Kiwi dollar has sights set on A80 cents, HiFX's Dan Bell says, with broad strength driven by speculation of QEIII from US Fed

Kiwi dollar has sights set on A80 cents, HiFX's Dan Bell says, with broad strength driven by speculation of QEIII from US Fed

The New Zealand dollar is on a roll against its Australian equivalent, reaching a six month high and probably poised to rise further with a cut to official interest rates expected from the Reserve Bank of Australia (RBA) in early May. More broadly the Kiwi has also been on the rise driven by speculation of more money printing in the United States. However, its wings could be clipped by the re-emergence of European sovereign debt woes and likely softening of investors' risk appetite.

HiFX senior dealer Dan Bell says the futures market has priced in a rate cut in Australia, New Zealand's biggest trading partner, at the next RBA rate setting meeting on May 1. Australia's cash rate is currently 4.25%. Bell says the key Aussie data out this week is the labour force survey, due from the Australian Bureau of Statistics on Thursday. Economists at ANZ are forecasting jobs growth of 5,000 and an unemployment rate of 5.3%.

"We've seen a recent run of economic data from Australia coming in weaker than expected, which has prompted many to speculate the Reserve Bank of Australia will be cutting interest rates in May," says Bell.

"That's actually fully priced in by the futures market, we're already pricing in a rate cut from the RBA in the first week of May. So if these jobs numbers from Australia come in weaker this week again you'll see further weakness in the Australian dollar."

The New Zealand dollar is trading at a six month high against the Aussie dollar, reaching A79.64 cents this morning. It last hit A80c on September 23 last year.

"We're trending up against the Aussie dollar. It does have its sights set on 80 cents, which we haven't been to for quite a while," Bell says.

Quantitative easing III?

Meanwhile, the New Zealand dollar's also on an upward trajectory against the greenback following much weaker than expected jobs growth data out of the US on Friday night, NZ time. US non-farm payrolls grew by 120,000 in March, little more than half the forecast gain of 203,000 jobs.

The report, one of the most closely watched pieces of economic data out of the world's biggest economy, caused concern over the potential of the US to help bolster the global economy with the Eurozone's sovereign debt crisis rumbling on and questions over whether China's economy will avoid a hard landing.

The non-farm payrolls report also sparked renewed speculation over a possible third round of quantitative easing (QE), or money printing from the US Federal Reserve, which has had official interest rates at 0% to 0.25% since December 2008 and says an "exceptionally low level" of rates is likely until at least late 2014.

"With this hint of further QE from the US we'll probably see the New Zealand dollar continue to drift up (against the greenback)," says Bell. "But I think it's still more of a range trade. It (the NZ dollar) is going to struggle to get back over US83c, US83.50c is going to be a pretty big level of resistance in the short-term."

Meanwhile, in Europe global financial markets have again re-awoken to Eurozone sovereign debt fears with Spanish bonds slumping last week as fears rose that Spain could join Greece, Ireland and Portugal in seeking an international bail out. The yield on Spanish 10-year bonds jumped 40 basis points to 5.75%, their biggest weekly gain since January.

"We've seen bond yields in Europe starting to drift up again. Bond yields in Spain are sitting around four month highs, bond yields in Italy are sitting around two month highs," says Bell.

"Italy has got quite a big bond tender this week (and) I think the situation in Europe is slowly coming back into focus. And if those bond yields continue to push up, obviously there's going to be question marks about the sustainability of this whole European debt crisis. If that comes back into the headlines, naturally we're going to see a (negative) turn in risk sentiment and we'll see the New Zealand dollar under pressure again."

Italy will auction up to €8.25 billion worth of government bonds on Thursday.

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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.

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China trade data now out showing it recorded a US$5.35 billion trade surplus in March - http://www.reuters.com/article/2012/04/10/us-china-economy-trade-idUSBRE...

We still seem to celebrate the NZ dollar increasing, even though the perennial current account deficit shows the NZ$ has been overvalued ever since it floated. 
Given nearly all other of our trading partners- wth the exception only of Australia- are actively managing their exchange rates down, why are we not contemplating something similar?
Given our -correct in my view-angst over asset sales and debt; and given our loss of assets or increased debt exactly equals the current account deficit each year, we should be following the lead of virtually every other country. 
Instead we have a Reserve Bank and Treasury stuck in a paradigm that clearly doesn't work, and their neo con friends in National going along with it. Labour were no better, but just maybe are considering addressing the issue.