Double Shot Interview: HiFX's Dan Bell reviews the week's global currencies action, with all eyes on Europe ahead of PREFU and OCR

Gareth Vaughan talks with HiFX Senior Dealer Dan Bell about the week's currencies action including a look ahead to Sunday's highly anticipated European Union leaders summit and next week's pre-election economic and fiscal update (PREFU) and official cash rate (OCR) review.

As New Zealand focuses on Sunday night's rugby World Cup final at Eden Park, European Union leaders will be meeting in Brussells in their latest attempt to get on top of the European sovereign debt crisis. However, Bell says although the European politicians gave themselves a deadline of coming out with a comprehensive pacakge to deal with the crisis this Sunday, that's now not likely to happen.

"Over night we actually had the policy makers out saying they aren't going to be making a big statement after the Sunday meeting," Bell says, "and that any significant statement about the bailout package will probably not be till Wednesday."

"I think they've realised they don't have a silver bullet. There's obviously some discussions going on in the background between Germany, France and the other 15-odd EU nations."

Earlier in the week The Guardian reported that France and Germany had reached agreement to boost the eurozone's rescue fund, or European Financial Stability Facility (EFSF), to €2 trillon from €440 billion as part of a "comprehensive plan" to resolve the sovereign debt crisis. This report initially cheered financial markets but was dismissed as untrue in some quarters. However, Bell says he believes there was probably some truth to it.

"If you look at Greece alone, their current debt level is about €390 billion. So if you've got a €400-500 billion fund, and Greece alone is going to take all of that up, they're going to need a lot more money to deal with this crisis," says Bell.

"So I think markets are anticipating some type of leveraged fund, certainly it has to be more than €500 billion. Is €1 trillion going to be enough? Is 2, 3, 4 trillion? Who knows. I certainly don't think they can keep letting the markets guess and I think everyone wants to see a little bit more clarity about what they're going to do."

Against this international backdrop the New Zealand dollar traded between US78.50 cents and US80.50c this week, giving it a 2c range.

"We've been in a holding pattern but we've had an extremely volatile ride," Bell says. "We're sitting pretty much in the middle of the range of the last 12 months. So if you look at the kiwi dollar we've traded as high as US88.40c in August (and) we traded as low as US71.20c back in March. We're currently sitting around US79.50c. So we're actually bang, smack in the middle of that 12 month range and that still represents volatility of over 20%, - a 20% swing from the low to high."

Next Tuesday, after the rugby result is digested, the government's PREFU will be in focus on Tuesday. Bell says the currency markets probably wouldn't trade specifically off the PREFU, but it will have an impact on the overall view of the New Zealand economy, and the underlying demand for government bonds.

"Two credit rating agencies (S&P and Fitch) recently have downgraded us (New Zealand's sovereign rating to AA from AA+) and we've got one credit rating agency, Moody's, who apparently met with the finance minister last week," Bell says.

"So I think it (PREFU) is on everyone's radars. There are still issues for us. We continue to borrow money and our external debt position continues to be very, very high. The government wants to try and get us to surplus and have some pretty ambitious goals there so getting an update this Tuesday will certainlty be important."

Then next Thursday the Reserve Bank reviews the OCR. Economists are anticipating it will be left unchanged at 2.5%. Bell says with no change expected, Governor Alan Bollard's statement will be key.

"What he (Bollard) says in terms of talking about the global developments will be important. Most of the market is not expecting any rate hikes until March or June of next year. I'm sure he's going to stick to the script, reference the fact that there's still a lot of global uncertainty out there and perhaps that inflationary pressures have come off," Bell says. "So I don't see a lot of volatility following his announcement on Thursday."

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.