Two Danish pension funds have revealed they made profits of DKK500m (€67m) or more on the financial markets in the first two months of this year from the effects of the wave of currency speculation on the Danish krone.
Labour-market pension fund Sampension and PKA, which runs three labour-market pension funds, made quick gains of DKK500m and DKK600m, respectively, in January and February as the Danish central bank (Danish National Bank) fought off upwards pressure on the krone partly by dropping some interest rates into negative territory.
The krone had attracted heavy buying from speculators after the Swiss National Bank surprised markets in January by abandoning the Swiss franc’s peg to the euro.
The European Central Bank’s (ECB) announcement that it would start large-scale quantitative easing later this year also created buying pressure for krone.
The Danish National Bank has since said two-thirds of the krone buying in January and February came from domestic pension funds, insurers, investment funds and companies seeking to hedge different kinds of euro assets by buying kroner in the form of futures.
Kasper Ullegård, head of fixed income at Sampension, told IPE: “We had previously established a relative position where we would benefit if Danish interest rates fell more than euro rates (…) and that’s what happened when the krone came under pressure.”
In the second half of 2013 and the first half of 2014, Sampension had bought Danish government bonds and sold euro-denominated, high-quality government bonds, issued by countries such as Germany, Finland and the Netherlands.
It had also been buying Danish mortgage bonds and selling euro-denominated, AAA-rated covered bonds.
As well as this, in the derivatives markets, it had been buying receive fixed, pay floating in krone interest rate swaps (IRS) and pay fixed, receive floating in euro interest rate swaps – matching maturity for the krone and euro swaps.
“When we did all this, we had no idea that was going to happen,” said Ullegård. “We thought the Danish economy was sound, so there was no way interest rates would exceed euro rates on a prolonged basis – we would argue that the opposite should be true.”
Since Denmark operates with a significant current account surplus, with capital flowing into Denmark every day, that money needs to be diverted with low comparative interest rates set by the central bank, he said.
Effectively, Sampension was betting on Danish interest rates being lower than euro rates, and when that scenario became exaggeratedly the case, for a phase at least, it closed positions to take the profit.
“This was more than what we hoped for,” Ullegård said.
Although he believes there could yet be another wave of speculation pushing the krone, Sampension firmly believes the Danish National Bank will succeed in maintaining the peg.
“It won’t break because it’s institutional – it is clearly the primary goal of Danish central bank policy,” he said.
Meanwhile, Pension fund administrator PKA, which runs three labour-market pension funds, also made a large profit in the first two months of this year on the foreign exchange markets as a result of the sudden drop in krone interest rates.
The company hedges its currency exposure using forex forwards, effectively selling dollars and buying Danish krone, to avoid having to pay a high capital charge due to regulatory rules.
Inger Huus Pedersen, head of fixed income at PKA, told IPE: “In January, obviously some in the market thought the krone should appreciate.
“When you have krone forwards, and Danish interest rates fall, you make money.”
Huus Pedersen and her team reacted to the changed market conditions with a tactical move, changing the forex hedges into contracts that hedged euro, rather than the domestic currency, against dollars.
The regulation allows pension funds to hedge foreign currency exposure against either kroner or partly euro.
“The net result was that we earned around DKK600m on the transactions, some of it realised and some not,” she said.
Huus Pedersen said PKA would not have switched its hedging from kroner to euro unless it was absolutely certain the krone would not be detached from its peg to the euro.
“The law allows pension funds to hold so much euro unhedged assets, that this is an implicit confirmation of the peg to the euro,” she said.