Here's our weekly currencies outlook and review with HiFX's Senior Dealer Dan Bell including a look at what next week's US presidential election will mean for the currencies markets, and a look at just how high the New Zealand dollar might go.
Bell says re-election for President Barack Obama in next Tuesday's election will probably be a negative for the greenback with his Democrats seen as more pro-fiscal stimulus than Mitt Romney's Republicans, meaning the status quo of the Federal Reserve's quantitative easing, or money printing will continue.
"The Fed will keep printing money and as and when required the government will step up," Bell says. "(But) if Romney wins he's seen as more fiscally conservative and may have a bias to start removing some of the monetary stimulus in place, although that will depend on who ends up taking over from the current Federal Reserve Chairman Ben Bernanke."
Romney has said he won't reappoint Bernanke when his current term ends in January 2014 if he becomes president. Obama reappointed Bernanke to a second four-year term following his initial appointment by George W. Bush.
'Romney probably happy to have a weak US dollar'
Nonetheless, Bell suggests Romney probably wouldn't want to see a strong US dollar.
"I think the situation in the US economy is that they're quite happy to have a weaker US dollar because it's good for their exporters and it's good for business. So at the end of the day it's a difficult one to call. If the Republicans win the presidential race then it could be a short-term positive for the US dollar, but overall probably not a lot will change and at this stage it does look like Obama might sneak over the line."
Meanwhile, Bell says with underlying readings of global financial conditions currently quite positive, less volatility is favouring the New Zealand dollar, which is seen by many traders and investors as a growth currency. Among the "quite positive" features this week was China's official October Purchasing Managers' Index (PMI). It rose to 50.2 from 49.8 in September, which is the first reading above 50 - meaning a pick up in activity -since July, supporting a view that economic growth in the current economic cycle may have bottomed in China.
"So I suppose the risk that we face over the next few months is that the New Zealand dollar does continue to rally and if the global economy continues to muddle along, and the US continue to print money, well naturally that's going to be positive for the Kiwi as well," Bell says.
Testing post float highs?
"Our (HiFX) technical analyst is quite bullish on the New Zealand dollar. He actually thinks the Kiwi's got potential back up to US88c, which is the post (1985) float high that we had last year," Bell says.
Sitting just under US82.7c late on Friday, Bell maintains it wouldn't take much to get the New Zealand dollar up to US88c again, having reached its post float high of US88.20c on August 1 last year.
"And in light of the fact our Reserve Bank has said whilst they could use monetary policy to have an influence on the currency, it's certainly not something they want to do. But I'm sure there's going to be an interesting discussion at the Reserve Bank if we did see the NZ dollar up at US88c."
On top of this Bell reckons the New Zealand dollar is set to push higher against the Australian dollar too, with a 50-50 chance of a cut to Australia's Official Cash Rate from 3.25% next Tuesday, and an ongoing easing bias from the Reserve Bank of Australia (RBA) expected.
"If the RBA cut next week and continue to maintain an easing bias, well the Kiwi-Aussie cross rate could continue to go up. We still think it has got potential back up over A82c over the next three to six months, which again is also going to be negative for our exporters."
The Kiwi was at A79.51c late on Friday.
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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.