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 Interest.co.nz 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.
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$1.06.5 on Friday afternoon.
"Being a more liquid and traded currency it tends to react quicker to commodity price volatility than the New Zealand dollar does."
Bell said uncertainty in Europe dominated the outlook for Greece with conflicting views and comments buffeting the euro.
Greece was essentially insolvent, he said.
"With the Debt to GDP ratio up over 160% and an economy in a recession or not a depression, I can't see how people are going to get out of this without someone taking a haircut," Bell said.
A restructuring could trigger a contagion through Europe, including the risk a Greek default could trigger a Lehman-style crisis on financial markets.
American economy weak
First quarter GDP figures this week were weaker than expected, while durable goods orders were soft.
"There are some people talking about the potential for some sort of QE III to emerge in the next few months," he said.
The European Sovereign Debt situation dominated the outlook for global currencies in weeks to come, although markets would also look closely at US jobs figures due next Friday.
RBNZ comments on NZ$?
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.