Risk aversion back as fears over Spain mount; Local eyes on Thursday's CPI as speculation continues over possible QE3

Risk aversion back as fears over Spain mount; Local eyes on Thursday's CPI as speculation continues over possible QE3

Risk aversion is back as a key feature in global currency markets, says HiFX senior dealer Dan Bell, meaning the New Zealand dollar's recent strong run against the greenback may have topped out.

The New Zealand dollar was last at US82.03 cents, down from a six week high on Friday of about US83.18 cents. Commodity-linked currencies such as the kiwi tend to weaken when international investors are risk averse.

The drop came after news broke on Friday night (New Zealand time) of Spain's banks borrowing 316.3 billion from the European Central Bank in March, almost double the previous month's total. The loans come from the ECB's long-term refinancing operation (LTRO) whereby it has so far lent €1 trillion at 1% over three-years to banks as its strives to contain the Eurozone's sovereign debt crisis. The Spanish banking industry has total assets of about €3.67 trillion.

"The concern is that if the Spanish banks need that much funding from the European Central Bank they are obviously not getting enough money from the market," said Bell. "And it's causing a lot of increased concerns that the current situation in Spain is unsustainable with higher sovereign bond yields pushing up towards 6%, and a banking system that is heavily reliant on central bank liquidity."

Of particular concern, he added, is that both the Spanish government and the country's banks are struggling.

On Friday (European time) 10-year Spanish government bond yields rose 12 basis points to 5.93%.

"Investors look at the bond yield, and anything over 6% is getting quite concerning. So I think that's going to be a focus. Any (bond) tenders that the Spanish government is going to undertake over the next few weeks will also be closely watched to see what sort of demand they have," Bell added.

Spain's government is trying to slash the budget deficit to 5.3% of Gross Domestic Product this year from last year’s 8.5%, against the backdrop of a contracting economy and unemployment of more than 23%. Spain is scheduled to sell both two-year and 10-year bonds on Thursday.

Meanwhile, the Trade Weighted Index (TWI), which measures the kiwi against the US dollar, British pound, Australian dollar, yen and euro was last at 73.4.

"Overall it feels like the New Zealand dollar is at the top end of the recent range, sitting at around US82.30c this morning (after) we got to about a six week high on Friday of around 83.18 against the US dollar," said Bell. We were pushing up to 79.80c against the Australian dollar on Friday and is holding its own against the pound sitting around 52p and continuing to be stronger against the euro, sitting around €63c."

CPI the domestic focus

Here in New Zealand the key focus of the week is Thursday's first quarter Consumer Price Index (CPI), a key measure of inflation, which the Reserve Bank is tasked with keeping between 1% and 3% on average over the medium term. CPI for the year to December was 1.8%.

"The market is expecting CPI of 0.5% to 0.6%, which would be in line with where the Reserve Bank sees inflation," Bell said. "If we see it weaker obviously it's going to reduce any chances of a rate hike from the Reserve Bank this year, so that'll be closely watched."

The Official Cash Rate is currently 2.5%.

Over in Australia the minutes from the Reserve Bank of Australia's April Monetary Policy Meeting, where it left the cash rate unchanged at 4.25%, are due out tomorrow. Bell said this should give insight into whether there's room for interest rate cuts ahead of the Reserve Bank of Australia's next rate setting meeting on May 1.

Whither QE3?

Meanwhile, Bell says a key theme bubbling away in the financial markets is speculation over whether the US Federal Reserve will launch another round of quantitative easing, or money printing, to try and boost the US economy with key Federal Open Market Committee meetings looming on April 24 and 25, and then again on June 19 and 20. Another round of quantitative easing, which would be the third, comes after the first two rounds totaled US$2.3 trillion.

It was initially done through emergency liquidity schemes and direct loans to banks at the beginning of the global credit crunch in 2008. The Fed then moved on to purchases of mortgage-backed securities and agencies debt, and some US Treasuries (so-called QE1) which cost a total of US$1.7 trillion, in November 2008. It then embarked on more purchases of US Treasures (so-called QE2 costing US$600 billion) in 2010 and 2011. The Fed has held 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.

"It's going to be very interesting to see what they (the Fed) have got to say at their next central bank meeting because we've got Wall Street and a lot of investors continuing to price in the chance of another round of quantitative easing," Bell said. "And naturally quantitative easing is negative for the US dollar and is continuing to provide support to the New Zealand dollar despite a potentially weaker global outlook."

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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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With a US government deficit for 2012 of $1.3 Trillion, I doubt the Fed has much choice but to print a similar amount of money, so QE3 will happen soon- and so it should I would say, as the alternatives are significantly worse for the US.
They would either have to:
spend a lot less- almost impossible while unemployment remains high, and economically stupid as well;
tax a lot more- politically and economically stupid in a recession,
borrow from the private local market (and so shrink the economy, and also raise interest rates)
or borrow from countries like China, Germany and the petro guys who have the spare cash. (Neither geo politically nor economically sensible)
Much easier to print the money.
We should consider the same option for our own deficit; and even for buying back some existing debt; but no doubt will carry on selling every profitable asset we can lay our hands on, until there is no more.

arent you a gold bug?
regards

steven,
Never really liked gold given its one of the more useless metals, although I understand technical traders probably do okay with it.  Am tending to favour stocks in companies that are likely to do okay no matter low or high inflation. Don't always get it right; but mostly okay, and better than no interest on savings. 
Mainly am interested in NZ being an okay place to live for my now university based children. Not looking promising unless we get some significant change in approach from government and leadership.
Good luck, and well done on your economics views on here.

Printing money will never work, it goes against basic economic principal. Currency is only a medium of ecxchange, if you just magic it up from no where it will debase its value, as we've seen form two or three years of it. QE only papers over the real problem of too much debt, the US, UK and Europe will all default in some form or another, there is no other solution.
If the US stops spending at the current rate, its economy will slow unemployment will go up, Obama won't get elected, if it continues spending, it will have to print, if not interest rates will cripple it. If it prints its currency will devalue bring hyperinflation. There is no easy way out, they should have let the collapse happen back in 2008, there would be light at the end of the tunnel by now!!
If NZ starts a QE program we will never get off it, politicians will find it too easy to justify more to get themselves elected. Ever heard of Zimbabwe?

"basic economic principal" if you persist on thinking economics 101 is the height of the "science" well good luck.....
Yep clearly you are a voodoo economics believer......
"Collapse", look at 1929....how long did it take to get to the bottom? and how much higher are we this time? the shortest fall I can conceive of is 3 years at -25% gdp per year and that is chaos....more likely is 10% a year for 5 or 6 years....light at the end, yeah sure....a small pin prick 20~30 years away.  Study the Long Depression......
"If the US stops spending at the current rate, its economy will slow unemployment will go up"
Interesting as that is in-consistant and in fact the opposite with what you said above, or didnt you think that borrowing like printing is inflationary?....
I dont know if Obama will get elected, the only possibility for such a failure as him to get a second term is the Republicans are way worse...oh wait..........
Otherwise when you are ready to step beyond kinder garden level economics have a look at liquidity traps......
 
regards