Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies and markets action, including the bounce on global stock markets and commodity markets late in the week on talk Europe may be serious about recapitalising its fragile banking system.
The New Zealand dollar also strengthened in line with renewed hopes for the global economy and those higher commodity prices.
Bell spoke about the irony of Europe's banks asking European governments for capital because they are having to write down the value of European government bonds.
"The European banks are in trouble because they own toxic sovereign debt and they're going back to the sovereigns and saying can you help bail us out because we're holding all your toxic bonds and our balance sheets are in trouble," Bell said.
There were a lot of obstacles for the 17 members of Euro zone to surmount before the crisis was over, he said.
Meanwhile, the Bank of England announced plans on Thursday night to print 75 billion pounds and use it to buy government bonds. Bell said this latest bout of quantitative easing was bigger than the market expected and highlighted the difficulty for the bank of stimulating the economy when inflation was over 3%.
Investors were so nervous about losing money in stocks they were prepared to accept interest rates that were even lower than inflation, meaning the real value was being eroded over time.
"In the current environment investors are selling out of equities and risky assets and buying US Treasuries and locking in negative real returns," he said. Treasuries were yielding 0.25% to 2% when inflation was higher than that.
Fear of losing capital
"It shows you how concerned investors are at the moment. They're willing to invest in a negative real rate of return because they don't want to lose their capital."
The European Central Bank held its cash rate at 1.5% and announced plans to buy 40 billion euros of covered bonds. It will also provide unlimited cash to European banks for one year terms until January 2013.
"The actions of the policymakers show how concerned they are about the situation there," he said.
Bell said markets would watch US Non-Farm Payrolls data due early on Saturday morning NZ time, with economists forecasting the unemployment rate at 9.1% and jobs growth for the month of 55,000-60,000.
The Reserve Bank of Australia softened its view on interest rates this week, opening the door to potential rate cuts later in the year.
The New Zealand dollar was around 78 Australian cents at the end of last week, but has strengthened to around 79.5 Australian cents by the end of this week after the RBA's dovish outlook, which would narrow the current interest rate advantage that Australia's cash rate of 4.75% has over NZ's 2.5%. The NZ dollar is in a range from 78 Aussie cents to 80 cents.
Against the US dollar, the NZ dollar bounced off its lows earlier this week of 74.60 USc to around 77.2 US cents on Friday, with resistance seen at 77.5 USc.
The New Zealand dollar spiked up to 50.4 British pence, having bounced from 48.5 pence last week.
"It looks like it has an upside bias, but we're not out of the woods yet."
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.