Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies and markets action ahead of the hotly anticipated speech from US Federal Reserve Chairman Ben Bernanke at Jackson Hole at 2am NZ time on Saturday.
Bell describes how stock market investors are more hopeful of a third round of quantitative easing or money printing (QE III) than bond investors and currency traders.
"Fund managers and equity anlysts are a little bit more optimistic, perhaps with some wishful thinking, because if he does come out with some sort of QE III naturally it would be positive for stocks and positive for their businesses," Bell said.
"However, in fixed income land and foreign exchange land, we've all come to the realisation that the speech this weekend isn't going to provide any sort of panacea. The likelihood of him announcing QE III is probably quite low. If anything he may mention an extension of the existing bond purchasing programme, but is probably going to disappoint a lot of people who were expecting some type of QE III announcement," he said.
Most inflation measures in America and elsewhere were ticking up and there had not been sustainable benefits from the last round of quantitative easing, he added.
More Greek drama
Bell also pointed to the 2 year bond yield in Greece being 44% as tensions grew between those countries who had bailed out Greece and doubts grew about the latest bailout.
Finland's move to do a side deal with Greece had destabilised the deal, he said.
"There's question marks about the political issues in the European Union and whether they can get some sort of cooperative stimulus package for Greece that is sustainable."
The Bundesbank was also criticising the Europan Central Bank's (ECB) action.
Bell pointed to a softening of the language from inflation hawks at the Bank of England this week, increasinging the prospects of more money printing in Britain as fiscal austerity added pressure to the economic outlook there.
Markets are expecting 50 basis points of cuts in the Reserve Bank of Australia's cash rate (currently 4.75%) before the end of the year, while markets are still expecting a rate hike in New Zealand Official Cash Rate (from 2.5% currently)
The New Zealand dollar was around 79 Australian cents on Friday and had traded in a range in recent days from 78.5 Aussie cents to around 81.2 cents. It had been in an up-trend since bottoming out at a 20 year low of around 72.5Aussie cents after the February earthquake, particularly now the respective interest rates on both sides of the Tasman appeared to be squeezing back together again, Bell said.
The New Zealand dollar was around 83 US cents on Friday with support around 81.50 US cents this week and resistance around 83.50 USc. Bell said the trend was for the New Zealand dollar to grind higher vs the US dollar, although the Jackson Hole speech would be crucial.
The New Zealand dollar was around 50.5 British pence on Friday withing a range of 51p-49.5p, with the prospect for the New Zealand dollar to continue to strengthen as interest rates rise here and the Bank of England looks to print more money.
The New Zealand had fallen somewhat against the euro in recent weeks but had stabilised around 57.5 euro cents by Friday, with support around 56.20 euro cents. The interest rate differentials are again in favour of the New Zealand dollar, given the OCR is expected to rise here while the ECB is expected to hold rates.
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.