To peg or not to peg - Safe Haven

Flight to quality, safe haven, uncertainty and capital preservation, all these buzz words lately seem to be the only thing that matter. And it isn't restricted to the usual suspects in the current risk-off environment, being JPY and CHF (reversal of carry trades etc). But before focusing on a fairly new contestant in this game, a couple of impressive statistics on the veteran player Swissie :

1) In between 2008 and now, the SNB foreign exchange reserves have multiplied by 5 towards almost 250 bio CHF (peak 300 bio in sept 2011). This was to refrain the currency from appreciating in a first stage and to keep the peg 1,20 against the EUR in a second stage. Roughly half of this amount represents accumulation of the single currency and 25% is covered by USD.

2) Not all interventions seem to have been successful after the facts. It is estimated that the during the mass accumulation of foreign reserves, the SNB so far has incurred a loss of 42 bio CHF or 8% of Swiss GDP (period mid 2010-mid 2011)

But since a couple of months and with single currency breakup tensions rising, markets have redirected their arrows towards another safe haven : Denmark.

The trends so far have been remarkable indeed. The Danish opted out in the nineties but decided to continue their DEM peg by copying ECB monetary policy after 1999. As a result, the central bank's main policy tool has always shadowed the ECB main policy rate instantaneously. The Danish central bank rate used to be a couple of basis points higher (25 on average) because of the liquidity premium and the premium for the exchange rate being allowed to float within a (tight range) against the EUR (7,46 +/- 2,5%). But lately, the DKK has come under considerable appreciation strains with poor liquidity enforcing the mechanism. It even forced the central bank in 2012 to cut rates beneath the level of the ECB (0,45% versus 1,00%) :

And when looking at the sovereign yield curve, it seems danish dynamite has overtaken southern Big brother Germany as the new continental bellwether : 2y yields went negative (-0,1%) and or closing in on the Swiss (-0,25%) while its 10y yield is now firmly below Germany's for quite some time (1% vs 1,20%).

Some observers are even so bold to conclude that the DKK is most likely the ultimate safe haven because in case the total implosion of the euro-zone should occur, the DKK will be pegged towards the new Deutschmark while the direction of NOK and SEK for example are more difficult to predict in this scenario. This is probably a very bold statement, also in view with the difficult to estimate collateral damage Germany would incur if all hell breaks loose. Will Germany come out as AAA after the dust settles down ? Any way, the Danish NB has now been forced to pull all kind of tricks to stem currency strength. It has accumulated some 500 bio DKK equivalent in fx reserves (2008 150 bio) and has announced more of the same in the pipeline, accompanied if necessary by negative deposit yields at the central bank (cfr black line evolution graph above). Whether that be a sufficient deterrent for investors to leave the DKK for what it is, remains to be seen : the message today seems to be 0% interest rates or negative, it doesn't really matter, again better safe than sorry. And the Central bank this time might not wait for the ECB to act first.

The question of "who are the ultimate real safe havens" , we leave in the middle for now, the reader is invited to judge on that. But over the past couple of days, some other remarkable events have taken place. For instance, in 2011 a lot of emerging market economies had all the trouble in the world in holding their exchange rates down. Today, some of them have a tough job in doing the opposite with considerable capital outflows putting currencies under pressure. And AAA countries are bound to experience further exchange rate pressure like Norway and Canada. In the case of Norway, the tight labor market has allowed for strong private wage settlements and still pressure from the public sector to obtain a similar deal (general strikes). So although the sovereign yield curve is still positioned at very low levels (safe haven buying), the swap curve and future pricing is telling us a different story on the future path of interest rates. And Canada really surprised us today : recovery well under way and interest rate rises necessary to contain stronger inflation and diminishing slack of the economy. Talking about a world upside down.