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Danish Krone : Euro Relationship Havoc

Image (Copenhagen): ExplorerBob

The corona crisis impact has hurt many small currencies as reported here at Fyggex.com, but they vary of course depending on their status. Earlier we wrote about Switzerland as a safe haven, Norway & Russia being victims of oil prices and Sweden as floating small currency being at risk. If we continue to look into Nordic small open economies,, how does it look for Denmark and the Danish Krone? Something Rotten in Denmark?

Danish krone buyers historical perspective

Denmark may look as if it would be a small country, but one must remember that it also covers the world’s biggest island, Greenland and the smaller Faroe Islands, all of them using the same currency, the Danish krone.

Image: Arno Vesterholm

The Kingdom of Denmark has many currencies, but the formal Danish krone (from the word Crown) was introduced first in 1619. It was bound to the Gold standard and later against other powerful countries’ currencies such as Germanys.

After the epoque of the great Vikings crusades, Denmark has been less violent and yet a very internationally oriented export driven country. Simply put, the Danes have been selling more abroad than buying back.

As the Eurozone is so close with Germany as a direct landline neighbor, good relations matter. Therefore, it makes perfect sense to have the Danish currency bound to the largest European trade area, as it gives stability with currency fluctuations, more predictable business and less risk to companies trade with the Eurozone. Having said that, the Krone has not been pegged to other currencies. Volatility against the currencies of the USA, Norway, Sweden, Australia or China remains as the everyday headache of the exporters.

Today, similarly to Sweden, Denmark is part of the European union, but both countries have decided to keep their own currencies and are not part of the Euro. Some commentators feel that it means they would be having a weakest possible observer seat at the decision-making table without any decision-making power nor influence.

Before the Corona / Covid-19 crisis travel restrictions, the pricey Danish currency meant significant travel and shopping over the bridge to the more affordable Sweden. Many were also choosing to live in Swedish city of Malmö/Skåne region and work in Copenhagen to max out the beneficial currency situation. Obviously that was a dream situation for Swedish local trade.

Image(the-oresund-bridge): Daniel Karlsson

Everything changed, new brave world?

As explained, the Danish Krone, is bound (also called pegged) to the Euro valuation. That relation is fixed, while the neighbor Sweden goes up and down based on investors demand. While Swedish or Norwegian export companies can enjoy weaker currency and hence less price sensitive exports potential, Danes are blocked.

Traditionally Central banks’ high interest rates correspond to higher currency value, but currency markets are complex and many aspects impact the value. The Corona crisis global economic slowdown with local lockdowns and mass lay-offs are not really motivating high rates.

Yet, that is precisely what is happening. A perfect storm. As you read from the Norwegian currency collapse article earlier, Denmark is taking hits now from many angles. As the currency is connected to the Euro, the Central bank is forced to increase interests, and it translates to even worse financial sector terms and conditions in terms of loans to companies and individuals causing even more stress to both corporate and consumers alike.

Meanwhile, as an interesting sidenote, the Danish Stock exchange seems to be relatively strong compared to Nordic peers based on Nordnet index fund ETF’s development for instance. And the largest company of Denmark, the world’s second largest logistics corporation Maersk share is as pricey as ever compared to the normal stocks.

Image: WikimediaImages

Part of the explanation why the Danish economy is still somewhat surviving is that the nature of it is more recession tolerant as it has many food & beverage producers such as Carlsberg beer (people must eat and want to drink), pharmaceutical companies similar to Novo Nordisk (people need their medicine) as well as for example the Vestas wind power company (you always need electricity).

Image: Steen Jepsen

Conclusion

Denmark has a very diversified economy, and while exposure towards Norway and the oil industry serving there is a major concern, the country has even some cryptocurrency industry specialized companies representing the emerging new economy.

It is obvious though that Danish real economy is facing a crisis. The Government is addressing this challenge with massive support packages. What comes down may come also up, but one must choose careful where to invest. If you have an appetite for risk, this can be your chance to get in to benefit from the pro-business flexible small country opportunities.

*Disclaimer: Fyggex, does not give any guidance, advice or recommendations to neither invest or not in any available cryptocurrency directly or indirectly via any trading platform, exchange or provider. Our sole purpose is to make you aware of the related real or potential risks and opportunities so that you can make your own research prior to any financial decisions you may want to take. Past performance and position are not a guarantee of risk-free future returns.

Sources:

25th April. Svenska Dagbladet. Pages 12-13

https://www.thelocal.com/20180408/strong-danish-krone-boosts-swedish-businesses

https://www.investopedia.com/terms/d/dkk.asp

Featured Image: Bigstream

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