Why Denmark won’t ‘pull a Switzerland’

A Danish 2 kroner coin
Chris Ratcliffe | Bloomberg | Getty Images
A Danish 2 kroner coin

In the wake of Switzerland's surprise move to unpeg its franc from the euro, speculators have turned their sights on Denmark's currency peg, but the Danes aren't likely to follow the Swiss, analysts said.

"The risk of the Danish central bank capitulating and letting the krone appreciate is very remote," Andrew Kenningham, an economist at Capital Economics, said in a note last week.

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Markets were caught off guard earlier this month when the Swiss National Bank (SNB) canceled its over three-year-old policy pegging the exchange rate of the euro buying 1.20 Swiss francs. The SNB had aimed to prevent a strong franc from causing deflation and hurting corporate earnings. The SNB also cut interest rates deeper into negative territory, by 50 basis points to negative 0.75 percent, in an effort to help cushion the blow.

Night and day

The SNB's move came amid expectations - since realized - that the European Central Bank (ECB) would introduce a quantitative easing program, which would further weaken the euro.

But unlike the SNB's relatively young peg, Denmark has tied its currency to neighbors' for over 30 years -- first to Germany's mark and later to the euro, Kenningham noted. The euro has been pegged to within a few percent of 7.46 krone to the euro.

In addition, Denmark's central bank hasn't seen its balance sheet surge as the SNB's has as, unlike the Swiss franc, the krone tends to fly under the radar of safe-haven flows, he said.

Others also noted that Denmark's AAA credit rating doesn't mean its krone stacks up as a safety play like Switzerland's franc or Japan's yen.

"The Swiss financial system (including the Swiss banks) is far larger and more attractive as a safe haven," Jan Randolph, director of sovereign risk at IHS Economics, said via email. "It's easy to park your billions in Swiss bank accounts with few questions asked in times of risk aversion."

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In addition, there just aren't enough krone-denominated assets for investors to chase, he noted.

"It's not as attractive as a safe haven because of the smaller, shallow, and less liquid markets if you need to get out quickly," he said.

Increased intervention

Not all traders appear to have gotten the message, with the Danish central bank, the Danmarks Nationalbank, stepping up its intervention to keep the currency in line with the peg over the past week.

"The Nationalbank has been buying significant amounts of foreign currency (its typical first line of defense to weaken the currency)," Capital Economics said in a note Friday. But even after it cut interest rates deeper into negative territory for a second time last week -- with its deposit rate now at negative 0.35 percent -- the krone is still likely to face upward pressure as the ECB begins buying assets, it said.

"If the pressure on the krone is sustained, the Nationalbank may well have to follow the ECB and conduct quantitative easing of its own," Capital Economics said.

But if maintaining a peg to the euro means aping the ECB and more than 60 percent of the country's trade is with the euro zone, why not just skip having a peg and join the common currency?

It's largely because Denmark wants to keep control of its interest rates, IHS' Randolph noted.

"Like the U.K., Denmark has large household and mortgage debt and needs to manage that for popular and political reasons," he said. In addition, Denmark doesn't want to commit its government budget toward bailouts of other euro zone countries, he noted.

Never say never

To be sure, just because Denmark's peg is seen as secure doesn't mean investors should consider those chickens already counted.

"As we have seen in the SNB case [earlier this month], and before that the Malaysian ringgit peg (1998), China renminbi depeg (2005), and Malaysian ringgit depeg (2005), among others, central bank policy shifts remain a great uncertainty," UOB said in a note Friday. "It is a reminder to take steps to protect and hedge one's investments."

--Mia Tahara-Stubbs contributed to this article.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1