On Friday afternoon I spoke with HiFX Senior Dealer Dan Bell about the week's currencies and markets action in our 'Never a Dull Moment' report, including news Greek leaders have agreed to a new austerity plan, the Bank of England has announced another 50 billion pounds of quantitative easing and the Reserve Bank of Australia surprised the markets by leaving the Official Cash Rate unchanged at 4.25%.

Bell pointed out the Greek deal agreed on Thursday was not a completely done deal, with Greece's 'Troika' of donors demanding reassurances from Greece's political leaders they will not change their minds after elections in April. The political pressure in Greece is now intense with strikes ongoing, he said.

Elsewhere in Europe, the European Central Bank held its key rate at 1% and was expected to inject a further 500 billion euros of cash into the European banking system on February 29 in its Long Term Refinancing Operation (LTRO) of 3 year lows at around 1%.

Bell said markets were more relaxed about the European crisis because of the extra liquidity now sloshing around the system, but Europe's underlying problems were far from solved.

More banks were likely to use the LTRO in the February 29 auction now any apparent stigma of using it had faded after the LTRO just before Christmas. "This time around everyone is going to go in boots and all," he said.

But little of this extra cash was being lent to businesses and households, with much of it being stashed away into government bonds.

"Is the additional liquidity being used in a way that is adding any real substantial benefit to businesses?" Bell asked, pointing to the hoarding in bonds. 

"As much as there is additional liquidity out there, the credit channel out to businesses is still suffering."

Banks and others were also using the 1% LTRO money to engage in 'carry trades' where investors borrow at 1% in Europe (and lower in Britain and America) and invest at 3% or higher in New Zealand and Australia, pocketing a profit on the way through. This carry trade was a factor behind the strength in the Australian and New Zealand dollars in recent months.

Surprise Australian non-move

Bell said the Reserve Bank of Australia's decision on Tuesday to hold its official rate at 4.25% had strengthened the Australian dollar against the US dollar and the New Zealand dollar, given it maintained the interest rate appeal of the Aussie currency.

However, the RBA had left open the prospect of a cut, he said.

Bell looked through the various New Zealand dollar exchange rates vs the Australian dollar, the Euro, the US dollar and the pound. He sees the New Zealand dollar remaining firm as America and Europe pledge to keep interest rates extremely low and look at money printing or quantitative easing.

Dan Bell is the Senior Dealer at HiFX, a UK-headquartered foreign exchange dealer with significant operations in Australia and New Zealand. It has a dealing room in Auckland. See more detail here.