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 event is looming over the markets. While recent surveys suggest that the likelihood of a Brexit 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.
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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.