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Denmark Launches "Back-Door QE", Halts Treasury Issuance: Why DKKEUR Could Be The "Trade Of 2015"
While much has been said about last week's third in two weeks rate cut by the Danish Central Bank, one which brought the deposit rate to -0.50%, having previously cut it to -0.35% and -0.2% in the aftermath of the ECB Q€ and the SNB's abandoning of the Franc ceiling - the latest move of desperation to preserve the peg of the DKK to the plunging Euro and one which as reported previously has led to such strange financial abominations as negative interest rate mortgages - few noticed an even more important announcement by the Denmarks Nationalbank. On Friday the Danish central bank said it would halt all government bond issuance "until further notice"!
Suspension of government bond issuance
Upon the recommendation of Danmarks Nationalbank, the Ministry of Finance has decided to suspend the issuance of domestic and foreign bonds until further notice.
The large surplus on the government finances in 2014 implies that the sale of government bonds has been greater than the funding requirement. Given the foreign currency situation, it is no longer appropriate to reduce the issuance of government bonds over several years. The balance on the central government's account at Danmarks Nationalbank is more than sufficient to cover the financing requirement in 2015.
Danmarks Nationalbank has purchased foreign exchange in the market and reduced the monetary-policy interest rates. This has resulted in a widening of the negative spread between money market rates in Denmark and the euro area. The interest rate spreads for government bonds, however, have remained positive in the longer maturity segments.
Danmarks Nationalbank expects that stopping the issuance of government bonds will contribute to reducing the interest-rate spreads in the longer maturity segments and thereby limit the inflow of foreign exchange.
What Denmark just did, in addition to going further into NIRP, is to try and halt the appreciation of its currency by preventing more inflows not only on the short end but across the Treasury curve, and by halting supply of government bonds - the government had been due to issue 75 billion Danish crowns ($11 billion) worth of domestic debt to cover its 2015 financing needs - it hopes to not only lower long-end rates further, but to further weaken the Danish Krone, whose recent strength as a result of offshore inflows is the chief reason why many are increasingly saying the DEK peg to the EUR is in jeopardy.
And stated even simpler, paraphrasing Jan Storup Nielsen of Nordea, what Denmark has done is "back-door QE", because as some forget, there are two ways to push the price of an asset higher (thus pushing its yield lower in the case of a bond): increase demand, which is what conventional QE does when central banks buy bonds, or reduce supply. Which is what Denmark just did by completely cutting off all Treasury issuance "until further notice".
"We had not expected this," said Jes Asmussen, Chief Economist at Handelsbanken. "Everything that happens now is surprising. We had expected the central bank to start to use other instruments if the pressure on the crown continued, but we did not consider it would be this exactly."
But why, when with every passing day it is becoming clearer that the facade of central bank omnipotence is falling away, and central banks will, out of sheer desperation, do anything to delay the moments which as at least the SNB has admitted, is now inevitable?
Some more from Reuters:
While unexpected and unconventional, the Danish move underscores a commitment to its decades-long fixed currency policy and is aimed at weakening the crown to keep it within a tight range to the euro.
Pressure had been building on the crown since the Swiss National Bank abandoned its cap on Jan. 15, letting the franc surge against the euro, and the European Central Bank adopted a bond-buying scheme that helped weaken the euro more broadly.
"They have been successful with pushing the short rates down but not the longer rates and that has been the catalyst for continued inflow into the Danish asset market," Kamal Sharma, G10 FX Strategy Director at Bank of America Merrill Lynch, told Reuters.
"They are obviously looking at the full extent of the policy tool kit."
They sure are, and the central bank "now hopes that removing the option of buying new Danish government bonds will reduce demand for the crown while pushing investors towards existing longer-dated bonds, which would lower borrowing costs more broadly."
That's great, there is only one problem: what was until recently a "central bank put" has now become a "global speculator call" option. Why? Because the as the SNB just showed, there are very specific and defined limits to what banks with non-reserve currencies can do to defend their monetary policy. As a result, the Danmarks Nationalbank can thank its Swiss peers for not only crushing any hopes it may have of defending its currency peg, but essentially assuring that it will suffer massive losses on any and all strategies it implements to avoid a fate similar to that of the Swiss.
