By Gareth Vaughan
A strong US jobs report appears to have convinced financial markets the US Federal Reserve will raise interest rates this year for the first time in nine years.
Dan Bell, HiFX director of sales, says the expectation is for the Fed to hike the Federal Funds Rate this June for the first time since June 2006. This outlook is likely to keep the Kiwi dollar under pressure against the greenback, potentially pushing it down to US70 cents or even lower, Bell reckons.
"We've been quite used to sluggish growth in the US economy since the financial crisis, we've been quite used to higher commodity prices, and that dynamic isn't playing out this year," says Bell.
"So I don't think the New Zealand dollar has got any chance of making it back towards 80c against the US dollar over the next 12 months. And I think there's probably a big adjustment that needs to happen in the minds of businesses and individuals that are hoping for the currency to recover to those sorts of levels. So I think we're reverting back to a longer term level against the US dollar and that's probably around US70c, potentially even lower than that."
Friday night's monthly non-farm payrolls report showed the US economy added 295,000 jobs in February, which was well above the 235,000 expected by economists. The official unemployment rate fell to 5.5%, a six-and-a-half year low.
"If you look at the last six months the jobs growth that the US has generated is the highest since the mid-1990s. You have to go back to the good old Bill Clinton days to see a period of such strong employment growth in the US economy," Bell says.
Last 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 (OCR), remains at 0 to 0.25%, where it has been since December 2008.
We'll hear more about the Fed's plans next week after the March 17-18 Federal Open Market Committee (FOMC) meeting.
A more dovish Wheeler?
Meanwhile, the Reserve Bank of New Zealand will review the OCR this Thursday and deliver its first full Monetary Policy Statement for 2015. No change to the 3.50% OCR is expected, but Bell believes Reserve Bank Governor Graeme Wheeler may adopt a more dovish tone. At January's review Wheeler was sitting on the fence, noting the next move in the OCR could be up or down.
"I think he (Wheeler) is going to come out more dovish," Bell says. "We've certainly got issues in the housing market, but if you look at the way Australia is playing out you can't separate New Zealand too much from what's happening in Australia, and China for that matter."
"So I think he needs to be very, very sensitive and aware of the ongoing weakness in the Australian economy, the ongoing I guess weakness in China, not that China has fallen off a cliff. But certainly their appetite to import commodities has weakened significantly over the last year or so. It's tricky job for the RBNZ at the moment that's for sure," Bell says.
The much touted push by the NZ dollar for parity with its Aussie counterpart appears to be off the table for the time being, with the Kiwi back around A95.4c, having been as high as A97.20c recently. Nonetheless Bell doesn't see the NZ dollar falling away against the Aussie dollar.
"The Reserve Bank of Australia cut interest rates in February (and) they left them on hold last week at 2.25%. But the RBA are expected to probably cut again and maybe even as early as next month or May. So that'll take their cash rate down to 2%. Our cash rate at 3.5% isn't doing us any favours in terms of our productive sector and our export competitiveness to places like Australia," says Bell.
"Our currency made a post float high of just over A97.20c over the last fortnight, and we've traded at post float highs against the euro as well over 68.5 (euro cents). So if you're looking at going on a holiday to Europe or Australia, we've pretty much never been better."
"Ultimately we are still talking about the New Zealand economy outperforming the Australian economy moving forward. The Reserve Bank (of NZ) probably have a neutral posture at the moment whereas the Reserve Bank in Australia is still talking the Australian dollar down and still talking about cutting interest rates. So I don't see the NZ-Aussie cross rate falling away too quickly. It's probably going to remain in that A94c to A97.5c to A98c range for the time being," Bell says.
In the video we also discuss China, the European Union and Greece.
Dan Bell is director of sales 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.