Double Shot Interview: HiFX's Dan Bell reviews the week's global currencies action, including the Italian bond meltdown; He sees RBNZ cut of OCR now possible

Double Shot Interview: HiFX's Dan Bell reviews the week's global currencies action, including the Italian bond meltdown; He sees RBNZ cut of OCR now possible

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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I agree, the OCR will need to be cut. The risks of inflation or any kind of economic overheating is far far lower than a complete stall of the NZ economy.  After killing the economy with outrageously high interest rates in 2008, and now noone spending, businesses not investing, we might start addressing the slow downward spiral ....   


lolollol, your kidding right? You never had a mortgage in the 80's then? man, the 2008 OCR rates were actually 5-7 years too late. Killing the personal debt bubble was needed far earlier and if YOU don't see why already then I guess your one of them...... (the deluded ones who think debt is what makes the world go round without repercussions)

YOUR ANSWER IS BASICALLY "Hey, lets just print more money with interest attached!"  RIGHT?

Along with those plonkers in the US and Europe

Actually, a bit of money printing might alleviate things short-term. Also maybe $1000 vouchers to each household - must be spent by xmas on goods & services e.g. Rudd gifting.  Also a 30% debt writeoff on every owner-occupied mortgage-holder.    Tax-freedom to all start-up companies in the productive & tech sector for first 3 years.  Some kick-starts to get spending & direct business investing  - 

What do you propose?  Hunker down & stash cans of food?  

I dont see a way out of defaltion and debt destruction and a banking crisis. We know from overseas experience that low interest rates can create more problems than it solves.  We need to keep funding our consumption as our exports are not enougfh to satisfy, so we may find ourselves at the mercy of the bond markets and no longer in control or the illusion that we ever had control stripped away. Tuesdays fonterra auction will be interesting.

Nope, now its a given IMHO.....its just when inside the next year....its not going to be pretty IMHO.


Why do I get the impression that Mr Bell has just started reading the same stuff most of us have been following for the last THREE YEARS (and why didn't he make millions in the fx market over the last 3 years!)

He cannot see that an ocr cut can cause the drop in activity to accelerate...that the problems are not costly credit but            fear and debt.

The fear comes slowly for the financially slow and that's most of the pop but they are waking up and the piigs fiasco is speeding that process. They hear Bollard and see a cut and they stop spending...they avoid the cheaper credit...they try harder to pay off debt...the whole mob moves to reduce activity even further....leading to what? ...I wonder here if Mr Bell has the answer !

Meanwhile the financially capable with savings in NZ quickly move capital out of the country....leading to what? ....another one for Mr Bell.

And oh gosh look at the govts tax revenue longer a torrent as in Labours' bubble times of 06 hell it's a dribble and turning to a drippy leak. But but the welfare payments are exploding higher...AND HIGHER....whatever could be causing that...where will go to....quicky quick...cut the ocr again.....CUT THE OCR ALAN HURRY HURRY...DOH


"Crikey John...Alan's said he's going to cut again...activity is dropping off at a faster pace"

"That's good isn't it?.....I know some blokes with ears the size of footy grounds so you better whisper Bill"

"Maybe we should raise the gst again and say cut paye like last time"

"Why did we do that?"

"Cos it was Party policy John"

"oh yeah....but it was good right?"

"Err well sort of....the problem is the peasants have stopped new building and cut their renovation work by so much ....we've had Fletchers on the phone every day...."

"But they have more cash ..the lower tax..the earthquake rebuild.."

"John there is a timelag between getting an extra dollar in the hand an hour and saving the extra eight thousand in gst on a new house.....and it'll be years before any chch kickup arrives"

"Oh....won't raising gst make that worse Bill?"

"I didn't think of that"

I thought the look back on raising GSTit was actually not regressive taxation....and yet the clowns that will vote National will still vote National.....They are it seems afraid that Labour will spend more, yet National will do the same, except its hidden in things like PPPs ie off balance sheet etc aka Greece fear is an interesting thing...



Of more importance:

"..There is a reluctance of the mind to admit that cutting interest rates increases the burden of debt contracted in the past, because it contradicts one’s intuitive expectation that it should decrease the burden of debt to be contracted in the future. To be sure, cutting interest rates does increase the burden of debt contracted in the past because liquidation value is calculated by capitalizing the stream of future interest payments. Since at the lower rate the present value of that stream is smaller, a shortfall is created that has to be amortized upon liquidation."  -  Antal E. Fekete 

There are those that will scoff at such insouciance, nevertheless, one has only look at the level of outstanding interest rate swaps contracts (USD 150 trillion) assigned to the five largest US banks to come to an understanding of the enormity of the problem.

For every dollar of these IR swaps there is a counterparty payer of fixed interest for a fixed tenor. The minute interest rates fall the present value of the fixed payments increases relative to the new value. 