Which means one thing: in the aftermath of the EURCHF devastation, where virtually unilimited stops were triggered under 1.20 sending the pair some 30% lower in milliseconds as HFTs and other traders were carried out feet first, increasingly more speculators are betting that the "Trade of 2015" could be doing precisely the opposite of what the Danish central bank is hoping will happen: i.e., shorting the EURDKK (or going long the DKKEUR) in hopes that when the Danish peg finally does break, it too will result in long Swiss France-type profits.
Of course, those who bet against the Danish Central Bank also get the benefit of being hedged against further European risk implosion, because should the Greek situation deteriorate even more resulting in inflows into safe-haven currencies such as the CHF and DKK (now that Draghi will do everything in his power to crush the Euro), then the cost of defending the Danish peg will become insurmountable and Denmark will, like Switzerland, have no choice but to give all those who are now on the other side of the trade the profit that will make many speculators' year in the blink of an eye.
They say "don't fight the Fed", and in this case - at least until Janet Yellen capitulates on the Fed's stubborn insistence of pushing the USD every higher - this means explicitly to keep fighting the Danish Central Bank until its peg finally breaks.
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nirp can fix this /s
If not, then double NIRP and continue exponetially till it does.
Knowing the Danish Central Bank, they would probably do -20% NIRP or more if needed. The peg is really all they care about.
And everybody in Denmark remember the bad years from the breakdown of Bretton Woods until the peg was reinstated in 1982. It is hard to find Danish people who do not want the peg defended for almost any price.
The peg will not hold, just like EURCHF
Denmark can be the next Switzerland
seems to make alot more sense than printing your currency to death, but what do I know?
I'll wait till after G Soros finishes topping off his weekly blood change, and establishes his position...
I'll wait till after G Soros finishes topping off his weekly baby's blood change, and establishes his position...
FIFY
Just keep front-running the infinite QE.
All the central banks can do now is print and run debt up exponentially.
Zimbabwe and hockey stick debt economics.
aren't you concerned about a crowded exit door if it all fails quickly as it is very likely to?
With apologies to anyone who has lost a loved one in a night club fire, i am personally praying for a "crowded exit" event of epic proportions, with a huge fucking stack of charred bodies inside each and every exit.
"Everything that happens now (by central banks) is surprising." It is only a surprise if you have you nose up the ass of the investor sheep in front of you.
<Baa baa black (and blue) sheep.>
central banksters should die
No, QE means adding of reserves.
This is not backdoor QE
QE means changing value of 1 unit of money
No, ekm1 is right. Quantitative easing is, as the name suggest, increasing the quantity.
it is a side effect. You have less purchasing power after QE - it's main factor, so they get more. It is all about wealth distribution -> poor people must became more poor, so rich can became more rich.
I think you are bit of track. You are talking about the consequences of QE (and I agree with you), but the actual meaning of QE is to increase the quantity of money.
Definition from Bank of England: "Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy and return inflation to target."
http://www.bankofengland.co.uk/monetarypolicy/pages/qe/default.aspx
mde... "actual meaning" was created by banks for sheep. and you just give me a link from most corrupt bank of the world.
Do you think that they are telling lies about all market fraud but they are telling truth about definition of financial words?
FUCK NO!
You are member of ZH for 1 year and you are still believe them (banks).
USA people are hopeless sheep...no chance to survive
....
This is one definition they don't have to lie about. They print money...
In a zero interest environment, those new money seek yield and ends up in mainly stocks. Who own stocks? The rich does = they get richer.
It's no trickery.
And nobody are a sheep for knowing basic shit like this! -.-
you are sheep...
and you seem to lack the brainpower to understand what I'm saying...
"those who bet against the Danish Central Bank also get the benefit of being hedged against further European risk"
That's the kicker. Throwing a mantle of safety-seeking on Soros-like bets on the krone is an invitation for those bets to happen.
