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Knuthsen: Danish central bank ready for a fight
The Danish central bank sold DKK 106.5 billion in January to prevent the Danish Krone from rising against the euro to which it is pegged. Saxo Bank’s Teis Knuthsen says the Danish central bank will continue to defend the euro peg with everything it’s got.
The Danish central bank may decide to intervene by cutting rates further to -0.75% from the current -0.5%. It has already cut rates three times in January and has temporarily stopped selling new bonds to investors to defend the peg to the euro.
Teis Knuthsen says that if the pressure continues, the levels to watch are first the informal EUR/DKK 7.4230 "soft" band, then the formal -2.25% band level at 7.2962. At that level, the ECB enters the equation with a bilateral intervention obligation under the ERM II.
Should that level prove to be too hard to defend, which is a very big if, Teis Knuthsen expects that the trading bands are widened to +/- 15%, as was the standard response during the EMS crises during the 90s.
Only if that level is impossible to hold will there be talk of abandoning the currency peg.
A decision to break the peg cannot be taken by the Danish central bank alone, but needs parliament backing, and since this is an election year in Denmark and since all politicians are in favour of the peg, Theis Knuthsen does not believe it will happen in 2015 – or at all.
02:18 minutes
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