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.
Liquid market
"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.
Australian doubts
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.
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15 Comments
I actually agree, JK is miles off but what is he going to say as its election year? "oh we are all f*cked"? Purchasing a new home....Im not sure why you are saying that, is it because you expect houses to stay high? I dont concur, the most logical person I have seen/listened to is Nicole Foss and see like me sees a depression and deflation....and worse a drying up of credit....just how bad house prices drop depends on how bad things get. If its isnt as bad as she thinks, 50% seems "normal", if it is and there is no credit, then house prices will be worth what ppl can pay in cash...about 10% of their present value is what they can manage today....and given the very high-unemployment and lack of energy Im beginning to think a drop of only 50% would be lucky...
NZD collapsing/dropping, I just dont know on that....once ppl are broke and once letters of credit disappear I wonder how we will ship goods abroad....and if there would be any point....if its not that bad then other currencies / Nations go south quicker than us and we stay quite high....but the rat in the wood pile then is our housing debt and its financed by hot money risk, and what if they want their money back?..........if the banks cant re-finance it? what happens? On the other hand we have an output thats wanted, food....
God its complex......
regards
IMHO the European crisis is a bit over extended. And the markets have already been pricing in / discounting it over the past two months. The possibility of a default is remote because nobody can afford or want another Lehman event, just yesterday as the Greek theme was finding some relief the financial media switched on to Italy. It is as if they have to create turmoil The SP500 is bouncing off the 200 SMA and it will find followers to drive the markets higher.
You may think its remote, but I think others / some are saying 80% certainty....there is now enough talk that I think a haircut is coming the only Q is how big, who and whether its within 2 weeks (20th June) or 2 months... Now I totally agree that the outcome is frankly going to be horrendious and wont be contained.....if nothing else once Greece goes the CDS's held by US banks will pay out and they wont survive that....and the CDS's are probably bigger by several factors than the Greek debt itself....So im willing to bet there are ppl out there trying to make Greece default...because they stand to make many many billions. To me its these ppl being on a pirate's gang plank near the hull and making free with the saw and a blindfold because they think they are cutting off others....trouble is where are they chopping? When we go into a depression their paper is worth nothing....
Look at it this way, Greece is all but un-governable they cannot get any [more] austerity measures passed and they cant meet the ones they have got anyway....so the IMF doesnt want to give them any more $.....and Greece cant get money any other way....with no Govn to Govern just what can happen? they have gone past the point of no return....they have taken on too much debt and with no recovery cant repay it....no one wnats to right them a cheque, but someone has to they have to be no worse than 60% so its just a Q of time IMHO....
regards
I agree with you in that it is total madness to think that a Greek default is a chance to profit... the losses will be insane, and will be shared by both sides of the trade it is a lose- lose prospect. I think they call it the ripple effect hitting every asset class.
"total madness to think that a Greek default is a chance to profit"....pardon!
Let me get this straight...you are saying the demise of a banking competitor is not a gain...
I am sorry but you are very wrong Michael...and 'somebody' will be on the plus side of the CDS activity that is certain...if they get the chance to trigger the default that is what they will do...you need to see a market or bank downturn as a chance to profit for somebody..some entity...welcome to the real world.
Greece is buggered...it's now only a matter of there being a rout in the bond defaults or an organised collapse...either way...there will be winners.
True but shorting can mean many things...buying gold would be shorting the toilet paper money market...not buying Greek property on offer would also be a short...the gain would be not making the loss..seems daft but as you point out there will be axe blows falling who knows where. We have entered an age when not making a loss is a plus...amidst a tide of lies.
And yet the spin would have us believe "recovery" to the bubble madness era is taking place...if only you would all go out and borrow big and splurge again on shite you don't need.
Of course the property sprookers will be hard at it with their endless bollocks and Key will say commodity prices are high forever....hundreds of thousands of new jobs will pop up like Purple Witch's hats in the Beech forests...and pink pigs will be seen over wgtn.
Yeah I knows the feeling..the cash position costs you the debasement theft going on unless you put it in something like Fisher&Paykel Finance or Marac GG ...that way you almost held your ground after tax and the big D.
The piigs fiasco has a way to run yet. The default is certain but they will not call it that. Blackrock will collect big time to say it isn't!...seems they call the tune.
Rates will rise but it will be said to be due to growth pressure on prices and not a rush to recapitalise banks...all pure garbage and high end BS.
Here on the shaking islands the Chch rebuild looks to be some way off just for a start...which crimps the Treasury fluff about growth and makes a mockery of govt fiscal surplus pie in the sky statements.
Expect this recession to roll on another 7 years at the least and at best because the piigs shite and or the Yanky default could well make it worse.If commodities do their normal thing and sink back quickly on a China stumble...well you can guess what that will mean.
I think Michael is looking beyond the immediate CDS win.....if he's thinking like Im thinking, well my thoughts are the system will freeze up initially and then spend 2 to 3 years deleveraging/collapsing into a mega depression....so if the paper CDS win was on um well paper it wont be worth much....Im really not sure what anything will be worth....except debt will be crippling....just as we run out of energy and the BBs wanted to retire......deep deep doo doo..
regards
Michael...it's over....now it's a case of who loses the most...and the trigger for this collpase will be the one that stands to either benefit the most or lose the least...and that position can change as the players know it....do you really expect Goldman or Blackrock to pass up a chance to score 100 billion by just causing a default implosion....do you?
Confidence has gone
http://www.stuff.co.nz/national/5163237/Financial-woes-keep-growing
And these guys need to spend less
http://www.telegraph.co.uk/finance/economics/8583008/IMF-warns-US-euroz…
and things that have been for a long time are changing.
http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelec…
I think Ostrich is going to do Ok in the next few months.
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