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Double Shot Interview: HiFX's Dan Bell reviews the week's currencies moves, including NZ$ surge to almost 82 USc, more Greek turmoil; looks ahead on Euro, A$, US$

Double Shot Interview: HiFX's Dan Bell reviews the week's currencies moves, including NZ$ surge to almost 82 USc, more Greek turmoil; looks ahead on Euro, A$, US$

Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies moves, including the New Zealand dollar's rise to almost 82 USc on Friday afternoon, the turmoil around Europe's financial markets and the subdued outlook for the US economy.

The New Zealand dollar surged on Thursday and Friday to near its post float high of just over 82 USc after reported that China's sovereign wealth fund may have set aside NZ$6 billion to invest in New Zealand assets, including New Zealand government bonds.

Finance Minister Bill English later commented on his meetings with the fund and the strong demand from Asian investors for New Zealand bonds, partly because of their keenness to diversify out of US dollars. See Alex Tarrant's indepth article here.

"The Kiwi rallied hard against every major currency," Bell said.

"It's very strong on a trade weighted basis near a 3 year high. We've strengthened significantly against the Australia dollar from 73 cents a couple of weeks ago to over 76 cents in the last 24 hours," he added.

Fonterra's positive payout news earlier this week and higher inflationary expectations data in New Zealand were factors in the Kiwi dollar's relative strength against the Australian dollar.

See more here on Fonterra's payout forecast announcement.

See more here on higher inflation expectations.

Bell also explained how some traders had been forced to unwind their long positions in the Australian dollar vs the New Zealand dollar, exaggerating the strength in the Kiwi vs the Aussie.

The Australian dollar had also weakened more than some other commodity currencies in recent days, in part because it is seen as most exposed to the China growth story and the easiest to trade.

"The Aussie is one of the most liquid currencies in the world now. It's in the top 5 most traded currency pairs. If you're an offshore investor or trader and looking at the China story and wanting to trade a liquid currency that reflects that underlying backdrop, the Aussie dollar is one of the best plays to get exposure there," he said.

The Australian dollar had topped out at US$1.10 late last month and was down around US$1.06.5 on Friday afternoon.

"Being a more liquid and traded currency it tends to react quicker to commodity price volatility than the New Zealand dollar does."

'Greece insolvent'

Bell said uncertainty in Europe dominated the outlook for Greece with conflicting views and comments buffeting the euro.

Greece was essentially insolvent, he said.

"With the Debt to GDP ratio up over 160% and an economy in a recession or not a depression, I can't see how people are going to get out of this without someone taking a haircut," Bell said.

A restructuring could trigger a contagion through Europe, including the risk a Greek default could trigger a Lehman-style crisis on financial markets.

American economy weak

First quarter GDP figures this week were weaker than expected, while durable goods orders were soft.

"There are some people talking about the potential for some sort of QE III to emerge in the next few months," he said.

The European Sovereign Debt situation dominated the outlook for global currencies in weeks to come, although markets would also look closely at US jobs figures due next Friday.

RBNZ comments on NZ$?

Closer to home, the Reserve Bank of New Zealand's Monetary Policy Statement on June 9 was also looming.

"With the New Zealand dollar on a Trade Weighted basis 5% above where the Reserve Bank was forecasting it to be earlier this year, the currency is taking a bit of steam out of our economy so it will be interesting to see what the Reserve Bank has to say about that."

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Our exporters must be really hurting.

Bugger, i work in PNG, get paid in Aussie $ and live in Gisborne

Dear me.  What to do?  Do we raise our OCR to curb inflation and strengthen bank balance sheets, and kill whatever is left outside the natural disaster economy?  Or do we clutch the back of our pants and hope we make it to the loo before election day? 

Well, pull up a chair, folks.  Things are about to get very interesting. 

The mistake being made Doug is the govt/RBNZ attitude that borrowers promise a better future than savers. When Bollard gets the ok to raise post November from English, it will be savers who begin to gain and it will be the savers who will generate the growth when they begin to spend. The higher ocr will encourage more saving and discourage the borrowing. That will be a nasty mouthful for the banks that have gambled on a feast of borrowing madness supported by Bollard and the govt.

Watch this space because it is the battle between a country building on a savings base as opposed to one using other peoples money.

I think at this stage, English and Co do not yet understand the seriousness of the situation and continue to believe their own BS. NZ will not and cannot grow using borrowed loot. The govt must not be allowed to socialise the private debts by debasing the currency which is what they are is a form of money printing...NZs very own QE bullshit. 

I'm in complete agreement with you Wolly, with respect to savers vs. borrowers.  Let's hope that when the smoke clears from the coming GFC (for real this time) we rediscover the kind of unspectacular, plain vanilla banking that provided an honest yield to its customers.  

I believe that English and Co completely understand the seriousness of the situation.  But when they see what is happening in Greece, Portugal, Spain, Ireland and elsewhere, they take comfort that those countries are further down the resolution track.  I believe they feel buffered by the even more flagrant QE taking place in America and the EU.  At this point in the game, winning or losing is irrelevant:  The trick for English is in not allowing NZ get too far ahead of the global default curve. 

As I see it, the real danger is that the great powers will sustain the wave beyond our capacity to keep standing on our board.  The earthquake aside, nobody factored in SCF and AMI.  But consider banks like Westpac, with 60% of its loan book in Australasian real estate -- assets that are currently losing value.   Factor in a ratings downgrade to those same banks, inevitably followed by a hike in consumer lending rates.  Could the government guarantee the depositors at one of the majors?

This is the most spectacular example of 'schadenfreude' ever conceived.  There comes a point when the the social contract itself is at risk; as witnessed in Tunisia, Egypt, Libya, Syria and Europe.  Are we so delusional as to think it can't happen here?

Agreed ...

Why all Wolly's rantings on this subject are ACCURATE. In the following ABC news broadcast the last part of the Finance Segment at approximately the 18-19 minute mark, is a featured quote from an IMF, Bloomberg bulletin on how the UK government is encouraging inflation in order to inflate away government debt and ALSO "maintain" the falsity of GDP growth. ... think about that .. couldn't find the original articles authority so you'll need to plow though the news bulletin to find it. But it's the first time an honest assessment has come out about it. And Wolly has been saying it for yonks. Ignore the wollster at your peril.

"Rantings"....I'll have you know they are carefully crafted manuscripts of quality economic policy.

I am standing on the shoulders of others when I biff rocks and bricks at the buggers who sell themselves as leaders of the nation...and toss the contents of the pisspot down on the financial criminals pretending to be prudent bankers et al. One or two of them deserve the stinking potload be upended onto their fat heads.


Taken from own friday top ten

One reason why pegging NZ currency is not a good idea=

Because the Hong Kong Monetary authority pegs its currency to the US dollar, Hong Kong ends up importing US inflationary monetary. This is acutely felt. Since Hong Kong is little more than a barren rock, nearly EVERYTHING is imported… so prices are rising in accordance with US dollar inflation.

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Days to the General Election: 39
See Party Policies here. Party Lists here.