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.
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.