Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies and markets action, including the meltdown on Italy's bond markets, the prospects for European Central Bank money printing and the outlook for the New Zealand dollar.
He also pointed to weak local economic data and the growing turmoil on global markets as reasons why he now saw a greater chance of a cut by the Reserve Bank of New Zealand in the Official Cash Rate than a hike in the next six months.
Bell said there remained a lot of risk around the European financial scene.
He pointed to signs of weak industrial production in Italy and the uncertainty many businesses faced there.
Bell cited slowing Chinese export growth and a drop in inflation, which opened up the prospect for stimulatory measures from the Chinese government.
The New Zealand dollar was weak versus the US dollar, the euro and the pound over the last week, given the commodity-linked Australian and New Zealand dollars tend to weaken the most whenever expectations about global growth soften.
The New Zealand dollar was in a range from around 75.5 cents to 79.5 US cents, with the potential for move to the low 70 cent mark if Europe's financial crisis worsened and investors moved to take risk off the table.
"Investors are starting to get a lot more concerned about what's been happening in the world, and the sort of carry trade advantage that the New Zealand and Australian dollars have had because of our interest rate advantage isn't enough at the moment to keep our currencies propped up," he said.
Bell said there was now more chance of a Official Cash Rate (OCR) cut from the Reserve Bank of New Zealand than a rate hike over the next six months.
"If we see a further blowout in the European debt crisis and that impacts on global credit markets, which it already is, then the cost of borrowing for our banks is going to go up, and potentially we're going to be paying more for our debt, both for households and businesses," he said.
"The Reserve Bank is sitting tight with the OCR at 2.5%, but if borrowing costs are going up and we're paying more for our overseas debt, then potentially we need to see a rate cut just to keep interest rates where they are," he said.
"I can't see interest rates going up any time soon. Talking to our clients, many importers and exporters, a lot of small to medium sized businesses, it's still pretty tough going out there."
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.