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Currency hedging and the Danish pension sector
The ratio of pension assets to GDP in Denmark is the highest among OECD countries. Danish pension funds invest more than half of the country’s pension wealth in foreign assets, giving rise to exchange rate risks that are managed using financial instruments. We study the currency hedging behaviour of the Danish pension sector and show that it differs with respect to exposures in dollar and euro, given Denmark’s fixed exchange rate against the euro. Additionally, we find a statistically and economically significant relation between US stock price movements and flows of kroner from FX rebalancing.
Key messages
Why is it important?
Denmark is a small open economy with a fixed exchange rate vis-à-vis the euro. Maintaining the fixed exchange rate regime is one of the main objectives of Danmarks Nationalbank, with monetary policy instruments reserved for this purpose. Danish pension funds are important actors in the market for Danish kroner. Understanding the pension sector’s currency hedging improves the understanding of the krone exchange market, which is important in the context of the fixed exchange rate policy in Denmark.
Key chart
Dollar hedge rebalancing leads to a flow of kroner
Note:
Krone flow is the monthly buying and selling of Danish kroner against dollars, driven by the rebalancing of dollar hedge positions by pension funds. Change in value of dollar assets is the monthly market-value change in dollar assets, excluding changes from the dollar exchange rate against the Danish krone. The latest observation is February 2024. We estimate that a 10 per cent increase (decrease) in US stock prices corresponds to purchasing (selling) kr. 28 billion due to FX rebalancing, holding all else equal.
Source:
Danmarks Nationalbank.