By Gareth Vaughan
Market expectations for when the US Federal Reserve will increase interest rates for the first time in nine years have been pushed out again with no rise now expected in September, says Dan Bell, director of sales at HiFX.
In our monthly never a dull moment currencies report Bell says recent volatility in global financial markets, off the back of heavy falls in Chinese share markets, have put paid to expectations the Federal Reserve will raise interest rates at its Federal Open Market Committee (FOMC) meeting on September 16 and 17.
"No rate hike in September is the market's call," Bell says.
"Obviously the last time we caught up the market was pretty much sure that the Fed were going to start raising interest rates in September With the volatility we've had in China, in the Chinese stock market over the last couple of weeks which has flowed through to global equity markets, everyone has pushed back the next Fed hike until either the end of October or the middle of December which are their next meetings," says Bell.
The FOMC meets on October 27 and 28, and then again on December 15 and 16.
Change the paradigm?
Market expectations for a Fed rate hike being pushed out has become a familiar theme this year. Early in the year a June hike was expected, which was then pushed back to September, with this expectation now having been pushed out again.
"There doesn't seem to be any inflation out there. Certainly globally at the moment inflation is nowhere to be seen and with the weaker oil prices that we're seeing it's very difficult to see where inflation is going to come from," says Bell.
"So we're in an interesting period where I think central banks are starting to reflect on what this low inflation environment means, and whether or not they have to change the underlying paradigm that assesses inflation and assesses the economy. Because some would argue if the outlook for inflation is so low then interest rates are never going to go up, and yet that reflects a more pessimistic view of the global economy."
"So it's an interesting time for what the policymakers are going to do around that inflation story," Bell adds.
The Fed hasn't hiked the Federal Funds Rate in the world's biggest economy since June 2006. The Fed Funds Rate has been set at 0% to 0.25% since 2008.
"It continues to be a big focus of financial markets, obviously what the Federal Reserve do around interest rates," says Bell, with recent extreme volatility in global markets causing concerns.
"We've seen the weakness in the US equity markets, obviously commodity prices continuing under pressure, oil prices dropping under $40 a barrel...when you get those types of price responses in the markets there's question marks whether now's actually a good time to be raising interest rates in the US."
Ironically the recent US economic data flow has been pretty good in terms of the likes of durable goods, consumer confidence and retail sales, Bell says.
"We've got US employment figures (non-farm payrolls) out on Friday night. (They're) always closely watched by the Fed and the market. We're expecting employment growth for the month of August to come in at around 200,000 to 220,000 new jobs, their unemployment rate down at 5% (from 5.3% in July)."
The Wild East
Meanwhile Bell says Chinese share markets have had something of a "wild east" feel in recent months as concern has spread about what it means to the world's second biggest economy and key driver of global economic growth.
"The reality is the Chinese stock market, the Shanghai Composite Index, rallied over 120% from back in August (2014) up to June (2015) and that was despite slowing earnings growth in China. So the reality is the move we saw in the Chinese market wasn't sustainable and really we are just seeing a correction. And unfortunately that correction has been pretty abrupt and can cause a lot of concern. But the bottom line is the Chinese stock market had no real rights to be rallying like it was so we are seeing it come back down to earth," says Bell.
Closer to home the Reserve Bank of Australia (RBA) is due to review its cash rate this afternoon (Tuesday), which is currently at 2%. (Update; the RBA has left the cash rate unchanged).
"I think the RBA are pretty happy with the cash rate where it is. The Aussie dollar was at six year lows under US71 cents recently. If you go back a couple of years and the Aussie dollar was trading well over parity. So there has been a huge fall in the Aussie dollar providing that support to export sectors outside commodities and resources side of their economy. So I think the RBA is on hold for the time being," Bell says.
'A given' the RBNZ will cut
On September 10 the Reserve Bank of New Zealand is due to review the Official Cash Rate, currently at 3%.
"It's pretty much a given the RBNZ will cut," says Bell. "The currency has done its job in terms of cushioning the impact from these lower commodity prices."
He suggests the recent level the Kiwi has been at against the Greenback - in the mid 60s, feels about fair value.
"But in the longer term I still think the New Zealand dollar has got more downside against the US (dollar), but (in the short-term it) could go a bit higher if the Fed hold off," Bell says.
"I think the US dollar is still in an uptrend against most major currencies, which I think means we've got further downside in the NZ dollar-US dollar, probably down into the low 60s, potentially into the high 50s if we continue to see the cycle unfold in commodities."
"(We're) relatively stable against the Australian dollar around 90c, trading a range between 88c and 92c... and that's probably going to be the case for a little while," says Bell
"The New Zealand dollar has probably been one of weakest currencies over the last few months so investors have really fallen out of love with our currency as these commodity prices have come off, and (with) the expectation for lower interest rates (in NZ)."
And as highlighted by Bloomberg recently, a weaker NZ dollar makes NZ assets - including property - cheaper for overseas buyers.
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.