Is the Danish central bank creating currency risk?

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.  

Don't bet against #Denmark’s central bank https://t.co/cDZcwbmWm2 via @PeterLevring pic.twitter.com/s2rm7Fkk1u

— Zoe Schneeweiss (@ZSchneeweiss) May 13, 2016

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.

Currency intervention an imminent risk in Denmark, Nordea says https://t.co/DT8mJYPwQ0 via @CHRWIENBERG pic.twitter.com/mo4WDNLMKJ

— Bloomberg Markets (@markets) May 20, 2016

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.

#Denmark Foreign Reserves have been shrinking for some months sending worries over whether the peg will be remove pic.twitter.com/atKWg44xsH

— Quinton Mendes (@CadeTradeR) May 20, 2016

Travelling Technicals with Global Indices: Swiss Market Index

With a modest population of just over eight million people, Switzerland's position in the world order remains amongst the top mostly because of the political neutrality the country holds as well as the loosely regulated financial sector that encourages plentiful capital inflows due to its image of being a tax haven for the wealthy. 

Nestled in the heart of Europe, the Swiss are known for their excellence in chocolates and cheeses but more notably their innovative ability in the fields of manufacturing and pharmaceuticals that play a vital role in ensuring a healthy trade balance that's the envy of other nations. The country has however suffered from protracted periods of appreciation in the Swiss Franc, it's local currency with the severity of sentiment having been tested in January 2015 when the Swiss National Bank president Thomas Jordan announced a surprise decision to remove a floor that had been placed on the Franc against the Euro stopping it from appreciating further.   

Besides this event, the nation has also found itself in the grasps of a battle to produce meaningful inflation following the lack of demand both locally and internationally which has eventually led the SNB to drop interest rates below zero (one of the first nations to do so) with imminent signs of continuing on this path as the latest economic data indicates the country is far from where it would like to be. 

The SIX Swiss Exchange in Zurich plays host to some recognisable multinational companies some of which are; 

• Glencore 
• Compagnie Financiere Richemont SA
• Credit Suisse Group
• Nestle SA
• UBS Group
• Swatch Group SA
• Novartis AG
• Zurich Insurance Group 

Let's get to the charts: 

Quarterly

An appealing chart at quick glance considering the volatile price moves that have been experience over the past decade. Although it must be noted that the timeframe is a quarterly, there remains distinct technical features that provide us with clues to what we can expect to see happen in the future. 

The index shot up to 9 500 during the year of 2007 followed by the slump most world markets went through occurring between 2008 and 2009. I've touched on this extensively saying that the similarity of technical damage incurred by market indices from the same event does stress the significance of its doing. The previous highs leading up to the bubble bursting played a pivotal role in dictating the direction of world stocks by providing overhead resistance that's stopped most indices from marching ahead and at the same time denting confidence when considering investment into equities. 

I made the resistance line of 9 500 bold because it marked an important level traders and investors needed to pass in order to be satisfied that the current bull run that's been in place since 2012 will remain intact and energetic enough to settle the index at higher levels. This hasn't materialised with the resultant action being the retest of the line of polarity highlighted in red. 

Again, I saw this as a crucial point in the bull run where it represented a step higher in its pursuit to the resistance level and higher.  The level of 7 500 was broken during 2008 but overcome five years later with the bulls setting themselves up for a good run. However observing the price action you'll notice the tails to the bottom were small then began expanding as the price got closer to 9 500. This would indicate heightened volatility at elevated levels spelling uncertainty. 

The area of interest will take place at 7 500, so don't be surprised if this level is well contested in the second half of the year. Depending on the sentiment world markets take on, it could prove either distressful or supportive of price going forward. 

Monthly

I've introduced a 50 SMA to clarify the bias price currently holds with the observation being critical in the tipping point of this chart. Price sits below the moving average having broken down in recent months. The moving average does however exhibit a positive gradient making things hard for traders to decipher the direction. 

Although the technical formation isn't perfectly aligned, the basis of the shape does help us understand what price action may be suggesting. The flat floor together with an upward slope along the highs building up to 9 500 confirms the volatile nature the quarterly chart had indicated, telling us that the level of uncertainty in this area remains high. 

The support between 8 200-8 300 has broken downward with price desperately trying to hold onto newly formed resistance. The RSI has generated a favourable indication for the bears by showing the momentum shifting below the 50 level after last being there in 2012. This suggests that the momentum from the sellers is much stronger than it had been while they were fighting for territory in the area between 8 200-9 500. 

 

The setup seems perfectly positioned for the trade with good risk to reward ratios.