Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies and markets action, including the slump in global stock markets after the US Federal Reserve warned of signficant economic risks and financial market stress.
Bell talks about the market's realisation that the US Federal Reserve is struggling to fire up the world's largest economy and that authorities on both sides of the Atlantic lack the cohesion or vehicles to fix the problems with sovereign debt and slides back towards recession..
"This Eurozone debt crisis has been bubbling for a while and there's a lot of people who have been surprised that global markets have held up so well," he said.
"This week we saw the broad realisation that the Eurozone debt crisis is not getting resolved and the US Federal Reserve has run out of ammunition," he said, pointing to the reaction after the Fed's warning and its widely expected 'Twist' strategy of selling short term bonds and buying long term bonds to push long term interest rates lower.
"Investors focused on that, and we've seen a capitulation trade in risk assets over the last couple of days," he said, citing the New Zealand dollar's fall from 83 USc this week to a low of 77.5 USc.
"We're still considered a risk-positive currency or growth currency. A lot of investors will hold New Zealand dollars on the basis that we offer a more attractive interest rate, so their home currency isn't New Zealand dollars and they have a home bias towards US dollars or Japanese yen," he said.
"When global confidence falls out of bed, you see investors taking their money back into US dollars and US Treasuries, which are considered the most safe-haven asset in times of turmoil."
Investors would watch out for concerted action from the G7 and G20 nations out of weekend meetings. After the interview the G20 pledged a "strong and coordinated" response to global economic challenges, but did not announce any action. See more here at Bloomberg.
"At the end of the day talk is cheap," he cautioned.
Bell pointed to weak factory output figures in Europe and China as a symptom of the economic problems underneath markets.
Weak New Zealand GDP figures for the June quarter on Thursday had also been a factor weakening the New Zealand dollar towards a key support level of 77.5 USc. A break below that level could see the currency fall to the mid to low 70c mark.
"We could easily see the Kiwi down another 10%," he said, pointing to what happened in late 2008 after the collapse of Lehman Bros.
The New Zealand dollar has also weakened against the British pound to around 50 cents from 53 cents last week, despite fresh talk of money printing by the Bank of England.
The New Zealand dollar had also defied logic by trading lower against the euro to around 58 euro cents from over 60 cents last week, despite the Euro problems and the chances of a cut by the European Central Bank.
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.