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Danish pension funds confident krone/euro peg will hold

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The Danish krone is unlikely to become decoupled from the euro in the way the Swiss franc recently parted company from the pan-European currency despite today’s expected decision by the European Central Bank (ECB) to initiate a wide-scale quantitative easing (QE) programme, according to Danish pension funds.

However, one suggested the Danish currency may end up fluctuating more widely against the euro than is now the case.

Michael Kjærbye-Thygesen, senior portfolio manager of fixed income at Sampension, said he believed the Danish krone’s euro peg would hold.

“It has been in place since 1982, and the Danish central bank will do all in its power to maintain the peg,” he said.

This would mean interventions and possibly further interest rate cuts, he said, adding that Danish rates were still attractive compared with core euro rates.

Kjærbye-Thygesen said he believed the market was now pricing in purchases by ECB of government bonds of the order of €500bln, as the central bank aimed to bring its balance sheet up by around €1trn.

“We expect the ECB to meet expectations with an announcement of €500bn balance sheet expansion from the purchases but will keep the door open for further purchases, should that be required,” he told IPE.

Sampension holds a large part of its bond portfolio in euro government bonds, as well as Danish government bonds, Kjærbye-Thygesen said, adding that the pension fund expected these holdings to benefit from today’s announcement. 

“We are not moving bond risk to the US, as there is a clear decoupling between the euro area and the US, both on the macro economy and the reaction of central banks,” he said.

Sampension takes the view that the US Fed will hike rates around the middle of this year.

Similarly, pensions provider SEB Pension sees no chance at all that the Danish currency will become uncoupled from the euro.

Jorn Styczen, CIO at SEB Pension in Denmark, said: “There is zero probability that Denmark is going to break the link with the euro.”

He said he thought there was general misunderstanding on the Danish krone and the position of the Danish central bank (Danmarks Nationalbank). 

“The situation of the Danish central bank does not resemble the Swiss National Bank (SNB) at all,” Styczen said, referring to the SNB’s decision earlier this month to cut the peg between the Swiss franc and the euro.

While the SNB’s peg to the euro was a relatively recent policy action, Styczen said the Danish krone had been pegged to the euro for many years. 

“It is the regime Danish investors are working with,” he said. “The euro is incorporated in all the legislation we have.”

If the Danish krone were to go the way of the Swiss franc, it would be a major change to the structure of the Danish economy, he said.

“Based on this, we are not changing our euro-hedging strategy,” he said.

SEB Pension’s assets had been positioned in anticipation of euro-wide QE for some time, he said, with the overall portfolio overweight in equities, long in US-dollar holdings and long in bonds.

“In general, we have been positioned for the ECB to act for many months,” Styczen said.

Elsewhere, Lars Lyhne, head of asset allocation at labour-market scheme PenSam, pointed out that, technically at least, there was a lot of flexibility in the Danish krone’s link to the euro.

“We tend to forget the krone is allowed to move 15% without leaving the peg,” he said.

“It was conceived in the days of the ERM (exchange-rate mechanism), where currency movements were more common at this level,” he said.

That said, the Danish central bank would be defending the plus or minus 2.25% band against the euro, he said.

“There is a lot of political will to maintain this peg, and the Danish perspective is very different from the Swiss one,” Lyhne said.

If the Danish krone were to fluctuate more widely against the euro, Lyhne said PenSam’s investments would suffer no direct impact because they were currency hedged.

“But there would be an indirect impact, as a 15% swing would hurt the Danish equity market, so there would be second-round effects on us,” he said.

“We are overweight equities compared with our benchmark, and one of the reasons for that is our expectations of more expansionary monetary policy.”

Separately, KLP Kapitalforvaltning, the asset management arm of Norwegian public sector pension fund KLP, said it was making no special preparations for the possible consequences of QE.

Lars Mouland, portfolio manager at the division, said the fund believed market expectations of an ECB announcement would be met.

“We expect some volatility in the next couple of days, but then things will continue,” he said.

“The ECB will buy enough to meet the €3trn balance sheet within a couple of years.”

He predicted national central banks would buy the majority of that amount.

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