Businesses, local bodies, whoever, have to wear the relatively higher funding costs for the contracted period beyond the rate cut. This causes costs to rise on a relative basis compared to those not so encumbered. Bankruptcy and illiquidity are common symptoms.     

The penalties to break these contracts under ISDA agreements are unusually harsh as the likes of a bankrupt Jefferson County found out to it's cost. History is littered with more casualties.

The nominal size of the interest rate swap market in New Zealand remains elusive, even to the RBNZ - but one can surmise the recent tenor additions to broker quotes indicates it is active. And while there are few public instances of IR swap related financial failure in New Zealand you can be sure our banks are on the receiving end of the fixed side and benefit hugely every time rates fall.   


The problem with this is it takes a very focused view of part of the total situation.....what we are really looking at here is the effect of deflation in assets I think.....that is the problem and not lowering interest rates per see.

Also consider the writer's bias,

"Antal E. Fekete, Professor of Mathematics and Statistics, Memorial University of Newfoundland, Canada, is a proponent of the gold standard and critic of the current monetary system.

His theories fall into the school of economic thought led by Carl Menger. His support of the gold standard has similarities to Austrian Economics; however, Fekete's treatment of fractional-reserve banking is different from that of Murray Rothbard."

The second you throw political bias into economics their theories all goes to pot...they spend their time justifying the outcome they wat/expect at the expense of rigour and objectiveness....its just wonky.


Great insights Stephen....  

@ Steven

Philisophical bias aside the mathematical outcomes in terms of greater NPVs of interest rate swaps after an interest cut are irrefutible. Not much deflation for the receiver of the fixed leg of the swap but agonising deflationary costs for the payer.

Where on earth do you think alll these huge investment house bonuses come from?

Just a fews basis points on longer tenor IR swaps on trillions is significant - and represents money lost through costs to business meeting higher collateral calls. - which is certainly deflationary.


Which sums it up as a ponzi long as there is asset appreciation everything is fine......the second this reverses the effect is greatly magnified and negative.....

Also of course from what I understand the US counties base "council rates" on the value of a home and not a proportion of the money they need, unlike our rates.  So not only are they negative, they also lose income stream as US house prices a triple? neg whammy....

Its going to be interesting here when that happens.....the constant QV re-doing to justify even more $ take will disappear overnight. I dont think how rough it will be has dawned on ppl yet.....or rather they dont even see deflation as a possibility let alone the complex neg impacts...unlike the Pollies who are rightly petrified.....


The linked aricle from Stephen Hulme is really interesting...  Written by Antal Feke

In fact...  it is scary reading.

What he is saying is that without the "serial cuts in interest rates" , US Treasury paper is unsaleble.

ie. US Treasury debt is a toxic asset and the only ones buying it are Speculators.

These speculators expect to reap risk-free profits when they turn around and dump the paper in the lap of the FED.

The Capital gains they make ( liquidation value of the debt) can only happen with the continual lowering of interest rates.

In simple english...I think what he is saying is that the US Govt Bond mkt is the biggest bubble of all time.....  and it truely is a Ponzi scheme.

The end result is massive deflation  OR   Hyper Inflation as the Fed monetizes the debt.

Gosh...  this is Alice in Wonderland stuff.

Stephen H...   Can u comment on my interpretation..???


Cheers  Roelof

"the only ones buying it"  not so I believe.....the EU is about to implode so investors have run to the US where in effect they are losing money by buying US treasuries. I  assume like any sane person they dont consider US banks safe either. So US bills is a "safe" haven......bit like saying I would rather a hand grenade in my mouth and pull the pin rather than a 1000lb bomb........

toxic, yes as many have been saying.

Massive deflation is the end result....initially IMHO.....the collapse in the economy of the globe is far bigger in money terms than any printing the FED or anyone else can do....then throw in over-capacity in factories that needed growing debt to sell.....but there wont be any credit and wham.....the worst depression ever.  Congrats the the laissez faire economics of Alan Greenspan et al.....a total screw up......

Once we hit the bottom.....about 5 or 6 years and then printing will be a worry...

So the thing to judge is the coming sequence of events.



What I find really interesting....  is that it is the lowering of interest rates in the US which is generating the demand for Bonds.... according to Fekete ( apart from the flight to safety buyers )

BUT... Steven... part of the reason they go to US Debt is because of the ongoing "Capital Gains" ie. liquidation value which is inversely proportional to interest rates.

This is counterintuitive... That  lower interest rates  increases the demand for US Bonds.....   and shows what an absolute bollocks this all is. ..  It really is fantasyland stuff, and is not based on ANY underlying economic principles ... let alone underlying economic realities.

Who would have thought things could be this contrived .... and this unrealistic.... And as Fekete is a bomb waiting to go off... and it could it could happen suddenly.

Cheers  Roelof