By Gareth Vaughan
The "perfect storm" that has hit the New Zealand dollar over the past couple of months looks set to continue, with the Kiwi potentially falling below US60 cents, says Dan Bell, director of sales at HiFX.
In our monthly never a dull moment currencies report Bell notes the NZ dollar on a Trade Weighted Index (TWI) basis is down more than 10% since mid-April.
"We have seen a huge fall around the NZ dollar in recent months and the old adage was we went up an escalator and down an elevator. And that's certainly the case if you look at the proceeding three, four, five years," Bell says.
"I think the momentum is still to the downside. From a technical perspective the NZ dollar has broken a lot of key levels of support. We're around 66 cents against the US dollar. By my understanding if we break US65 cents it opens up US59-60 cents in terms of another level. And I could easily see that happening, particularly if we get these rate cuts from the Reserve Bank and dairy prices don't recover."
"So overall the NZ dollar is well and truly in a down trend and there doesn't look to be anything immediate on the horizon to stop that. I would continue to think there are further downside risks over the next few months," says Bell.
He suggests the Kiwi has been caught in "a perfect storm" over the past couple of months.
"The Kiwi does underperform in a risk aversion (environment). And at the moment the situation in Europe, the situation and the uncertainty around the Chinese stockmarket, is creating a negative backdrop. So investors are going to be less likely to hold on to the NZ dollar...Dairy prices continue to fall, there are ongoing concerns there, and that's having an impact on business confidence in New Zealand as well (with) recent readings of business confidence starting to show the NZ economy isn't quite as rosy or upbeat as it was last year," Bell says.
Against this backdrop some economists, and the market, are predicting another three Official Cash Rate cuts from the Reserve Bank over the next few months, taking the OCR down to 2.5%. Last month's 25 basis points cut, to 3.25%, was the first OCR cut since March 2011 and comes after four increases, of a combined 100 basis points, between March and July last year.
"With the weaker currency coming into effect obviously that has implications for the cost of imported goods. So I think we're going to see the impact of that start to flow through to inflation, and that's going to be another interesting thing for the Reserve Bank to take on board, - a weaker NZ dollar leading through to higher inflation in the tradables sector. But at the same time weaker dairy prices and a softer economic backdrop forcing them to cut interest rates," Bell says.
Meanwhile with the Greek drama continuing to unfold, Bell notes a potential scenario is Greece being asked to leave the Eurozone. Over the weekend Greeks voted against yielding to further austerity demands from their creditors, leaving Europe’s leaders to decide whether Greece can remain in the euro.
"And then we have this Grexit scenario which is where the risk aversions are and concern is in the financial system. We're better prepared than we've ever been for this situation post the Global Financial Crisis. (But) the thing that we never really know is if in fact Greece does leave the Eurozone, what sort of knock-on effect that has on investor confidence globally, whether or not that impacts global credit markets (as) obviously New Zealand still borrows a lot of money offshore," Bell says.
"Does a Greek exit end up seeing the spreads that are being charged in global wholesale credit markets widen out and in turn make it more expensive for us to raise debt? These are the questions we don't really have answers to until something actually happens."
Chinese sharemarket 'retracement'
In terms of the other big financial markets event currently playing out, sharp falls in Chinese sharemarkets, Bell points out this is against a backdrop of a recent strong run up. The Shanghai and Shenzhen sharemarkets fell 29% and 32%, respectively, over three weeks to Friday, and at the time of writing were mixed on Monday after weekend efforts to shore them up.
"Over the last six months the Chinese stock market is up 110% to 120% around the recent highs (and) off 30% to 40% over the last few weeks. So very, very volatile and when you see a stockmarket fall by that much, obviously it's going to raise concerns. But in the context of how quickly the stock market went up there, to see the stock market continuing to go up at that rate of knots would've been potentially as concerning, if not more concerning, than the drop that we've had."
"Obviously you don't want to see it unwind too aggressively because that has implications for global investor sentiment," adds Bell. "Hopefully we're seeing a retracement in what has been a very, very speculative market. And as long as that continues in an orderly fashion, hopefully that doesn't spill over."
Fed still expected to hike
Closer to home the Reserve Bank of Australia is expected to leave its Cash Rate at 2% when it's reviewed on Tuesday, and maintain an easing bias.
And in the United States the market is still expecting the Federal Reserve to increase its Federal Funds Rate, for the first time in nine years, by the end of 2015.
"The market is still predicting that the Fed will start hiking interest rates in September or December," Bell says.
"Overall I think the US economy is on plan for the Fed to start raising rates in September. Remember they've had this very, very stimulatory Fed Funds Rate (0% to 0.25% since 2008) for a long time now so we're only taking about them hiking that by 25 basis points and starting a tightening cycle that probably isn't going to be that aggressive considering what's happening out there in the world," adds Bell.
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.