One more euro peg feels the heat as the fixed currency regime falls

First it was the Swiss, then the Czech Republic. Who’s next?

“It shows that countries with strong balances will continue to have a hard time keeping their currencies weak against the euro,” Arne Lohmann Rasmussen, head of fixed income research at Danske Bank A/S in Copenhagen, said by phone. “This will add to the upward pressure on the Danish krone.”

Though not as cataclysmic a shock to currency markets as Switzerland’s decision in January 2015 to abandon its euro cap, the Czech Republic’s move is a reminder that fighting market forces remains an uphill battle.

Denmark negatives are the large and growing current account surplus, which reached nearly 10% of GDP, creating demand for krone assets in order to cover its krone-denominated liabilities.

“First Switzerland dropped its ties to the euro, now the Czechs and it leaves Denmark as one of a few countries left with a pegged currency,” Rasmussen at Danske Bank said.

The economist doesn’t expect this to unleash a new speculative attack against Denmark’s currency regime like the one that followed Switzerland’s free float two years ago.

Source: Bloomberg

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