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.
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7 Comments
Just a thought !
Tonight’s final AB vs France 24: 12 - I think it is going to be a tough game, especially in the first half, but then 20 minutes in the second half the All Black just overrun the tiring “French powder sacks”.
It seems to me the AB’s play a much faster and modern game then previously, before the WC. I’m wonder if Gordon Tietjens & Eric Rush had some influence ?
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But then we never know, French coaches think differently: I think in England/ New Zealand you eat too much sugar and meat and not enough vegetables.
Arsene Wenger
" I think in England/ New Zealand you eat too much sugar and meat and not enough vegetables." LOL at that. It's probably true actually.
I can't believe I'm about to miss the game :( We were going to watch it with some Kiwi friends after a BBQ at their place but one of the kids has been quite sick since yesterday so I have ended up having to stay home...and we don't have TV (yeah, I know...but given the amount of ads and quality of the programmes we feel that enjoying the great outdoors is a better use of our time, plus we don't have that much spare time anyway). So now I've got the choice of spending my evening either working or watching a DVD of Bridget Jones on my computer. Oh dear.
Colin – my big apology to the French – they nearly sacked the AB. Why do the French always cause so much trouble - should we really eat more veggies - garlic and broccoli/ cabbage to make us more explosive like the French did and always are ?
Well done AB sugar sweet - 1 point more meat and RUGBY WORLD CHAMPIONS !
"European banks must find €108bn in new capital " . That's 108 thousand million Euros worth of potential lending that is going to be tied up on the banks balance sheets. It doesn't matter which banks, as far as the number goes ~ it's liquidity that is going to be missing from the marketplace. If the Central Banks magic it up with QE, it goes onto the public balance sheet to be 'paid back' at some stage; that's higher taxes and/or a cut in services and jobs. If the magic is aimed at stimulating inflation, then that's a greater amount of debt that has to be repaid ( the only way to pay for inflated asset prices, is for the next borrower to pay the last owner, more; with more debt). And how does it work with the Central Bank's QE'ing and being austere, at the same time? It can't. So the result will be...less lending by all banks..as they shrink their balance sheets, so their current capital covers a smaller amount of assets ( less lending ),as a way to 'raise' more capital ~ leading to asset price falls as lending is curtailed.
Nicholas, To raise the capital the banks will need to get depositors to give up deposits in return for an equity stake. No money will be tied up in the banks capital but rather the bank with existing assets will have fewer liabilities.
Banks are constrained in lending via the amount of capital they have to allocate against the new loan. They will have new capital and can lend more where loans create deposits - ie a loan is like a bank cheque that clears or is cleared with interest payment, where all banks tend to be lending and all receive each others loan monies that clear or are content to receive interest.
QE does not fundamentally change the banks balance sheet. It is just an asset swap and does not increase bank capital.
So for example if Soc gen has 50billion in Spanish and Italian bonds and they are bought by the ECB, Soc Gen has the same capital. Its ability to create loans is not fundamentally changed before or after QE.
I think the relevant issue for Europe is who will invest in the banks by giving up deposits when almost certainly much larger capital raisings and nationalisations are likely as the banks take more and more losses on Sovereign debt.
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