By Bernard Hickey
Here's my weekly currencies review and outlook with HiFX's Senior Dealer Dan Bell, including a look at the New Zealand dollar's continued strength despite more worries about the worsening Euro-zone debt crisis, further signs of a slowing US economy, and nervousness ahead of this weekend's Greek elections.
The New Zealand dollar rallied a further 1 cent through the week to close around 78.3 USc, having bounced from 75 USc in early June.
"Despite all this uncertainty about the Greek election this weekend, the fact that Spain has been downgraded by a number of a credit ratings agencies and bond yields there pushed up to that 7% level seen as the point of no return, the New Zealand dollar and sentiment in general has been supported by expectations that the US central bank is going to go out and print some more money next week," Bell said.
The prospects of a third round of Quantitative Easing (QE III) or money printing to buy government bonds being announced by the US Federal Reserve next Thursday morning has been a key driver on markets after weaker than expected jobs figures, inflation data and retails sales figures in the world's largest economy.
"All this is leading many to believe the US central bank will announce another round of unorthodox policy," he said.
Many 'short' positions had also been taken out in recent days as traders squared up their positions ahead of any uncertainty emanating from the Greek election, forcing the New Zealand dollar higher.
Bell said the theory was if the centre-right pro-bailout New Democracy party was to win the Greek elections then sentiment might stabilise and the New Zealand dollar may continue to rise.
However, if the left wing Syriza party won then there was as risk the current bailout package deal would collapse and cause deeper uncertainty about Greece's continued presence in the euro.
Already, central banks are preparing to take concerted intervention on Monday or Tuesday to keep credit markets open if a 'bad' Greek result caused ructions in markets.
Also, the Bank of England and the British government announced this week a plan to lend more than 100 billion pounds through banks to businesses, reinforcing the seriousness of the Euro-zone crisis for the global economy.
"They realise that the banks aren't providing a credit channel to UK businesses and they're trying to encourage that credit channel to loosen up, but at the end of the day people are sceptical about where the demand is going to come from," Bell said.
Bell said there was strong support for the NZ dollar around 77.5 USc and resistance around 78.5 USc, although the next resistance level of 79.80 to 80 USc may be tested if there was a positive result in Greece.
The New Zealand dollar had also strengthened in recent weeks from 59 Euro cents to 62 euro cents as the euro weakened.
Some investors were now worried that an ultimate Euro-zone solution would require Germany having to stump up funds and guarantees to rescue indebted Southern European nations, which would hurt Germany's credit rating. German bund yields rose this week, surprising many used to safe haven buying pushing them to fresh record lows.
"There's been talk about the market reassessing the safe haven aspect of German bunds. Some are starting to question if this whole European debt crisis rumbles on then Germany is going to have to bear a bigger burden going forward, and then perhaps Germany doesn't deserve that AAA rating. If Germany was downgraded you'd see significant capital flows out of the euro," he said.
The New Zealand dollar would continue to strengthen against the euro in that case. There was even speculation this week that the German Bundesbank may buy Australian government bonds.
The New Zealand dollar was also strengthening vs the British pound as expectations grew of further money printing in Britain.
Fed decision looms
Bell said the focus next week after the Greek elections would be on the US Federal Reserve's decision on Thursday morning NZ time. Speculation had grown in recent days that the Fed may even start buying assets other than government bonds, including mortgage backed securities.
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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.