By Bernard Hickey
Here's my weekly currencies review and outlook with HiFX's Senior Dealer Dan Bell, including a look behind the New Zealand dollar's remarkable three cent bounce from 74 USc to 77 USc this week and a look ahead to how central banks and governments might react to the Euro-crisis and slowing growth in China and America.
"Whether or not it's a false rally or a dead cat bounce, will remain to be seen, but for now sentiment has stabilised and that's created some support for the Kiwi," Bell said.
"The key driver around the bounce has been expectations that the US central bank is going to undertake another round of quantitative easing," he said.
More US dollar money printing would be seen as weakening the US dollar and strengthening appetites for riskier assets such as commodities and the New Zealand dollar.
Markets will be focused this week on inspections of Spain's struggling banks and the lead-up to Greek elections on June 17.
"Spain's going to be a big issue and it's going to take a long time. They're talking about using the European Stability Mechanism which kicks off in July to potentially recapitalise Spain's banks," he said.
"There's a view that Spain is simply too big to fail and that policy makers can't let Spain and Spanish banks continue to deteriorate because it's going to be the end of the road."
US Federal Reserve Chairman Ben Bernanke commented to Congress on Thursday about the risks to the economic outlook, but didn't make any concrete statements about the potential for further US money printing.
"Everybody was disappointed about that and since then over the last eight hours (Friday) we've seen most risk assets under pressure and the New Zealand dollar has fallen over a cent from its recent highs," he said.
China's surprise move to ease monetary policy provided some heart to investors worried about a hard landing.
"You could look at it two ways and say China's policymakers are trying to pre-empt some worse-than-expected news flow that's going to come out of China soon, but overall markets saw that as a positive, which gave the New Zealand dollar some further momentum and the Australian dollar went all the way up to parity."
The Australian dollar has risen from just under 96 USc to just over US1.00 in the last week, although it was back at 99 USc late on Friday.
The volatility was challenging for importers and particularly for exporters, Bell said.
"If the currency is moving 5-10% in a month you're going to have a pretty big impact on your gross margins."
Bell pointed to sharp inflows of funds into US assets last week as investors hunted for safe haven assets, particularly those rated AAA by the major ratings agencies.
"Since the European debt crisis, the percentage of AAA rated assets in the world has increased significantly in the US as most of the AAA assets outside of the US has decreased," he said.
Bell said close to 75% of the world's AAA rated assets are now in the United States. Last year just 30% of all AAA rated assets were in the United States.
One problem for the US government, however, is a looming 'fiscal cliff' of expiring tax cuts and big defence spending cuts at the end of the year, both of which would contract spending in the economy. Politicians have to negotiate a deal before the end of the year to avoid the economy hitting that cliff.
"It's another reason why the market expects the Federal Reserve to step up to the plate and add further stimulus."
Australia and New Zealand
The Reserve Bank of Australia cut its official rate by 25 basis points on Tuesday to boost the economy. Meanwhile, Australia's GDP grew 1.3% in the March quarter, more than double expectations. This was followed by stronger-than-expected employment growth, which helped drive the Australian dollar higher towards parity with the US dollar.
Next Thursday the Reserve Bank of New Zealand is expected to release its June quarter Monetary Policy Statement and announce its Official Cash Rate decision. Economists expect the RBNZ to hold the OCR at 2.5%, but markets are pricing in a 10-25% chance of a 25 basis point cut. See Alex Tarrant's preview here.
"I think it's going to be a case of leaving his powder dry. If the situation in Europe does get worse we might see the Reserve Bank of New Zealand act, but for now it's going to be sitting tight at 2.5%."
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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.