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 started off looking at a break this week in the tight link between the New Zealand dollar and the US stock markets over recent years.
Increasing confidence that the US Federal Reserve may not have to print more money in a third quantitative easing (QE III) has strengthened the US dollar and disrupted the usual 'risk on/risk off' pattern for the New Zealand dollar. Typically the Kiwi dollar rises and falls in tune with US stocks and appetites for 'riskier' assets globally.
But our currency dropped to almost a 2 month low of 80.56 USc on Thursday, despite a rally in the US S&P 500 stock index to its highest level since 2008 and a rally in the Nasdaq to its highest level since 2000.
"Last year we were trading with an 80% correlation to the US stock markets," Bell pointed out.
The US Federal Reserve's comments on Wednesday about a strengthening of the US economy, but no mention of QE III, was the catlyst for the move.
Bell also pointed to a rise in long term interest rates in the United States. However, he said it was too soon to say the risk on/risk off pattern for the New Zealand dollar was broken completely.
"It's too early to say that this correlation has completely broken. It's only going to take a little whiff of QE III and suddenly the US dollar is under pressure again," he said.
Chinese hard landing?
We also talked about comments from some economists of a danger of sharp slowdown in growth for China.
"We've had JP Morgan's head of strategy in China talk about a hard landing in China and looking at issues in their housing market. They've over-invested in housing. You've seen a massive surge in house prices in China," he said.
Cement and steel prices were falling.
"China is quite key to our economic performance," he said.
Bell pointed to the weak Chinese trade figures from last week as factor for China watchers.
Markets will look ahead next week to GDP and current account figures in New Zealand, but central bank comments in the Northern Hemisphere would dominate the outlook.
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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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