Following on from Switzerland’s removal of its currency ceiling, fears are mounting that the Danish central bank may soon follow suit, sending further shockwaves through the forex market.
Forex brokers, global banks and traders can only watch with bated breath, waiting to see whether the country removes the fixed exchange rate policy that’s been in place since the 1930s.
In the aftermath of the chaos caused by the Swiss National Bank’s (SNB’s) shock decision to remove its currency ceiling, investors are now beginning to ask whether Denmark could soon do the same.
The move by the SNB means that Denmark is the last major economy in the world to peg its currency to the euro.
Although such a move would mark the first time since the 1930s that Denmark was without a fixed exchange rate policy, this has not allayed investors’ fears. Most financial players failed to apprehend the possibility of Switzerland acting in this manner before it did so, leaving those with a vested interest in fear of being burned a second time.
Indeed, commentators have pointed to the similarities between the two nations and the economic pressures they’re faced with. “DNB (Danish National Bank) appears under similar pressure to the Swiss National Bank,” according to a Capital Economics’ spokesman.
Like the Swiss franc, many investors in the Danish currency have turned to it in the belief that it’s a ‘safe currency’, especially with the prospect of quantitative easing on the horizon. This has placed “upward pressure on its peg to the euro”, and the fallout from such an event promises to be as catastrophic as the Swiss disaster.
Although Denmark’s economy minister has sought to allay fears, stating that the peg remains “secure”, this has done little to placate investors.
These fears on the part of investors are unsurprising, despite the assurances coming from within Denmark. Too many traders were caught unawares by the decision of the SNB and, as its chief, Thomas Jordan, has commented, “you can only end a policy like this by surprise. It is not something you can debate for weeks.”
The impact of this decision by the Swiss was exaggerated by a widespread investor belief that the franc, like the krone, was an incredibly safe and stable currency. People fear that if one of the world’s most reliable currencies can experience such a dramatic fluctuation, then so can another.
This belief left many investors severely out of pocket, decimating hedge funds and leaving the future of many of the world’s largest financial institutions uncertain. It meant that the move was almost completely unanticipated, which majorly impacted the ‘short’ positions adopted by the many who believed the ceiling had become a permanent feature of SNB policy.
The list of victims of the Swiss crisis was undiscerning, and included amongst it some of the world’s most successful forex investors, banks and brokers. The indiscriminate nature of the chaos is what truly has investors doubting the security of their holdings going forwards.
Although it seems certain that this air of nervousness will pervade for a long time to come, only time will tell whether the Danes are truly committed to their statement that the euro peg will be upheld.