Danish Krone Peg Collapse Amid Brexit is a Possibility: Danske Bank

Inadvertent consequences across the financial markets are a frequent occurrence. Such was the case of the decision of the Swiss National Bank to abandon its foreign exchange rate floor under the EUR/CHF that it had introduced in 2011. Following the sharp appreciation of the Swiss franc, other currency pegs in Europe seemed threatened in January 2015.

Come May 2016 and another Black Swan Black Swan A Black Swan event is most commonly associated with an unforeseen calamity or event. In its most basic form, this event results in disastrous consequences for multiple parties, markets, or individuals and are characterized as extraordinarily rare in frequency, yet are seemingly predictable in retrospect. In the foreign exchange space, the most noteworthy of these events in recent memory was the Swiss National Bank (SNB) crisis which roiled currency markets back on January 15, 2015.During this in A Black Swan event is most commonly associated with an unforeseen calamity or event. In its most basic form, this event results in disastrous consequences for multiple parties, markets, or individuals and are characterized as extraordinarily rare in frequency, yet are seemingly predictable in retrospect. In the foreign exchange space, the most noteworthy of these events in recent memory was the Swiss National Bank (SNB) crisis which roiled currency markets back on January 15, 2015.During this in Read this Term event is looming over the markets. While recent surveys suggest that the likelihood of a Brexit Brexit Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades.The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minis Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades.The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minis Read this Term is less than previously feared, financial markets remain unpredictable in their nature.

Danske Bank has highlighted substantial risks for the Danish krone currency peg if the United Kingdom votes to leave the European Union. A Brexit event would have unintended consequences across a variety of financial markets and according to the researchers at the Danish bank, the Danish krone peg is one of the key indicators of stress in Europe.

With the possibility of a Brexit, foreign exchange and CFDs brokers have to identify the most vulnerable assets on their books and hedge their exposure appropriately. Not only the Danish krone peg is under potential threat but also index futures contracts and even Asian currency pegs.

Post-SNB Pressure on the Danish Krone Returning

With the pressure on the currency peg increasing in the aftermath of the Swiss National Bank’s move last year, Brexit has also driven the exchange rate of the Danish krone to the higher bound.

According to bookmaker Betfair, throughout the past couple of weeks, the implied probability of an exit from the European Union has declined from 31.7 per cent to 20.4 per cent.

Denmark’s biggest lender Danske is joined by Nordea Bank in the call that policymakers will have to respond drastically to prospective financial markets turmoil resulting from Brexit. In light of its prognosis, Danske is advising its clients to put in place protections to hedge their exposure to foreign exchange risks.

Peg Collapse not Immediate Danger

Commenting in a research note on the matter, Danske Bank’s senior analyst Jens Pedersen explained that the Danish krone is supported by the upward pressure on short-term money-market interest rates.

According to him, the demand for Denmark’s currency is driven by “safe-haven demand on the back of the uncertainty regarding potential spillover effects on the euro from the pending referendum on EU membership in the U.K.”

That said, Danske is not predicting an immediate collapse, rather, the company is advising its clients to hedge their exposure with positions that can be rolled forward 8 to 10 years into the future.