HiFX's Dan Bell on currency wars, Japanese inflation targeting, and how the RBA may force the RBNZ's hand on the OCR this year

Here's our weekly currencies outlook and review with HiFX's Senior Dealer Dan Bell, which includes a look at the "currency wars" sweeping the globe and what to expect from the Reserve Bank of New Zealand's (RBNZ) Official Cash Rate (OCR) review next Thursday.

The RBNZ will review the OCR against a backdrop of renewed quantitative easing (QE), or money printing, overseas. With its country's economy struggling, it was revealed this week Japan's trade deficit last year tripled to a record ¥6.927 trillion (about NZ$91 billion), the central bank is acting.

The Bank of Japan has adopted a 2% inflation "target", compared with its previous "goal" of 1% inflation. It also says it'll continue asset purchases on an "open-ended" basis to further expand monetary stimulus.

The move pushed the yen down against all major currencies, no doubt to cheers from Japan's struggling exporters.

"Against the New Zealand dollar it (the yen) has depreciated by about 15% since the start of December last year," says Bell. "So in two months you've seen the New Zealand dollar go up from the mid-60s to over 75 against the yen and that's the highest we've been since 2007-08."

Weakening currencies to bolster exports

Bell notes that in the current environment of weak global economic growth every country wants a weak currency.

To this end most developed countries have their interest rates near zero, and many, including Japan, the United States, EuroZone and Britain, have also been undertaking additional economic stimulus such as QE to try and boost their economies.

"And part of that is also trying to weaken their currencies to make their exporters more competitive," says Bell.

"Everywhere really, if you talk about the Bank of Canada this week talking about the high currency and the impact that's having on their economy, Norway and Sweden were talking about the impact of the currency, the Bank of England's talking about the currency this week. Obviously the Bank of Japan is doing something, actually out there printing money. (And) even some of the leading commentators in Australia are talking about the high currency and the fact that the Reserve Bank of Australia (RBA) is going to be more likely to cut interest rates this year to help bring the currency lower."

"So it's a big topic at the moment and it's going to be a big issue for New Zealand this year," Bell adds, pointing out that on a Trade Weighted Index (TWI) basis the New Zealand dollar's still sitting around five year highs with the TWI today at 75.5.

"Against the Australian dollar we have been trending up. We're over the A80 cents mark. Against the Euro we're still sitting around multi-decade highs, and against the pound sterling close to all time post float highs."

"So it's going to be very interesting to see what the RBNZ has to say on Thursday," says Bell.

Just jawboning expected from Wheeler but should he do more?

Bell expects a "steady as she goes" approach from RBNZ Governor Graeme Wheeler, with no unconventional efforts to weaken the Kiwi to be revealed on Thursday, but some rhetoric about wanting a weaker dollar likely. Although one way of weakening the New Zealand dollar would be cutting the OCR, this is also not expected.

"In a situation where global central banks are cutting interest rates still, or they are printing money, our exporters are feeling the pinch of our high currency," says Bell.

"And at the end of the day it's going to be a challenge for New Zealand to grow in a sustainable way through exports if our currency continues to go up. So the challenge for the RBNZ next week is, despite having a stronger Auckland property market and the Christchurch rebuild flowing through to house prices and to inflation, overall it seems that the New Zealand economy still has some major challenges and the currency's going to be one of those challenges this year."

"At the end of the day they (the RBNZ) have got a tough job. We don't have the (deep) pockets to go out there and start intervening. We don't have the appetite to do things like the Federal Reserve or the Bank of Japan or the European Central Bank for that matter," adds Bell.

"In a perfect world the market should determine the value of your currency. But the challenge is we've got these other central banks that are undertaking very interventionalist type policies, which has a real impact on trade flows, and the real economy. So unfortunately it's not a perfect world. New Zealand is just a small economy that is being exposed to a lot of these other policies that we've got absolutely no control over."

The challenge from the RBA

Meanwhile, the RBA also poses a challenge to its New Zealand counterpart this year.

The Australian Cash Rate is currently 3%, but is expected to be cut. Bell says some analysts are picking it'll be dropped to as low as 2% by year's end.

"So if that was to happen and we remain at 2.5%, that has the Kiwi-Aussie cross rate, in my opinion, up at A85c and that could easily unfold this year. A85c is around the 10-year average for the Kiwi-Aussie cross rate and that's going to have a big impact on our export sector because Australia is still our largest market," says Bell.

"(So) the challenge also is with the RBA. If they start cutting interest rates I think it's going to be very difficult for us to even talk about raising interest rates anytime in the next 12 or 18 months."

He says the market has the chances of an Australian interest rate cut on February 5, the RBA's first Cash Rate review of the year, at about 40% to 50%.

"But looking out further we are seeing the market price in a 100% chance of a rate cut from the RBA."

Also see Dan Bell's five key issues for 2013 here.

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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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Good summary Dan.  Its possible this year could be the most important in terms of currency plays by central banks that could trigger some trade tensions ie China USA.  It could also be the year when we see a change from the US federal reserve to reduce quantative easing measures and adopt other measures.  Maintaining growth competitiveness in Australia is the big question for 2013 and the same for New Zealand but to a less extent.