Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies turmoil, including the stock market's extreme volatility and the New Zealand dollar's wild swings as investors panicked over the state of the US economy and Europe's banking system.
He details the New Zealand dollar's ride through an 8 cent range within a week against the US dollar and its weakness against the pound and euro.
"The New Zealand dollar through this period of risk aversion has been one of the worst performing currencies," he said.
Bell talks about the home bias many investors have during a period of such volatility and why investors have rushed back to US dollars and US Treasuries despite the credit rating downgrade for the United States.
He said the US Federal Reserve's guarantee of near 0% rates for another two years on Wednesday was initially disappointing because it contained no specific mention of a third round of quantitative easing , although the sharp slide in US Treasury yields saw stock markets (and the NZ dollar) sprint higher later on Wednesday.
Then concerns on Thursday about Europe's banks and sovereign debt drove a fresh slump on markets and 'riskier' currencies.
"It almost feels like the European banks are coming under the same sort of scrutiny and questioning as the US banks did during the sub-prime mess back in 2007 and 2008," he said.
"A lot of the analysts are starting to look at the banks' balance sheets, particularly in France. A lot of Greek banks are owned by French banks, so naturally concerns in Greece are starting to spill over into France."
French banks stocks fell more than 10% in one day.
"(Europe) continues to be a slow moving train wreck and structurally you have continue to be concerned with what's going to happen there."
Bell talked about the Swiss National Bank's efforts to drag the franc down vs the US dollar and Euro, which was hurting exporters. Late on Thursday the central bank suggested it may peg its franc to the euro, shocking many in the market.
"A peg to the euro would be quite crazy in my opinion, but it has markets second guessing them, and it's also talking about taking a negative real rate on Swiss bank deposits, just trying to stop these flows out of the US dollar into the Swiss franc, which is damaging their economy."
China's peg creeps higher
Bell also talked about moves this week by Chinese authorities to allow the yuan to rise against the US dollar to its highest level in 17 years.
China may be using the revaluation to help it fight inflation, he said.
"Potentially it's also a good thing for the global economy if China has more purchasing power and starts buying more products from offshore," he said.
The New Zealand dollar rose to a 12 month high against the Australian dollar of over 81 cents this week after tepid Australian jobs figures saw markets begin to price in a cut in the official cash rate over the Tasman.
Looking ahead, he said currency markets would watch stock markets closely ahead of the August 26 meeting of central bankers at Jackson Hole in Wyoming.
At last year's meeting US Federal Reserve Chairman Ben Bernanke announced a second round of quantitative easing, unleashing currency wars and a surge in commodity prices that helped trigger the North African spring.
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.