Swiss Franc Fiasco puts pressure on China and Danish currency cap schemes

Considering how much money was lost (and made) off the surprising Switzerland National Bank decision to let the Swiss franc (CHF) float against the euro, it is not surprising that speculation is now swirling in global financial markets regarding which currency or currencies will be allowed to float.

So far, the most intense chatter has been swirling around the Danish krone and the Chinese yuan. If you’re thinking of making some money off these currencies, you might want to hold off. Short-term indicators suggest that neither the Danish nor Chinese central banks will follow the lead of the SNB. To be sure, there’s pressure on these two currencies. The Danish krone shot up to its highest value against the euro since 2012. The Chinese yuan has registered more modest gains.

Danish banks were quick to squelch any premature talks of a euro peg removal. After all, they insist, the Danish krone has had its value capped by Denmark’s central bank for decades now. They don’t see things changing any time soon. Indeed, according to Danske, investors looking at the Danish krone should expect Denmark’s key rates to go down further in an effort to cool the Danish currency’s appreciation. The Danes already cut rates to negative .20 %. What’s at stake? Well, when any country’s currency becomes more valuable against benchmarks like the US dollar or the euro, that country’s exports become more expensive. This applies as much to Danish dairy and pork products as it does to Swiss chocolate and luxury watch exports. Of course, keeping a currency artificially depressed costs central banks a lot of money. Considering the amount of foreign exchange reserve Danish banks have, they can continue to buy up euros to keep the krone stable.

As far as China is concerned, there has been a drop in China’s total dollar reserves. However, its holdings hasn’t dropped to a level low enough that China’s central bank can no longer fight off threats to the yuan’s officially depressed value. If you are expecting China to unpeg its currency, you might have to wait quite a long time.