Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies moves, including news the New Zealand dollar hit a fresh post-float high of 85.05 USc on Thursday after stronger than expected New Zealand GDP growth figures for the March quarter.
Bell said comments from US Federal Reserve Chairman Ben Bernanke on Wednesday night about being prepared to add further stimulus to the US economy were also a factor boosting the New Zealand dollar to record highs on Thursday morning.
"That made risk assets more favourable and also Moody's downgraded the outlook for the US sovereign debt rating (which weakened the US dollar)," Bell said.
The stronger than expected New Zealand growth figures made a December rate hike more likely, although Bell said anecdotal evidence suggested the New Zealand economy may not be as strong as the data suggested.
The New Zealand dollar had also performed strongly against the Australian dollar after the firm New Zealand growth figures and signs of a slowing consumer economy in Australia, where upmarket department store group David Jones issued a profit warning and consumer confidence fell.
The New Zealand dollar has risen to almost 79 Aussie cents this week from around 73 Aussie cents in May, which helped push the Trade Weighted Index to new three year highs of over 73. The Reserve Bank last intervened in 2007 to push the currency lower when the TWI was over 76.
High vs the Euro too
The New Zealand dollar rose to a fresh high of 59.5 Euro cents on Thursday as fresh turmoil in the European sovereign debt markets reduced appetites for the Euro.
"Earlier in the week there was concerns that Italy was going to be the next economy to seek some sort of bailout," Bell said, adding however the concerns may have been overdone.
Chinese demand for European bonds had helped stabilise the market later in the week. China needs a stable eurozone to help it diversify away from its reliance on keeping its US$3 trillion of foreign reserves mostly in US Treasury bonds.
Will he or won't he
Markets had also focused on comments by Bernanke about further stimulus, including initial comments that a further round of quantitative easing (QE) or money printing was possible. However, he followed that up with comments on Thursday night that inflation was higher than when the Fed decided last year to introduce a second round of QE.
"You've got a pretty divided opinion out there. Some think that the hurdle is quite high for QE III and that you'd have to have a significant deterioration in their economy for QE III to be launched. On the other hand you've got some saying it wasn't as bad for QE II last year so what's stopping him this time?"
"Personally I think the hurdle is pretty high for QE III."
Debt ceiling chicken
Bell said a US sovereign default would be devastating for the global economy, although markets did not believe it was likely.
However, if the United States was to lose its AAA rating there could be a significant amount of funds to flow out of America as there are many pension funds that are forced to hold AAA-rated assets.
That could boost non-US dollar assets such as the New Zealand dollar.
However, massive financial turmoil could also force many investors to take bets off riskier assets such as the New Zealand dollar, forcing it to drop.
"But once the market absorbs that news and starts to reflect on it the money has to go somewhere, and you could see more money flow into Australia, which has a AAA rating. Perhaps the New Zealand dollar gets caught up in a perfect storm where we're associated with the Australian economy. We don't have a AAA rating, but we are seen as the little cousin to Australia," Bell said.
"The Kiwi dollar may see a huge selloff, but maybe then it could bounce back, so you'd see huge volatility and swings in the currency market if they don't get something sorted on the debt ceiling."
Markets would focus on New Zealand's second quarter CPI figures due on Monday. The market is expecting a 0.8% rise in the June quarter and RBNZ sees a 0.7% rise. Any higher number would bring forward the potential for an earlier tightening of the Official Cash Rate.
The Reserve Bank of Australia is expected to release minutes from this month's monetary policy setting meeting on Tuesday. Financial markets are now pricing in rate cuts, a turnaround from a few months ago when most expected hikes. The turnaround is focused on a the weak Australian domestic economy where a heavily indebted household sector is worried about falling house prices.
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.