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Sancho Panza

Crown Hits 8-Month Low As Denmark Raises Capital Controls Option

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Reuters 20/2/15

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Feb 20 (Reuters) - The Danish crown fell to its lowest in over eight months against the euro on Friday, after a government adviser said the country would be prepared to introduce capital controls to defend its currency peg, traders said.

Hans Jorgen Whitta-Jacobsen, the head of the Economic Council, told Reuters the central bank was willing to use extreme measures including capital controls to defend the peg to the euro "to the last drop of blood".

The crown fell to 7.4640 per euro, its lowest since early June 2014. The euro was last up 0.23 percent at 7.4615 crowns, a substantial move for a pair that usually trades in a 0-0.01 percent range, and on track for its biggest daily move since 1999, when the single currency was introduced.

"The news that capital controls are being considered was the main reason for the lower crown," said a trader at a Danish bank in Copenhagen. "It has been pretty volatile, but it is too soon to say that the upward pressure on the Danish crown is ebbing."

Currency flows into Denmark have picked up on speculation it may abandon the peg after Switzerland shocked markets by removing its franc/euro cap on Jan. 15.

Since then, the Danish central bank has intervened aggressively in the currency market and cut interest rates deep into negative territory. Its deposit rate of minus 0.75 percent is the same as the Swiss National Bank's.

Whitta-Jacobsen said there was no parallel between the Swiss and Danish cases, and two weeks ago central bank governor Lars Rohde told Reuters the bank would do "whatever it takes" to protect the fixed currency policy.

Under the Exchange Rate Mechanism (ERM II) set up with the launch of the single currency, Denmark agreed to keep the crown in a corridor of 2.25 percent either side of a central rate of 7.46038 to the euro. In practice, it has kept it within 0.50 percent.

It spent a record $15 billion intervening last month to keep the currency within the tight range.

Analysts said worries about Greece and an imminent European Central Bank bond purchase programme were likely to put further upward pressure on the crown.

In response, Denmark's central bank could intervene more aggressively, cut rates further or possibly launch its own quantitative easing (QE) programme of asset purchases.

ING said that, given Denmark's task of sending effectiveicon1.png signals to the market had become increasingly difficult, "we believe that QE may eventually be required." (Reporting by Anirban Nag; Editing by Robin Pomeroy and John Stonestreet)'

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Don't worry the Danish authorities are telling us that everything is fine.

Are capital controls a sign of desperation?

I think that the hint in this area which was released on Friday is exactly that. In case you have not read it here are the full developments. From Bloomberg today.

In reports by Reuters and the Telegraph, Hans Joergen Whitta-Jacobsen, the head of Denmark’s Economic Council, is quoted as saying the country could impose capital controls. Whitta-Jacobsen, who doesn’t advise the central bank, has since said he doesn’t think such a measure is necessary or likely.

Never believe anything until it is officially denied ( Otto Von Bismarck and Jim Hacker).

https://notayesmanseconomics.wordpress.com/2015/02/23/denmark-tries-to-face-its-currency-demons-but-what-about-its-household-debt/

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Remninbi.

They dont have an open capital a/c though and it has reached its limits.

Impossible trinity/trilemma. i.e. fixed exchange rates, monetary policy, free capital flows.

http://en.wikipedia.org/wiki/Impossible_trinity

The point is that you can't have it all: A country must pick two out of three. It can fix its exchange rate without emasculating its central bank, but only by maintaining controls on capital flows (like China today); it can leave capital movement free but retain monetary autonomy, but only by letting the exchange rate fluctuate (like Britain – or Canada); or it can choose to leave capital free and stabilize the currency, but only by abandoning any ability to adjust interest rates to fight inflation or recession (like Argentina today,[9] or for that matter most of Europe). ” Impossible trinity and Historical events

The combination of the three policies, Fixed Exchange Rate and Free Capital Flow and Independent Monetary Policy, is known to cause financial crisis. The Mexican peso crisis (1994–95), the 1997 Asian financial crisis (1997–98), and the Argentinean financial collapse (2001–02)[10] are often cited as examples.

Edited by R K

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What's the point of having an independent currency, if you try to peg it to another ? It's even more stupid than actually joining the euro. Presumably the Danish people or the Danish parliament have said they don't want to be part of the euro, so why is the Danish central bank subverting their wishes?

They dont have an open capital a/c though and it has reached its limits.

Impossible trinity/trilemma. i.e. fixed exchange rates, monetary policy, free capital flows.

You've been listening to that greek bloke.

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I know. The OP mentioned that Denmark was considering capital controls to help peg its currency to the Euro.

We were asked to come up with a country that had tried this.

I answered Renminbi.

Ah ok.

Edited by R K

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