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.