Well it is true that the Investor is having a negative yield, but Danish mortgage borrower has also to pay a margin (lending spread), between 0.45% and 1.52% depending on their LTV.
So no borrower is getting paid to borrow money!
https://translate.google.dk/translate?sl=da&tl=en&u=http%3A//rd.dk/PDF/P...
Desperate times call for desperate measures.
Denmark is not safe. The only haven currencies north of here are CAD, NOK and CHF. And then DEM.
welcome to the land of smoke and mirrors, aka, overcharge for tax, prevent citizens from raising livign standards and call it a "fiscal surplus".
hats off for the structural surplus in trade and on the fiscal side..has to be admired,i suspect that corruption is extremely low in denmark...
but ..... here is yet another example of the disconnect between a fair tax and a tax that in the short term, reduces everyone to the same level, but in the long term, reduces opportunity to people to live their life to the fullest.
does denmark have the answer for the greeks? will they end up with the same marginal tax rate of 70% via austerity in both places, but from massively different starting places?
From wiki (hich could be complete BS of course, but anyway) : http://en.wikipedia.org/wiki/Economy_of_Denmark
The worlds largest public sector (30% of the entire workforce on a full-time basis is financed by the world's highest taxes. A value added tax of 25% is levied on the sale of most goods and services (including groceries). The income tax in Denmark ranges from 37.4% to 63% progressively, levied on 4 out of 10 full-time employees.Such high rates mean that 1,010,000 Danes before the end of 2008 (44% of all full-time employees) will be paying a marginal income tax of 63% and a combined marginal tax of 70.9% resulting in warnings from organisations such as the OECD.
"hats off for the structural surplus in trade and on the fiscal side..has to be admired,i suspect that corruption is extremely low in denmark..."
Yep. Denmark is the least corrupt country in the world it would appear: http://www.transparency.org/cpi2014/results
If you start going backwards in time, you'll see that Denmark is also the least corrupt country in 2013, 2012, 2011 etc. Impressive actually.
It's perceived corruption though. I know it's the only way to measure it but there is a difference. It's what enterpreneurs think of their own country...
Plus yes I lived in Denmark and it is a hell of a tax burdened place. A 0.5 liter coke bottle in a supermarket sets you easily back 3 Dollars, they call it sugar tax, funny enough other European countries without the "sugar tax" are not necessarily more obese!
Sure they have taxes, but part of that story is also wages. You can afford a $3 Coke when a McD employee makes $20 an hour (Jesus freaking christ!)
https://translate.google.com/translate?sl=da&tl=en&js=y&prev=_t&hl=en&ie...
They may make 20 Dollars but half of it is eaten up by the state...and that's what matters, what's left in your wallet at the end of the day. So in other words you may be little better off than in the US with a way bigger social safety net (for now...we'll see how long they can keep it up).
Still, there are homeless people roaming the streets of Copenhagen so it's not all happy family life...
Fucking the country through the back door sounds more Greek than Danish.
I'd sooner take their word for it, they are cutting issuance because they don't need the money ... it's not an attempt at manipulating the currency, because it's fundamentally unable to do so. Playing with rates as a means to force inflation only works if the government runs a deficit.
The way to manipulate currency lower when government doesn't want to run a large enough deficit is trivial ... you print money, buy stuff other than domestic government bonds (internal private debt if you want bubbles, foreign currency/bonds if you want to throw money away and piss off your citizens, gold if you want to stop being invited to central banker parties ... it all just works). If it doesn't work, print more ... either you end up owning everything or it starts working.
When I was on an trip trough Denmark, a couple of years ago, I talked to a Danish Student who was working in the Camping store and ask him: ”Why don’t you guys just adapt the Euro when you are pegging to it all the time, what’s the use”? In Denmark Euro’s are accepted everywhere and you get Viking money with holes in it in return, maybe that’s the deal? The student answered “Just in case.”
Well let’s see if that “Just in case” moment will arrive for the Danish Krone at some point in time.