Which currency peg will collapse next?

Following the Swiss National Bank's shock decision, investors are asking which country will be next to unpeg their currency.


It'll take more than a Swiss shocker to rattle the Danes

At the start of this year, "investors thought there was next to no chance" that the Swiss central bank would stop artificially weakeningthe Swiss franc against the euro,says The Daily Telegraph's

Peter Spence. "They do not want to be burned a second time." So after last week's Swiss shocker, everyone is wondering which country might be next to abandon a long-held currency peg?

Denmark's currency peg is under pressure

The authorities are in a similar position to the Swiss. Concerned investors have moved money from euros to krone, which has forced the DNB to buy foreign currencies to prevent the krone from rising too far. When the European Central Bank (ECB) launched quantitative easing (QE) this week, the DNB had to slash interest rates twice and buy more foreign currency to keep the krone weak.

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Markets expect the DNB to be far more committed to the euro peg, which is over 30 years old the Swiss National Bank had only been holding the Swiss franc back for three. Moreover, the DNB's balance sheet has only swollen to 20% of GDP following its foreign-exchange purchases, compared to 70% in Switzerland. So there should be some way to go before fears over a bloated money supply or major future losses on currency holdings begin to rattle the Danes.

Even so, given the money flowing outof Europe, the DNB may have to bemore radical, says Capital Economics.It has already imitated unconventional ECB measures, such as generous three-year bank loans, but the Danes may yet have to turn to QE of their own.

Hong Kong's will endure

The main advantage is predictability and stability for businesses' costs and pricing: Hong Kong's economy is completely dependent on exports, so there would be huge uncertainty if the currency were to float freely. The link to the dollar, the world's reserve currency, has also shored up the financial sector during bouts of emerging-market panic, when capital tends to flee to the developed world.

These factors are widely deemed to outweigh any disadvantages, such as having to import US monetary policy. This problem is mitigated by Hong Kong's extremely flexible labour market, which has tempered both inflationary booms and slumps in demand.

but will China's?

A stronger currency fuels these trends. To make matters worse, major trading partners are printing money to make their exports more competitive. Japan's aggressive QE has been a particular headache, says Socit Gnrale's Albert Edwards and Europe's won't help either. Devaluation of the yuan is "an inevitability". Capital flows out of China suggest investors may agree.

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.