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HiFX's Dan Bell says NZ dollar may continue falling, potentially to around US60c, given global, and domestic issues driving it

HiFX's Dan Bell says NZ dollar may continue falling, potentially to around US60c, given global, and domestic issues driving it

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.

Greek uncertainty

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.


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When the Fed raises rates the BoE won't be far behind. With the RBNZ cutting should be some interesting times ahead.

It is horrifying thinking back at how close I was to buying an Auckland house in April.

I wonder if foreigners are liquidating any hard assets, or whether it is all just forex trading that is causing the decline in the NZD. The drop so far wI'll presumably be welcomed by the RBNZ, but there will be a point where if it drops too many floors down the elevator too quickly, then fewer OCR cuts will be needed or possible.

unlikely - is fairly standard behaviour, whenever there is fear in the markets, the cognoscenti, those with the ready loot, head for a safe haven - usually the USD - until things settle down - or blow over

Actually, JPY is or was an important barometer. Despite all their money printing, NZD is down 10%+ from its highs against the yen.

"The deterioration in the Kiwi's outlook will inevitably attract speculators looking to make money by betting against the currency. This is in an important observation as such positioning could well exacerbate the move lower should enough money be brought into play.

Trader Kathy Lien at BK Asset Management says selling the New Zealand dollar is one of her top trades at the present time:

"We believe that the weakness in data and change in monetary policy outlook is very bearish for the currency and the main catalyst for further losses will be the central bank's Financial Stability Report and Wheeler's press conference Tuesday afternoon / Wednesday morning local time. If Wheeler talks easing NZD/USD could drop below 72 cents. The New Zealand dollar is a currency that you should be trading this week and after today's sharp decline, the best tactic would be to sell on a bounce."

For the moment it's just a matter of the carry traders taking flight and market traders shortselling the currency, because of our poor economic performance.

I expect foreigners will take the opportunity of our weak currency to further load up on hard assets and take advantage of the owners weak bargaining position to drive down the prices.

I sold Kiwi to buy US a couple of weeks ago based on NZ OCR cuts. A lower OCR to me means RBNZ signalling a lack of confidence in the NZ economy, while the US economy seems to be recovering. Also OCR cuts means less return from NZD term deposits.

a lower OCR also means more borrowing in NZ, and thus more spending. that pushing up imports.

Do watch the world confidence factor for money running home to the USD when the market gets trickey (which is usually tied to the times when RBNZ starts thinking of jumping)

But our GDP is languishing up %.2 in the last quarter CPI is %.1

Debt in Housing, Farming and Business went up %6.8

Something is wrong, who's going to pay the interest?

Yet the financial ppl in here would have us believe that the OCR is too low, all is well, "we deserve the high interest and complete safety of bank deposits" yeah right.

btw can you separate out the housing debt component? The thing that worries me is the farming and business debt increasing, if its also 2%+ or worse 5%+ that is bad sign IMHO. Housing debt is down to greed IMHO sadly that will impact the likes of me (ie tax payers with jobs) if our economy stalls, but its the former debt that could nose dive us if they give us struggling.

This is how much housing debt we have right now ...

NZ$ 199,705,971,679

And interest rates are to low, it's why we have a speculative bubble in assets.

Housing debt (repayable over 25+ years) is less than one year's NZ GDP of NZ$239,065,000,000. I agree it is unnecessarily high due to unreasonably low interest rates. But the long-term debt to short-term economic activity ratio is not that concerning. Being conservative, one 20th of the debt due each year ($10 bln) to GDP is only an annual 8.3% repayment load. In contrast, household deposits (after paying down that debt) are growing +10% pa.

You need to separate out the impact of flows (GDP etc) and stocks (debt). Mixing them causes confusion, draws wrong conclusions, taints analysis.

You need to separate out the impact of flows (GDP etc) and stocks (debt). Mixing them causes confusion, draws wrong conclusions, taints analysis.

Would you please add definition to your claim, since many draw the debt to GDP ratio comparison?

and that is why NZ will never grow, so much interest flowing out of the country and not being spent in our economy to support local business whom in turn employ workers.
its a wasted resource hence why I am disappointed in all governments reluctance to tackle the issue and make housing an unattractive investment.

Imports are however getting more expensive, at least for the stuff I tend to buy, shipping is also hefty.

The vast majority of FX trades is unrelated to the real economy and simply speculative. So it looks like the speculators are cashing in on their long profits and reversing the trend as they feel there is more profit in the short direction now. I think that sums up the story. Forget dairy, China etc.

As long as central planning banks around the world are supplying speculators with trillions of printed money to distort markets, there will be high levels of volatility and irrationality be it FX or real estate.

that might be true for smaller movements, but many of the large jumps are fundamental driven. Also look out for stuff that the market has already taken into account, so fundamental jumps that have been reasonably well predicted tend to be part of the everyday trend and don't show up much more than the machines scalping. So it's the stuff which isn't to expectation, and that isn't predicted.
And also in NZ the liquidity can be a little thin at times so people shipping 40 - 100 M in foreign trade or in preparation for big deals can knock the NZD side of trades pretty significantly, and trade unlike speculation tends to go one way. That's why as a comm doll, our tend tends to be solidly influenced or export/import and world commodity performance. (As to the Euro, which is effected heavily by banking performances)

FX is indeed about things like China and dairying, FX can be viewed as a reflection of confidence in the direction of a nation's economy. FX doesn't actually physically produce anything but is a price setting mechanism.

Now that everyone is forecasting further drops, there can't be much downside left.