish GDP. This increased the central bank’s FX reserves to 40% of GDP. To discourage capital inflows, the bank cut its deposit rate by 70bp to -0.75%.”
“We take the view that the Danish central bank will continue to vigorously defend the peg. There is no question that it is operationally capable of doing so: It could cut its deposit rate (more deeply into negative territory), if necessary.”
“And, more importantly, FX interventions by the Danish central bank can, at least in principle, be infinite as: (i) the FX interventions are profitable (central bank FX reserves earn a higher return than the DKK deposits issued to fund the purchase of those reserves), and (ii) the DKK peg is permanent in nature, rendering potential revaluation-loss considerations by the central bank of little relevance.”
“Ultimately, we see the Danish central bank’s willingness to take on balance sheet risk in the defence of the peg as high, owing to the peg’s fundamental political support.”