EU Banks Take Up Active Intervention In Volatile Political Climate

Central banks in several European countries are closely watching their currency movements against the dollar and the euro as political tensions rise across the continent. Three countries in particular – Switzerland, the Czech Republic and Denmark are considered vulnerable to sharp movements in euro. The Danish and Czech currencies are pegged to the euro while Switzerland which recently abandoned its peg remains sensitive to currency swings.

These currencies have been coming under upward pressure causing central banks to take action. According to latest data, the Swiss National Bank reserves went up by around 4 percent last month while Denmark’s central bank sold Danish krona worth 4.7 billion. Czech authorities purchased €14.5 billion in January, which was almost equivalent to the euro purchased by it in 2016.

DW (English)

In Switzerland, the strong Swissie and the prevalent disinflation hasn’t resulted in a recession but is affecting the economy. The stronger dollar in the past few weeks has help mitigate the impact of a weak euro on exporters.

According to the Czech central bank’s policy, a euro cannot be worth less than 27 krona, a measure put in place to control currency appreciation. The recent rise in inflation to 2.5 percent and official rates crossing 0.05 percent are indicating a need for revision. The country’s central bank has indicated that it will be eliminating the peg soon.

Denmark is faced with the prospect of selling more krona in order to defend its peg to the euro. According to Bank of America’s Merrill Lynch, the krona has reached levels against the euro last seen when the Swiss depegged its currency in 2015 and when Greece faced its debt crisis in 2012. Analysts however don’t expect the peg to be eliminated.

One of the key factors affecting the currencies is the current European political climate which is volatile particularly in countries facing elections this year. Analysts are hoping that anti-establishment parties do not come into power as this might have a disruptive effect on markets. Similar investor worries are also fueling the demand for safe haven assets like the Swiss franc and the Danish krona.

The overall rise in protectionist agenda across the globe is adding further pressure. Pierre Bose, head of European strategy at Credit Suisse pointed out that the small countries in Europe have been amongst the biggest beneficiaries of globalism. The other key influencing factor is the Eurozone monetary policy.

In a statement, Ugo Lancioni, forex and fixed income portfolio manager at Neuberger Berman said

Quantitative easing and negative rates in the eurozone have certainly been a key driver behind those central banks