Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies moves, including deepening concerns about a Greek sovereign debt default, slower economic growth in America and the New Zealand dollar's slide this week towards 79 USc.
"You've had people talk about Greece defaulting on its debt obligations, which would have devastating implications for the global economy," Bell said.
"You've had some analysts compare the Greece situation to Lehman Bros. Financial markets are extremely interconnected. If Greece isn't willing to repay its debts then those bondholders are going to be taking a loss. Those bondholders are mostly European banks, but those European banks took out credit default swaps, which are a form of insurance. A lot of those CDS are ultimately owned by US banks," Bell said.
"Markets are extremely concerned about what happens when those credit default swaps go off. Like we saw back in 2008 with the sub-prime disaster, we don't know how bad that could get," he said.
A dispute between European finance ministers and the European Central Bank over how to deal with Greece's sovereign debt crisis was also unnerving markets.
This saw the euro slump from US$1.45 to US$1.405 this week.
European finance ministers want both the private and public sectors to share the pain of a Greek debt restructure, but the ECB has warned this would be seen as a default which could trigger financial market chaos.
Whether a credit default has occurred is decided by the International Swaps and Derivatives Association (ISDA) Credit Derivatives Determination Committees. See more detail here.
A meltdown in European financial markets would create significant risk aversion globally, which would cause a selloff in the New Zealand dollar. It fell from over 83 USc to around 80 USc this week.
"The forex market is the most liquid and actively traded market in the world. If you have a specific event, investors and traders will use the currency market as a transmission market to unwind positions and put on counter trades to manage their risks. It's quite difficult to unwind complex derivatives, but it's pretty easy to sell the Kiwi dollar and get the hell out of Dodge," Bell said.
The New Zealand dollar was seen as a 'risk on' currency that would move more sharply than others whenever a crisis event happened.
Weak US economic data was a factor in further falls in US stock markets, along with the impending conclusion of the US Federal Reserve's Quantitative Easing programme on June 30.
Markets would watch the FOMC's meeting next Thursday morning New Zealand time for signs of what the Federal Reserve may do, although no change is expected in the Fed Funds rate at near 0%.
"I do think the market has underestimated the impact of the end of QE II. If you go back to when QE II was first announced, you've seen a massive rally in commodity markets and equity markets and that impact of that liquidity and on sentiment is being reflected in the market," Bell said.
Australia's economic data had been weaker than expected in recent weeks, although the Reserve Bank Governor Glenn Stevens continued to talk about increasing the Official Cash Rate there from 4.75% to control inflation.
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.