At the start of the week I decided to focus my attention on major currencies and the volatile climate they were exhibiting as well as the troubling situation most developed nation's central bankers are finding themselves in trying to reverse the years of expansive monetary policy measures that has produced ill-effects that are seemingly weighing down economic activity.
The monetary noose that hangs around these nations necks seems to be getting tighter with every consecutive week that passes as the trickling news flow slowly starts to build up momentum to turn this cash flush fanfare into a nightmare on Elm street.
Being aware that there are a number of countries mostly in Europe that implemented such extreme measures of sinking interest rates below zero before the ECB and BOJ joined the foray, it would make sense to find the nation that's had these measures in place the longest and assess whether there's been a level of success.
As luck would have it I found a handful of stories about the Danmark Nationalbank who currently holds the longest reign of interest rates in negative territory with the ongoing recording setting feat sitting at four years!!!
The funniest part is only last week Governor Lars Rohde cautioned those who wished to speculate against the central bank saying officials would unpack whatever measures were necessary to stop the Danish Krone from appreciating against the Euro. The reason for such a strong message is revealed in the fact that the DNB has placed a peg on the level it wants to protect the Krone from surpassing against the Euro.
Tough talking didn't prevent a scare from happening early last year when the Swiss National Bank, who itself had a floor in place against the Euro, abruptly removed the peg in an unexpected move that created a toxic currency whirlwind of volatility that reverberated throughout the entire financial market. At the time, the DNB defended its own peg bravely after speculation became rife that it could follow suit with the SNB and remove the floor.
However once things settled down the Krone began depreciating, helping it avoid the inevitable ascent the DNB hoped to ward off but this time it decided to use foreign currency
reserves it had built up over years since negative interest rates hadn't assisted its objectives up until that point.
It's imperative to understand that the reason the SNB removed the floor against the Euro is because the ECB was speculated to and has now begun a protracted quantitative easing program that would would sponge up all the foreign reserves the SNB had available which had fast depleted once speculation grew. The issue came in the nature of the communication between the SNB president Thomas Jordan and the public with the perceived level of trust towards the central bank amongst the highest out of all its peers.
Jordan's timing of the removal of the peg was left too late in the game and miscommunicated improperly that direct fault can be pointed at him and his colleagues for creating mass panic that left financial markets reeling.
If common sense prevails, the market would've realised that the mammoth monetary stimulus currently being effected by the ECB dwarfs all the monetary programs being meted out by Nordic countries including that of Denmark. These nations are simply too small to compete against monetary stimulus of this size and scale which means their local currencies get brushed aside by the waves of crisis-fearing money making its way to their shores in an effort to shelter wealth.
This probably explains the markets skittish sentiment after Lars Rohde made comments refusing to concede his effort to the market and allow a free hand to decide appropriate equilibrium. It translates into the possibility of seeing another SNB type shock descending into market sphere's, adding risk at a time when major currency volatility is at its height.
The worrying foreign currency reserve drain that's occurred over the last year surely puts the writing on the wall for DNB officials or is this yet another case of attempting to cover up the flaws of a failed process that isn't working and probably won't be the saving grace of the world burdened with troubled economic times.
