Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies and markets action ahead next week's key meeting by the US Federal Reserve's Open Markets Committee (FOMC) on Tuesday and Wednesday, where it is expected to consider 'Operation Twist' rather than a third round of money printing or quantitative easing.
Bell first looked at the concerted action announced overnight by the world's major central banks to provide 3 month US dollar funding to European banks unable to borrow in US dollars from US banks and money market funds.
"It signals that the central banks are very concerned about the next three to six months and have pulled out all the stops and said they'll step in and make sure the European banks can get short term funding," Bell said.
"I think this is a short term thing. The markets have been trading on the headlines on the potential for a Greek default. The politicians are trying to jawbone the sentiment in the short term, but the reality is that Greece continues to be a slow moving trainwreck and most economists and market observers are expecting Greece to default in some form in the next six to 12 months," he said.
Bell talked about the so-called Operation Twist that the US Federal Reserve is expected to consider at the September 20/21 meeting. This strategy would see the US Federal Reserve sell shorter term bonds and bills and use the funds to buy longer term bonds to push longer term interest rates lower, and thus hope to stimulate borrowing and economic activity.
He noted figures out this week showing US annual inflation was at 3.8% in August, which is well above the Federal Reserve's target and leaves less room for money printing, given the inflationary impacts and concerns from some FOMC members about rising inflation.
Australian CPI/RBNZ MPS
This week the Australian dollar was pressed lower after inflation figures were revised lower, prompting calls for lower official interest rates from the Reserve Bank of Australia in the next year..
Bell also talked about the Reserve Bank of New Zealand's September quarter Monetary Policy Statement on Thursday, where Governor Alan Bollard signaled a delay in an expected Official Cash Rate hike and a lower peak for interest rates over the next year.
Cross rate ranges
With many visitors in New Zealand for the Rugby World Cup, Bell looked at the likely trading ranges for the various New Zealand dollar cross rates.
The New Zealand dollar ranged between 59 euro cents after Thursday's MPS and near record highs of 60.5 euro cents at the end of last week.
"I don't see how the Kiwi/Euro will fall out of bed too far given the current situation in Europe, so we'd expect a range of 58.5 to 61 euro cents," he said.
The New Zealand dollar remains strong vs the British pound, with the Bank of England setting very low interest rates and talking about further quantitative easing. Bell pointed to a range from 51 to 52.5 pence in recent days.
The NZ/US cross rate has been under pressure from highs of 83.8 USc last week to around 81.8 USc this week as risk aversion around the European crisis dragged the NZ dollar lower. He saw a range of 80 cents to 84.5 cents.
The New Zealand dollar has been in a range from just under 78 Australian cents last week to a high of 80.5 cents later this week. The New Zealand dollar has been firm in recent weeks on growing talk of Australian rate cuts, but remains well below the 10 year average of around 84/85 Australian cents, given Australian official interest rates are around 4.75% and NZ official rates are at 2.5%.
The pressure is for the New Zealand dollar to track higher vs the Australian dollar with Australian interest rates expected to fall over the next 6-12 months while Kiwi rates rise.
"But still, if you're a Sydney-sider over here to watch the Wallabies play Ireland this Saturday night you're going to be getting more bang for your buck than most others."
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.