Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's big moves in the global economic scene, on currency markets and looks ahead to next week's events.
Weak US jobs growth figures last Friday night were soon overshadowed by talk of a Greek pullout from the Euro zone. This was quickly denied by officials in emergency meetings, but highlighted the tensions still evident within Europe's sovereign debt markets and its banking system.
Bell says it's now clear Greece will need another bailout because it requires 60 billion euros of funding in 2012 and simply can't afford to borrow it with market interest rates over 20%.
He explains how any restructure of Greek bonds would hit Europe's banks and the wholesale credit markets.
"The contagion effect is from the banking sector specifically. It's not just going to be the EU that's out of pocket if Greece goes under," he says.
The euro slumped to US$1.4150 from almost US$1.50 a week earlier. The Kiwi dollar has strengthened to 55 euro cents in the wake of the Euro debt concerns.
However, Bell warns that market expectations are the European Central Bank will raise rates again in July, potentially endangering those peripheral Euro zone economies struggling under high debt loads.
"It really is a tale of two very different economic structures in Europe. Germany continues to perform very well, but those other countries are struggling. A few economists are questioning the strategy of the ECB," he says.
Pound weak vs Kiwi dollar
The Bank of England decided to leave rates on hold this week, but three of its policy making committee voted for a hike.
British inflation is forecast to rise over 4%, well over its target of 2%, meaning the Bank of England is likely to hike its cash rate by 50 basis points to 1%.
British growth remains disappointing, however, meaning the pound is weak vs the Kiwi dollar, which has risen to 49 pence in the last day.
China in focus
China's increase in its reserve assets ratio to over 20% was being watched closely on markets.
"This is part of their programme of trying to tighten their monetary conditions and slow down their economy," says Bell.
Commodity prices were volatile, in part because of worries about Chinese growth and the European debt crisis.
"Investors are starting to question whether we've got some kind of sustained rally in the global economy that justifies some of the valuations in stocks, commodities and currencies," Bell says.
"The mood has changed. Sentiment is starting to look a bit fragile and it wouldn't surprise me to see a decent amount of volatility in the next few weeks."
Australian jobs growth weak
Australian employment fell in April, surprising economists who had expected growth, although previous months had been strong.
The Australian dollar fell almost a cent against the US$ and the New Zealand dollar, which rose from 73 Aussie cents to over 74.7 Aussie cents.
"It goes to show how much hot money is floating around there," he says.
Markets will be watching the New Zealand budget on Thursday with the focus on what Standard and Poor's does with New Zealand's AA+ credit rating, which is on review for possible downgrade.
US inflation figures due later on Friday will also be watched closely, with core inflation expected to be around 1.3% while headline inflation is seen around 3.1%.
Dan Bell is the Senior Dealer 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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