Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies and markets action, including the New Zealand dollar's brutal move up from 74.5 USc last week to almost 80 USc this week as some global investors bet Europe could find a solution to its sovereign debt crisis and prevent a slide into global recession.
The New Zealand dollar often rises when investors buy 'risk on' currencies and commodities that are seen as sensitive to a strengthening of the global economic outlook.
Bell pointed out a 14% rise in the S&P 500 index of US stocks since October 4 had coincided with a 7% rally in the NZ dollar over the same time.
Last weekend's annoucement from French President Nickolas Sarkozy and German Chancellor Angela Merkel they would take every necessary action to defend the euro was the catalyst for the surge in stock markets and appetites for risk generally.
"From the two leaders of the Eurozone's largest economies it was seen as quite a positive event. They were saying they would do everything in their powers to stabilise the region and recapitalise the banks," he said.
"Everyone woke up on Monday thinking 'Hey, let's buy some stock and Kiwi dollars' and away we went," he said.
Bell pointed to the hurdles in front of Europe before any rescue plan is successful, including the need for the 17 Eurozone economies to agree on who would pay to increase the size of a bailout fund for Eurozone bonds and who would recapitalise European banks.
"As much as the policy makers are giving us these verbal assurances and jawboning some positive sentiment out of the market, the reality is we haven't had any real detail on how this is all going to work," he said, adding the European Central Bank was not keen on the plan or suggestions of a larger hair cut for holders of Greek debt.
Questions remain about whether the ECB will help increase the size of the EFSF (European Financial Stability Fund) and whether governments or shareholders would recapitalise their banks.
Summits crucial
Bell pointed to an EU summit on October 23 as a key event for markets to focus on, followed by a G20 meeting on November 3 in Cannes.
"The next fortnight is going to be very crucial for Europe and whether or not we can get some more certainty on what they're up to."
'Chinese Put Option'
Meanwhile, in China its sovereign wealth fund stepped in to the market this week to buy battered Chinese banking stocks.
"The fact that the Chinese government stepped in this week shows they are committed to steering the economy through any downturn. You could say the Chinese government is going to put a big Put Option under the whole thing, and if there's issues with the banks or property sector, they'll step in."
Australian change
Bell pointed to stronger than expected employment data this week in Australia as one of the driving factors pushing up the Australian dollar vs the US dollar and the New Zealand dollar as markets begun to remove the prospect of a Reserve Bank of Australia rate cut on Melbourne Cup day.
The New Zealand dollar had fallen below key support at 78 Australian cents after the figures.
Bell said the New Zealand was trading in range from around 77.5 USc to 78c to 80.5USc to 81 USc.
"We're stabilising for now, but the reality is the NZ dollar tends to underperform when the global economy is looking fragile and I don't think that has necessarily changed, so I think the Kiwi dollar will probably struggle around these current levels."
The NZ dollar was around 57.8 Euro cents and had been down to 56.30 Euro cents. It was now stabilising.
The Kiwi was back up over 50 pence after more signs of a weak economy in Britain and the downgrade of several British banks on Thursday evening. It had been as low as 48.5 pence last week.
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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And just in case anyone thinks the European deal is going to be easy, here's Germany's Deutsche Bank saying its shareholders won't pay and the current solution proposed (and celebrated) earlier this week, won't work
http://online.wsj.com/article/SB10001424052970204002304576628390557928046.html
BERLIN—Deutsche Bank Chief Executive Josef Ackermann Thursday opposed European Commission President José Manuel Barroso's demand that European Union banks should temporarily increase their equity capital, saying it wouldn't tackle the real problem and private investors wouldn't provide funds for such a recapitalization.
"The injection of capital wouldn't address the actual problems," as funding of banks is not the problem but the fact that government bonds are not risk-free anymore, Mr. Ackermann said at a Deutsche Bank conference in Berlin. Instead, he urged governments to restore trust in the solidity of state finances, adding Deutsche will do everything "to not take state aid."
Mr. Ackermann also warned that the debate on forced bank recapitalizations suggests that bigger write-downs on Greek debt now appear more probable.
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