HiFX's Dan Bell says NZ$ could fall below US70c; RBNZ & Fed credibility on the line over interest rate expectations

By Gareth Vaughan

A weakening New Zealand dollar could drop below US70 cents if the Reserve Bank of New Zealand cuts the Official Cash Rate (OCR), or strongly hints at cutting it, and weaker New Zealand economic data emerges, says HiFX's Dan Bell.

In our monthly never a dull moment currencies report Bell, director of sales at HiFX, said with the Kiwi at US71c on Tuesday, its lowest levels since 2010, the potential was there for it to slip under US70c. The RBNZ is due to review the OCR, currently at 3.5%, on June 11 with the market pricing in about a 56% chance of a cut, Bell said.

"It's not going to take much (to fall under US70c) if we get confirmation of a clear easing bias and we see some weaker data out of New Zealand, I think we could easily be into the high 60s. I think that would be justified," said Bell.

At that point it looks quite attractive for exporters, he added.

"I don't think many exporters would've been budgeting off a sub-70 Kiwi-US this year. I certainly know that importers weren't." 

"I think exporters have to do what's right for their business particularly if they've budgeted off certain levels and they can lock in gains. An exporter taking out a forward contract for one year at the moment, selling US buying Kiwi, would be getting under 70 cents, which is remarkable really considering 12 months or so ago we were trading at US88c. So it's amazing how quickly the currency can change, and obviously businesses need to be able to respond to that," said Bell.

RBNZ easing bias expected with 'credibility on the line'

Meanwhile, if the Reserve Bank doesn't cut the OCR on June 11 it's expected to have a definite easing bias, said Bell.

"They're already starting to talk about room to cut interest rates in New Zealand. (So) I think they'd lose a bit of credibility if they don't follow through with a clear easing bias next week."

"Obviously we've seen significant weakness in dairy prices over the last 12 months. The general feeling is that aggregate demand in the New Zealand economy is starting to come off the highs that we've had last year, the Christchurch rebuild has not quite run its course but it's starting to slow down, and perhaps the strength that we've seen in the housing market in Auckland, whilst it's still a big story, perhaps it isn't bubbling along at the rate of knots it was."

Fed credibility on the line too

The US Federal Reserve is also under the spotlight with expectations it too will move on interest rates, but in its case by lifting the Federal Funds Rate for the first time in nine years.

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 OCR, remains at  0 to 0.25% where it has been since December 2008.

The Fed's Federal Open Market Committee (FOMC) next meets on June 16 and 17, and a June interest rate hike had been anticipated by the market earlier in the year. However, that has now changed.

"The market isn't expecting that (June hike) to happen. The market has now shifted the first rate hike from the Fed out to September this year," said Bell.

"I guess at the end of the day the market has stepped back a little bit and said 'well, the timing of the first Fed rate hike probably isn't as important as how aggressive they go moving forward.' So in terms of next year how many times they actually hike interest rates, which they are going to do I think that's a given. They've flagged it to the market, they've had the follow through in the economy for them to justify them hiking interest rates, and I think the time has come for sure."

How the global economy responds to a Fed rate increase is also important, Bell notes, given "everyone's pretty addicted to this cheap credit and the bottom line is the Fed set the tone for global credit demand."

"Obviously equity markets are still ramping along at record highs in a lot of countries, asset prices across the board in equities and the housing market and what not are still very, very strong. So  I think the Fed, to maintain any credibility, has to raise this year. But not in June," said Bell.

In the video Bell also talks about Australia and the outlook for the Australian economy, the Aussie dollar and Australian interest rates, and the conclusion many observers are drawing that "there is going to be some sort of (debt) default from Greece."

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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.