HiFX's Dan Bell looks at the NZ$'s rise to 82 USc and talks about the risk of RBNZ intervention as foreign central banks gear up to print

By Bernard Hickey

Here's my weekly currencies review and outlook with HiFX's Senior Dealer Dan Bell, including a look at the New Zealand dollar's jump towards 82 USc on hopes the European Central Bank will buy Spanish bonds as part of a bailout plan designed to reduce Spanish borrowing costs and preserve the euro.

Bell also talked about data out on Friday night showing better than expected jobs growth in the United States.

"We see a lot of resistance around 82 up to 82.50 and we think it's unlikely we're going to sustain a rally up to those post-float highs that we had last year, particularly given the way commodity prices have fallen lately," Bell said.

"It's difficult to justify the New Zealand dollar at these levels when commodity prices are on average off 10% on average from this time last year," Bell said.

The currency's rise to four month highs despite a near 6% fall in commodity prices in those same four months has restarted speculation about Reserve Bank intervention.

The Reserve Bank commented on April 26 that the currency remained elevated despite falls in commodity prices, as shown in this interactive chart. They have obviously fallen further since then but the currency still remains elevated.

Here's what the RBNZ said then: “The New Zealand dollar has stayed elevated despite recent falls in commodity prices. Should the exchange rate remain strong without anything else changing, the Bank would need to reassess the outlook for monetary policy settings"

Bell said the Reserve Bank would be watching closely.

"We have a new governor in the next month or so. It's going to be interesting what he has to say in his first monetary policy statement," he said.

"Looking at commodity prices and domestic issues, it's not a favourable environment to have a high currency and weaker export prices."

We also talked about when the Reserve Bank last intervened to drag the New Zealand dollar lower, which was in mid-2007 when the Trade Weighted Index was around 76. It is currently around 73.5. The central bank subsequently sold NZ$4 billion worth of New Zealand dollars and has bought back around half of that, making net profits in the four years to June 30, 2011 of NZ$411 million. See more here in Alex Tarrant's article.

Bell looked at the chart showing how effective the intervention was in mid 2007 in getting the currency down.

"It was quite effective. I know the central bank doesn't like to intervene, but in that particularly instance it took a lot of the froth out of pretty much everything," he said.

"This time around they're going to be looking offshore at what the global central banks are doing. The problem is when you look at places like the US, where they've got this Quantitative Easing, and the UK with its own form of quantitative easing and Europe will probably have its own form of quantitative easing."

"It's very difficult to push back against these large central banks who are playing this game of trying to weaken their currency and print money."

Markets will be focused over the next week on jobs data in New Zealand, economic data in China and the ongoing noise out of Europe. The Reserve Bank of Australia held its Official Cash Rate as expected, although markets expect another 75 basis points of easing over the rest of 2012.

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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.