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Opinion: Kiwi jumps over 54 USc as US$ weakens on Fed money printing news
March 19th, 2009
By Danica Hampton
The NZD/USD surged sharply last night, from around 0.5280 to nearly 0.5450, after the Fed announced it was expanding its quantitative easing program.
As widely expected, the Fed left the fed funds target range at 0-0.25%. The Fed reaffirmed its commitment to do whatever it takes to stimulate growth and backed this up by expanding its quantitative easing program. The Fed will up its purchases of agency mortgage-backed assets by US$750b, its purchases of agency debt by US$100b and will purchase US$300b worth of government bonds.
The announcement elicited a dramatic reaction in markets – US 10-year government bond yields fell about 50bps to 2.50%. US equities surged, the S&P500 is currently up 2.60%. While the USD plunged drastically – EUR/USD surged from 1.3100 to above 1.3400, AUD/USD climbed from 0.6600 to above 0.6750 and NZD/USD rose from 0.5280 to nearly 0.5450.
Effectively, the Fed is expanding its balance sheet by US$1,150b and investors fear the increase in US money supply will erode the purchasing power of the USD. While there fears triggered knee-jerk selling of USD last night, it must be noted that the link between whether or not quantitative easing undermines the USD is inflation. Only if quantitative easing stokes inflation will it erode the purchasing power of USDs and weigh on the USD.
The speed and magnitude of the recent ascent in NZD/USD isn’t sustainable –the NZD/USD surged nearly 4% in less than an hour. As such, we suspect we’ll see the NZD/USD dribble off its highs as the day unfolds. However, the global backdrop of a weaker USD and firmer global equities will likely see dips in NZD/USD limited to 0.5340-0.5350.
The USD dived against most of the major currencies last night, as investors digested weak UK jobs numbers and the Fed’s expansion of its quantitative easing program.
GBP weakness was evident early in the night, ahead of the UK jobs data and the Bank of England minutes. The jobs data was at least as bad as investors feared. The claimant count rose 138,400 – the biggest monthly increase since the series began in 1971 – and the ILO unemployment rate rose to 6.5% from 6.3%. Meanwhile, the Bank of England minutes showed a 9-0 vote in favour of cutting interest rates to 0.50% and instigating £75b worth of quantitative easing.
GBP/USD plunged from above 1.4050 to below 1.3850. Solid demand was noted for EUR/GBP, which climbed from around 0.9260 to above 0.9400, and this provided a bit of support for EUR/USD. However, as the night progressed, the GBP weakness gave way to a generally weaker USD in anticipation of the FOMC decision.
As widely expected the Fed left the target range for the fed funds rate at 0-0.25% and warned that downside risks to growth and inflation meant that interest rates would remain at “exceptionally low levels” for an “extended period”. More importantly, the Fed reaffirmed its commitment to employ all available tools to promote economic growth and price stability. Specifically it announced it would:
** Increase it purchases of agency mortgage-baked securities by up to US$750b (total purchases of these securities now total US%1.25t).
** Increase its purchases of agency debt by up to US$100b (to a total of US$200b)
** Purchase up to US$300b of longer-term Treasury securities over the next six months.
In the wake of the Fed decision, US government bond yields dropped sharply (10-year yields fell more than 50bps from 2.94% to 2.48%), Wall Street surged higher (the S&P500 us currently up 2.4%) and the USD plunged dramatically. EUR/USD climbed from around 1.3100 to above 1.3400 and USD/JPY sank from around 98.80 to below 96.00.
* Danica Hampton is BNZ’s Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.
Tags: Danica Hampton, Federal Reserve, kiwi, money printing, NZ dollar, NZD, NZD/USD
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March 19th, 2009 at 9:15 am
Is it time we fixed our exchange rate as who can plan under these circumstances?
March 19th, 2009 at 9:30 am
Fix to what, Kate?
US$; Euro ( isn’t that fixed mechanism ready to fall apart itself?); Gold; Pound? Or the long term inevitable ( our major trading partner, at least) – the Aussie.
March 19th, 2009 at 12:42 pm
Kate, who can plan anything in this environment, the exchange rate isn’t the only thing swinging wildly, interest rates and demand amoung other things are too, and it’s not just for NZ.
I don’t think it’s a reason to fix it to any other exchange rate, I think if we fix to a higher currency it will just blow out our trade deficit out even worse than it already is.
March 19th, 2009 at 12:50 pm
Kate – are you just flying a kite? You cannot believe that surely. The NZ/USD rate has been volatile around a trend for years. it is the same now.
It is not easy to plan, but it is possible.
March 19th, 2009 at 1:43 pm
Yes, the Aussie given they are our major trading partner.
March 19th, 2009 at 1:53 pm
What benefit would it bring? The two currencies move in tandem – largely.
March 19th, 2009 at 1:56 pm
A good portion of the flutations against the USD are because of the USD, so it would be doing the same against the Aussie dollar.
After all this the USD might not be the benchmark currency anymore.
March 19th, 2009 at 2:03 pm
sj – we are more vulnerable to speculative plays – it’s a bandwagon we’d be better off for the time being. Just a hunch.
March 19th, 2009 at 2:37 pm
Trouble is;
Fix th NZD to the Aussie and ALL our cash will be on the next plane to Sydney. Simplistically, a fixed currency, without exchange controlls ( and let’s not even THINK about bringing that red tape back!) and different interest rates between the pair will see the funds go to the currency of highest yield ( the carry trade without the exchange risk). And vice versa, as soon as interest rates get out of alignment. And if we align (fix) our interests rates, there goes our autonomy. NZ would then be at the beck and call of Australian economics and, worse, politics. That’s why it took so long to harmonise the European currencies into the Euro. I wonder how Spain, Ireland and Italy feel about that now?
March 20th, 2009 at 11:37 am
“There must be someway out of here
said the joker (politician) to the thief (banker)
There is too much confusion, I can’t get no relief”
Well there is the only way (as defined by Big Ben and Uncle Sam)
Inflate everything to a new level…..
The problem is debt value is higher than asset value, print money and the asset value goes back to nominal debt level….everybody happy !!
Meantime be the smart one and buy Gold first …
March 20th, 2009 at 12:04 pm
Major industrialised countries with relative stable currencies are now sliding increasingly into trouble. What is the NZ$ doing when currencies such as US$/ Yen/ Euro/ SFr/ etc. are losing strength because of that and what does that mean for our economy ?
March 22nd, 2009 at 6:19 pm
I’ve got some US cash that I want to exchange into New Zealand dollars— should I hold it and wait— is the New Zealand dollar going to drop back down to .49USD anytime soon? or do you think the US dollar is going to keep declining thus forcing the NZ dollar up? I know that Bollard will readjust the cash rate again in April- should I just wait until April. (oh what to do? what to do?)