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 surprising news this week the European Central Bank (ECB) had to lend over 500 European banks almost 500 billion euros to ease pressures in the European banking system because of the sovereign debt crisis.
Bell talked about the potential for a 'carry trade' where European banks borrow from the ECB at 1% and then lend on to struggling Southern European governments at 5% or more.
This, in theory, would help the ECB effectively fund struggling governments without having to directly buy bonds and boost both the profits and capital positions of struggling banks.
Bell said some banks may choose not to buy the government bonds, particularly as they look to keep their balance sheets liquid ahead of a difficult year of having to roll over large amounts of debt.
"European banks in the first quarter of next year need over 200 billion euros in additional funding. If you're an offshore investor looking at Europe and considering all the tension and drama and crisis over the last year, you're going to be asked to step up again and fund this situation," he said.
European governments would also have to roll over 800 billion euros of debt in 2012.
Bell said there was the potential for more volatility for the New Zealand dollar next year than this year.
The New Zealand dollar was finishing the year about where it started vs the US dollar, but in the meantime had swooped through a 20% range from a low of 71.2 USc in March after the Christchurch earthquake and Japanese Tsunami, to a high of 88.5 US cents in August before the European crisis worsened again.
This 20% volatility was in line with the volatility seen in most years, but less than the 50% swings seen in 2008 during the Lehman crisis, Bell said.
"If they keep muddling through this drama in Europe and they keep doing enough to keep the wolves from the door and the US start printing money again, then the New Zealand dollar would rise," he said.
"But if we saw continued risk aversion and uncertainty then the New Zealand dollar would fall as the European markets fall and create this contagion impact across credit markets."
Markets would watch the Chinese property market and the prospects for a further easing of monetary policy by Chinese authorities early in 2012.
"What happens in Australia and China next year will have a big bearing for New Zealand."
Bell also pointed to the Australian dollar's move to an all time high of 78 Euros this week, while the New Zealand dollar was not far off its all time highs against the Euro.
Dan Bell returns on January 27.
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.