HiFX's Dan Bell says European Central Bank may cut interest rates and get its printing press out again before the all important June 17 Greek election

The European Central Bank (ECB) may cut its benchmark interest rates from 1% and add to the €1 trillion (about NZ$1.66 trillion) of three-year money it has poured into the region's banks through its Long-Term Refinancing Operation (LTRO) before the all important June 17 Greek election that's set to determine that country's Eurozone future, says HiFX senior dealer Dan Bell.

In his weekly Never a Dull Moment currencies market chat with interest.co.nz, Bell predicted the recent fickle and cautious nature of the market was likely to continue until the outcome of the Greek election was known.

The election comes after no political party was able to form a government following the initial election on May 6, with the country divided between those who want Greece to accept the austerity measures foisted upon it as conditions of its bailout packages from the European Union and International Monetary Fund, and those who don't.

In international financial markets the concern is of a "Grexit", or Greek exit from the 17-nation Eurozone, if an anti-austerity party wins the election, and the domino effect this may have on other Eurozone countries with high sovereign debt levels such as Spain and Italy, not to mention defaults on Greek debts.

"I think the problem that we've got now is that the Greek election is scheduled for June 17, so between now and then we're really going to be waiting to see what result comes out of there," Bell said. "And until we get a result, either positive or negative, we're going to be in no man's land, to a certain extent."

"It continues to be a very fickle and cautious market."

Spanish PM wants ECB action

Spanish Prime Minister Mariano Rajoy called this week for ECB action to bring down Spain's rising borrowing costs after the country's sovereign bond yields closed in on levels that pushed Greece, Ireland and Portugal into bailouts.The yield on Spain’s benchmark 10-year bond was at 6.204% this week, after rising as high as 6.5% last week, approaching the 7% threshold that led Greece, Portugal and Ireland to seek bailouts. See more here at Bloomberg.

The ECB helped out last August when it began buying Spanish bonds and then lent Eurozone banks €1 trillion at a 1% interest rate for three years through two LTRO tranches - in December and February - with some of this money recycled into sovereign bond purchases.

"Spain and Italy have been in focus over the last few months. We know that their bond yields keep going up, investors are demanding a higher yield for holdings their government bonds," says Bell.

"I think we're getting to a point now where the European Central Bank probably has to step in with some form of additional liquidity measures. That might take the form of another LTRO, which they've already done two of, one at the end of last year which actually gave everything a massive boost, and another one a couple of months ago. It may well also be that the European Central Bank has to cut interest rates in Europe again."

Not much more to cut

Given the ECB already has interest rates at 1%, there's not much further to cut.

"So it's probably going to be more of a liquidity measure to try and put some cheap money out into the Eurozone, get some money into the banking system, and hopefully prop up these sovereign bonds," Bell says.

The ECB's interest rate setting Governing Council next meets on June 6 in Frankfurt.

In the meantime, the New Zealand dollar, which this week fell below US75 cents for the first time in about six months, will take "the path of least resistance," Bell says, which seems to be to track lower.

"Greece and euro debt situation is really driving the currencies markets. We dropped down to under 75 cents against the US dollar this week so that's the lowest level in about six months and that's just on continuing risk aversion across all global markets.

"We've seen stocks and commodities and the New Zealand dollar, Aussie dollar all weaker. The US dollar has been stronger against most major currencies as investors dump so-called risky assets and go back into the perceived safe haven of US government bonds," Bell says.

"We've come off a long way over the last few weeks. If you look at the New Zealand dollar on a trade weighted basis, we're actually down almost 10% since the middle of April."

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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.