By Gareth Vaughan
Volatility is already a key feature of the global currency markets in 2015, and HiFX's Dan Bell is warning importers and exporters to fasten their seat belts and expect a bumpy ride.
In a Double Shot interview Bell, head of corporate FX at HiFX, says there could be a 20% swing in the value of the New Zealand dollar this year, particularly against the United States dollar.
"Particularly for businesses I think risk management needs to be taken more seriously this year because we can see a 20% swing in the New Zealand dollar in a 12 month period. And obviously if you're exposed to the currency through exporting or importing, that can have a huge impact on your earnings and really just wipe out your margins pretty quickly," Bell says.
"I think 2015 is going to be a very volatile year. We've already started with a lot of volatility. Obviously the central banks are back in the forefront of things, oil prices (have been falling), and (with) what's going on in the US economy and China for that matter, it's going to be an interesting year."
Already this year we've had the Swiss National Bank stun financial markets by dumping a three-year-old cap on the Swiss franc, sending that currency soaring against the euro. We've also had the Bank of Canada shock markets with an unexpected interest rate cut in response to falling oil prices. And the European Central Bank (ECB) has embarked on a €1.1 trillion, 19-month quantitative easing (QE), or money printing, programme. The ECB's plan to buy €60 billion worth of assets a month is €10 billion more than had been expected.
"If you look at the New Zealand dollar over the last 20 odd years,... it's not unusual to see the NZ dollar versus the US have a 20% swing in a 12 month period. We're trading just under US75 cents today, which is the lowest level since mid 2012. And we continue to look quite weak against the US dollar breaking that key US75c level. I think's quite a big level of support and a psychological level of support," Bell says.
"It wouldn't surprise us to see the NZ dollar into the 60c (range) against the US dollar this year with the way things are going. So you could look at a range of anything from US65 cents back up to 80US cents, which is where you see about a 20% move."
Global ramifications from ECB move
In terms of the ECB action, Bell says it's likely to see the NZ dollar remain strong against the euro having recently reached a record high over €67c. The ECB's move is also likely to have international ramifications, as did the US Federal Reserve's QE.
Last October the Fed brought the curtain down on its QE 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 (OCR), remains at 0 to 0.25%, where it has been since December 2008.
"The European Central Bank putting this amount of stimulus into their system is going to have flow on effects into the global economy in the same way the US Federal Reserve and their money printing exercise had global ramifications," says Bell. "And obviously will continue to see money flowing into the New Zealand dollar because we offer a much higher interest rate than most other developed economies."
"Obviously people were talking about parity and generally when people start talking about parity that's usually the top of the market. But the reality is our cash rate is at 3.5%, the Reserve Bank (of New Zealand) meets next week (to review the Official Cash Rate). No one expects the Reserve Bank of New Zealand to do anything next week. (But) it will be interesting to see if they drop their more hawkish stance because they have been potentially talking about raising rates," says Bell.
"Last year they were talking about taking rates higher and the market was expecting the cash rate in New Zealand to be up around 4.5% towards the end of 2015. Now most analysts and economists have really pulled that expectation back and most believe the OCR will remain at 3.5% for all of 2015. In fact we are starting to see the market price in a small chance of a rate cut from the Reserve Bank this year."
Given this, the NZ dollar-Aussie dollar cross rate is likely to be at the forefront of RBNZ minds, along with the housing market.
Across the ditch the Reserve Bank of Australia reviews its 2.5% cash rate on February 3.
"The Reserve Bank of Australia continue to talk their currency down and there's also talk about the potential for rate cuts," says Bell.
The NZ dollar has, meanwhile, been weakening against the greenback with an expectation the Fed may increase interest rates this year.
"This is really part of the Federal Reserve normalising monetary policy. When we say normalise it doesn't mean the Fed Funds Rate is going to go very high. But it will start to see some hikes. At 0.25% at the moment we'd expect the Fed Funds Rate to go up a couple of times over the next six to 12 months," Bell says.
"That's obviously benefiting the US dollar. So the US dollar is stronger against most major currencies, and the US economy on broad terms continues to strengthen."
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.