HiFX's Dan Bell on what it might take for the RBNZ to intervene in the currency markets, how the fiscal cliff might be good for NZ exporters, and growing current account deficit concerns

HiFX's Dan Bell on what it might take for the RBNZ to intervene in the currency markets, how the fiscal cliff might be good for NZ exporters, and growing current account deficit concerns

Here's our weekly currencies outlook and review with HiFX's Senior Dealer Dan Bell.

Pushed higher by news the United States Federal Reserve is keeping its money printing presses rolling, the New Zealand dollar this week climbed above US84.50 cents, touched A80c, and the Trade Weighted Index (TWI) topped 75, a similar level at which the Reserve Bank intervened in the currency markets in 2007, selling New Zealand dollars in an attempt to weaken the Kiwi.

So what are the chances of the Reserve Bank, under new Governor Graeme Wheeler, stepping in again?

Not good, according to Bell.

"I very much doubt it. I think we have to see a real sustained, almost like a disorderly rally in the New Zealand dollar for the Reserve Bank to even start thinking about it," Bell says.

"The New Zealand dollar has been more or less grinding higher against a lot of the majors. I mean we have had a strong rally against the US dollar, in three weeks we're up over 2.5c, almost 3c, but it hasn't been a disorderly rally. It has just been happening. Every day you come in and it's up another 25-30 basis points."

(But) I think if the New Zealand dollar started to gain 1%, 2% every day for a sustained period, the Reserve Bank would start to get concerned. But at this stage no, I don't think the Governor will be intervening. I could be wrong but whilst the TWI is at the same level as it was when the Reserve Bank intervened back in 2007, we aren't seeing this disorderly rally in the Kiwi just yet."

The TWI is the nominal New Zealand dollar exchange rate weighted 50/50 by New Zealand's trade with its major trading partners and the nominal Gross Domestic Product GDP, in US dollars, of those countries. The TWI rose as high as 76.9 in July 2007.

The Reserve Bank confirmed its only openly publicised intervention in the currency markets, since the dollar was floated in 1985, on June 11, 2007 saying it had intervened because the Kiwi's value was “exceptional and unjustified in terms of the economic fundamentals”. The New Zealand dollar was then trading at around US76c, a post-float high that has since been extended above US88c, and fell by around 1 cent after the announcement.

Fiscal cliff could have a silver lining for NZ exporters

The looming US fiscal cliff could, however, send the Kiwi lower. Referring to about US$607 billion in automatic tax increases and spending cuts set to take effect from January, the fiscal cliff could cut 4 percentage points off US GDP next year, force unemployment up a percentage point - or by about two million jobs, and send the US into recession, according to the Congressional Budget Office.  Stark divisions between the President Obama led Democrats and Republicans, who control the US House of Representatives, have thus far prevented any resolution, with the Republicans reluctant to raise taxes and Obama pledging not to extend President Bush era tax cuts for wealthy Americans.

"It (the fiscal cliff) is a big deal," Bell says."There is no resolution (and) comments from one of the Republicans over the last couple of days indicate that they think the Democrats are (just) going to let the fiscal cliff roll over on January 1, (meaning) there isn't going to be a resolution."

"So over that period we could see quite a bit of volatility come back into the market, particularly at a time when the market is quite thin and a lot of people are on holiday. We could see a bit of risk aversion in the first week of January."

And there'll be no shortage of brinkmanship between the Republicans and Democrats.

"We know they don't like each other, they don't like working together. It's going to be extremely negative for the US economy if they don't get it sorted."

But under this scenario the greenback could gain strength and the Kiwi lose it, thus giving a boost to New Zealand exports.

"I think you'll see weakness in global stocks and commodities and ultimately that's going to be negative for the New Zealand dollar because we will see this flight to safety, which continues to benefit AAA rated assets, most of which are still based in US dollars. So the US dollar could strengthen under that scenario despite the fact that the issue is coming from the US," Bell says.

He maintains the world's financial markets aren't currently taking the fiscal cliff issue as seriously as they could do, with investors "quite comfortable" that global central banks are printing money, and continue to talk about printing more if they need to.

"Investors are taking that to mean that 'hey, things are okay. Let's just keep hold of our risk assets.' The S&P stock index is up over 15% this year so investors have had a pretty good run," Bell adds.

See Bell's doomsday and best case fiscal cliff scenarios here.

Credit rating agencies watching current account deficit

New Zealand's third quarter GDP figure is due out from Statistics New Zealand next Thursday, which Bell says is expected to show growth of about 0.5%. Prior to that, September quarter current account data is due on Tuesday.

This comes after October's overseas trade figures showed a NZ$718 million monthly deficit, which was NZ$268 million above the consensus of economists' expectations and way ahead of the NZ$226 million deficit recorded in October last year. BNZ economists now forecast the deficit will widen to 5.5% of GDP in calendar year 2012, from 4.9% in the year to June 2012, and expect it to "pierce through 6%" during 2013.

Bell warns a continuing deterioration in the current account deficit could see New Zealand's sovereign credit ratings come under threat.

"We're starting to see a deterioration in New Zealand's current account deficit again and back pre-GFC (global financial crisis) that used to be quite an important driver of the currency markets. But lately it has all been risk on, risk off, money printing here, money printing there and the New Zealand dollar has generally benefited from a lot of these global central banks printing money whilst our central bank has not been printing money, and whilst we've still got quite a low debt-to-GDP ratio."

"But I think if you do continue to see a sustained deterioration in our current account, it could be flagged by the credit rating agencies next year and that's where it could have an impact on the New Zealand dollar. So if someone like S&P came out and said 'listen you guys are sucking in too much offshore capital and you're paying too much interest to overseas investors to prop up your property market,' then they might talk about downgrading the outlook for our credit rating, so that could be a story that comes about next year. But for now, as we can see, the New Zealand dollar is pretty hot at the moment."

New Zealand currently has sovereign foreign currency credit ratings of Aaa with a stable outlook from Moody's, and AA from both Standard & Poor's and Fitch, both also with stable outlooks. New Zealand has domestic currency credit ratings of Aaa with a stable outlook from Moody's, and AA+ from both Standard & Poor's and Fitch, both with stable outlooks.

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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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