Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies and markets action in their 'Never a Dull Moment' report, including news this week that investors are disappointed at the failure of last week's summit to solve the European debt crisis.
Investors are also worried about a continued lack of action by the European Central Bank to intervene to support bond prices and keep interest rates down, he said.
"There seems to be no other solution to this debt crisis. The way things are going in Europe it looks like things will get worse before they get better, which relies on the ECB participating more heavily in the bond market, which they continue to say they're not going to do," Bell said, adding he saw the risk of continued risk aversion and falls in riskier currencies, including the New Zealand dollar.
Bell talked about the stresses inside the European banking system, which is forcing banks to rely on the ECB as a lender of last resort.
"The pressure on the credit market in Europe is making matters worse and it's all happening under the radar," he said.
European banksalso faced calls to raise fresh capital from shareholders, which was difficult amid a climate of falling markets and credit market downgrades, he said. Even governments would struggle to help raise capital for banks given their own parlous fiscal positions.
Bell pointed to the euro's fall through US$1.30 this week to an 11 month low as crucial. He saw options barriers around US$1.29, meaning any break through that level could take it down to US$1.20.
Back when the Euro fell to a low of US$1.18 in August 2010, the New Zealand dollar was trading at 65 USc.
"That correlation between the euro vs the US dollar and what's happening in the Kiwi vs the US dollar is quite close. It's running at an 80% correlation at the moment."
The New Zealand dollar was a range from 74 USc to 78 USc, although overall Bell saw a downtrend in place. He noted however that markets were extra volatile during the less liquid Christmas/New Year period.
"It wouldn't surprise me to a see a 5-10% range in the New Zealand dollar in the next two to four weeks."
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.