Buying the Danish crown against the euro has become popular among hedge funds and other speculative investors looking to protect themselves against a break-up of the single currency, though some warn it could be a risky bet. Denmark is not in the eurozone but its central bank, the Nationalbank, intervenes to keep the crown pegged within a band against the euro.
Many assume that if the eurozone broke up the Nationalbank would switch the crown's peg to a new German currency, which would probably be the euro's strongest successor.
"This has been a favoured trade for quite a while among some hedge funds. There have been waves when people have focused on the Danish crown and talk about the Danish currency being a safe-haven currency," said Niels Christensen, currency strategist at Nordea in Copenhagen.
Denmark has a history of maintaining exchange rate targets. The crown was pegged to sterling in the late 1930s, to the dollar-based Bretton Woods system after World War Two and to the German mark from the 1970s. In a referendum in 2000, Danes voted against adopting the euro but Denmark has retained a peg to the single currency via the ERM II exchange rate mechanism.
"If there was a breakdown of the euro then Denmark would probably very quickly peg its currency to the new German currency," Christensen said. He added there was broad agreement among politicians and economists that pegging the currency has been beneficial to the Danish economy. Mostly investors conduct these trades by buying euro put/Danish crown call options - bets the euro will fall - with a maturity of one to two years. The crown's peg ensures low implied volatility, suggesting the market expects very little movement in the euro/crown rate.
"With the peg between the currencies the volatility is very low and therefore it's cheap to use that cross as an insurance against a break-up of the euro," said Richard Falkenhall, currency strategist at SEB in Stockholm.
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