By Bernard Hickey
Here's my weekly 'Never a Dull Moment' chat with HiFX senior dealer Dan Bell about currencies and markets action in the week that's gone and the week ahead.
We start off talking about Reserve Bank Governor Alan Bollard's comments on the high New Zealand dollar on Thursday, including his suggestion he may cut the Official Cash Rate if the currency continued to rise. See more here in Alex Tarrant's article on Thursday.
Bell points out the New Zealand dollar fell slightly immediately after the Reserve Bank's comments and its lower interest rate forecasts on Thursday. But then it rebounded quite strongly through Thursday night and Friday in tune with increased appetites for risk globally and higher stock markets.
"We are still trading with an 80% correlation with the S&P 500 Equity Index. So, risk on -- they're pumping their money into the New Zealand economy -- risk off -- and they're taking their money back to the US economy and the Japanese yen," he said.
Bell then talked about the Bank of England's announcement this week it will push ahead with its 325 billion pound money printing (Quantitative Easing) programme, which has seen the pound weaken versus the New Zealand dollar in recent months. The European Central Bank's decision to pump another half a trillion euros into the financial system last week has also been a factor in currency markets.
"The world is awash with liquidity. You've got these banks getting this cheap funding again. The hope is it makes it into the credit channel and starts to create some momentum for these economies," he said.
"But you also have the carry trade, which is proving very popular, where you've got cheap funding offshore and buying back into the New Zealand and Australian dollars, which have higher rates, which will continue to provide support for our currencies."
What about when the 'drugs' are withdrawn?
However, Bell pointed out last week's Long Term Refinancing Operation (LTRO) may be the last one conducted by the ECB for now.
"They're going to wait and see and hope it has a positive impact on these sovereign yields (government bond markets)," he said, noting however that previous attempts to withdraw stimulus had not been successful.
"We've seen in the US over the last few years that as soon as the US central bank starts to pull back from this accomodative policy stance. ie if they say they're not going to print some more money, then equity markets come off and risk assets (such as the NZ dollar) fall," he said.
"This addiction to cheap money and central bank liquidity has been propping up the global economy and holding up sentiment. Without that, we'd be in a much worse place, and the New Zealand dollar would be much lower against most of our major counterparts."
Looking ahead to the Fed
Bell said markets would be focused late on Friday on US non-farm payrolls figures, which are expected to show growth in February of around 200,000 and unemployment of around 8%. There were 227,000 jobs created in February. (Updated Saturday morning)
However, long term unemployment remains very high and many long term unemployed no longer receiving benefits are not included in the figures.
The US Federal Reserve's policy setting Open Markets Committee is scheduled to meet next Wednesday New Zealand time. Its announcement and the potential for some kind of sterilised form of money printing where cash that is printed and used to buy bonds off banks would then be mopped up through auctions of securities by the US Federal Reserve.
Bell said the New Zealand dollar continued to be a 'buy on the dips' currency, given the 'risk on' mood in global markets and the continued bouts of money printing by central banks in the Northern Hemisphere.
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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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