Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies moves, including the New Zealand dollar's rise to ever higher record levels against the US dollar, pound and euro after a European debt deal and on fresh signs a recovering New Zealand economy may push the Official Cash Rate up sooner than previously expected.
Bell said the New Zealand dollar rose to a record high of 86.4 USc late in the week as investors put 'risk on' the riskier currencies. Stronger than expected inflation data also boosted the currency. See Alex Tarrant's report from Monday on strong CPI figures.
Bell said chart analysis showed the Kiwi dollar had the potential to rise to 90 USc after its rise through an initial level of 85 USc this week.
"You have go back over 30 years to pre-float days to get any kind of guide to how high the NZ dollar could go. At over 86 USc, to see it up another 300-400 basis points is not too much to ask given how much it has risen recently," he said.
The New Zealand dollar also rose this week briefly to over 80 Australian cents, although it ended the week a tad softer on some profit taking.
"You've still got the global economy awash with cash. The US has been on their money printing exercise for the last couple of years. Other central banks have had other forms of quantitative easing or money printing with low interest rates and the money has to go somewhere," Bell said.
"The New Zealand dollar relative to a lot of other economies is still quite attractive," he said.
This week's debt bailout in Europe was still fundamentally another 'kicking of the can down the road', although it was a great confidence builder. Markets would focus on the confidence aspects for now.
US default and double dip recession?
America's political debate over how to raise its debt ceiling was also now the focus of market attention.
There was still a low probability of a US default on August 2, but if it did happen there was the ironic prospect of a flight to quality of US dollars and US Treasuries in the event of a default. That would push the New Zealand dollar down, he said.
Looking ahead to RBNZ on Thursday
This coming Thursday's decision by the Reserve Bank of New Zealand on the Official Cash Rate would be closely watched by currency markets. Rates are expected to stay on hold, although strong inflation figures this week have seen some economists bring forward their views on when the OCR would be hiked.
"We're not expecting any change to the OCR next Thursday. The expectation is he's going to talk up earlier rate hikes and the market is bringing forward expectations of the first rate hike from December or early next year to September this year," Bell said.
Governor Alan Bollard has to comment on the New Zealand dollar, he said.
"The New Zealand dollar over 86 USc has to be a huge issue for any manufacturing exporter who isn't getting the prices the commodity exporters are. (The high currency) is going to be doing some of the tightening for him," he said, adding there were no signs yet of Reserve Bank intervention to push the currency down.
"If you saw the markets get to the point where the appreciation became disorderly that's when they'd get concerned and (potentially) intervene on a smoothing basis rather than make some change to the overall direction, because the Reserve Bank doesn't have the firepower to change the underlying trend in the long run," Bell said.
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.