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HiFX's Dan Bell reviews the world of currencies in 2014 and looks ahead at what to expect in 2015

Currencies
HiFX's Dan Bell reviews the world of currencies in 2014 and looks ahead at what to expect in 2015

By Gareth Vaughan

Just weeks ago exporters may have only been able to dream of a New Zealand dollar down to US70 cents, but this could become a reality in 2015, says HiFX's Dan Bell.

On the other side of the coin Bell, head of corporate FX at HiFX, suggests the Kiwi dollar may head above 95 Australian cents next year.

"I think against the US dollar we're going to continue to see the New Zealand dollar struggle on the basis of broad US dollar strength," Bell told interest.co.nz in a Double Shot interview.

The NZ dollar hit a two and half year low of US76.24c on Monday night, and Bell sees it dropping further as the US Federal Reserve continues "normalising" monetary policy in 2015.

"I think we could easily see US70c for the Kiwi-US, under US70c (is) probably a little bit of a stretch. But in a broad US dollar strength environment, and normalisation in their interest rate policy, that could easily be possible," Bell said.

In October the Fed brought the curtain down on its Quantitative Easing, bond buying, or money printing programme that was put in place at the height of the Global Financial Crisis in 2008. All up, this saw the Fed add US$3.7 trillion worth of assets to its balance sheet, which was about an eight-fold increase. However, the Federal Funds Rate, the US equivalent of New Zealand's Official Cash Rate, remains at  0 to 0.25%, where it has been since December 2008.

However, that may finally change next year.

"I think the US are well on the way to normalising monetary policy. It has been a long time coming, this is years and years in the making," said Bell.

"They (the Fed) have been telegraphing this for a long, long time and I think they've given the market plenty of time to realise that interest rates in the US are not going to be at zero forever, and ultimately we are going to start to see them normalise interest rates. It doesn't mean that we're going to see the Feds Funds Rate go from zero up to 3% or 4% in a short period of time. But I think we're certainly going to see them start to raise interest rates, probably from June next year."

Although the huge drop in the oil price over the past few months, of around 40% to under US$65 a barrel, will help keep inflation weak, Bell said it's also likely to see US consumers spend more money in the retail sector.

Aussie dollar parity?

Closer to home an expectation has built that the Reserve Bank of Australia may cut interest rates in 2015.

"Their cash rate is at 2.5%, obviously ours is at 3.5%. (So) if we see them down another 25 to 50 basis points the difference between the New Zealand dollar and the Australian dollar interest rate environment continues to favour New Zealand," said Bell.

"We're trading around A92c at the moment. We could easily be trading over A95c and then you start talking about parity, particularly if we continue to see the weaknesses in iron ore prices like we've seen this year. Iron ore prices are down 50% and we know that's Australia's largest export commodity."

More broadly Bell said it'll be interesting to see what the expected US dollar strength does to the overall global investment climate next year.

"I think the market is a little bit behind in terms of catching up with the fact that a lot of emerging economies have been issuing bonds in US dollars. They've been raising debt in US dollars. So if you continue to see strength in the US dollar, and these businesses aren't growing as much as they'd have liked, then that could create some major issues for the emerging economies of the world."

"Potentially a bit of volatility, and a bit of risk aversion, could weigh on the New Zealand dollar more than it weighs on the likes of the (British) pound," Bell said.

"So I'm not convinced we're going to see a lot of strength in the New Zealand dollar versus the pound next year. I actually think we've probably seen a top there, we got up to a high of around 56 pence against the pound this year. We're (now) trading around 49p, (and) I think we could easily see it back around 45p into next year. Against the euro it's probably going to remain steady around 60 euro cents. And against the yen it (the NZ dollar) is going to continue to remain strong whilst they print money until the cows come home."

Wide trading range

Earlier this year the New Zealand dollar traded above US88c, with the Reserve Bank selling a net NZ$521 million during August in a successful effort to help weaken it. That was the Reserve Bank's biggest monthly sale of New Zealand dollars since selling NZ$1.489 billion in July 2007.

"So when you look at US88c all the way down to US76c cents that's a pretty big range. And obviously that has a pretty significant impact on the cost of imported goods into New Zealand, and the returns our exporters are getting if they're selling US dollars," said Bell.

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Dan Bell is head of corporate FX 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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2 Comments

Interestingly, some industrial commodity equities are on a tear, such as Sumitomo Metal Mining. are up 50% in 2014. I guess it all depends on what is perceived as valuable to your productive economic base.

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High interest rate ,  so high NZ dollar. 

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