HiFX's Dan Bell looks at the NZ$'s surge over 83 USc after the US Federal Reserve unleashes QE Infinity; NZ$ also firm vs Aussie dollar as 'Lucky Country' loses its luck

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 surge over 83 USc after the US Federal Reserve announced plans for unlimited money printing and mortgage bond buying to try to push US unemployment down.

The New Zealand dollar rose to a 6 month high of 83.5 USc on Friday night after the announcement as global stocks rallied to 2007 highs. The euro had also risen to over US$1.30 from as low as US$1.20

The Kiwi was supported around 82.50 USc in the short term, with resistance at 83.5 US c and 84 USc, Bell said.

"A break above 84 USc and a big close above 84 USc suddenly starts to open up those post-float highs around 88 USc. That's what the technical guys are saying," Bell said, adding he did not yet to buy into that view.

"But in the short term, the New Zealand dollar has got more upside momentum. It looks like everyone is going to continue to bail out of the US dollar until they know how the overall situation is going to play out," he said.

He noted there remained doubts about the effectiveness of the US Federal Reserve's plan to buy up to US$40 billion a month in mortgage bonds in an unlimited way to drive to drive down borrowing costs and encourage more borrowing.

"Most of those borrowers who are already under water aren't of the credit profile that means the banks are going to lend to them. Even though they're going to bring down the overall cost of borrowing, it's probably not going to have the huge impact that many are hoping for," Bell said.

"The argument is that this money is going to get out to the people really struggling in the US economy. But there's an argument the only thing it's really doing is aiding the increase in asset prices in liquid financial markets such as equities and commodities and currency markets."

Bell noted a slight rise in US Treasury yields on Friday night, although the immediate outlook was for subdued inflation.

"But, if you keep on printing money then at some stage it could have unintended consequences, and that could be inflation."

Strong vs the Australian dollar

Bell talked about the New Zealand dollar's recent strength vs the Australian dollar to almost 79 Australian cents, given the current outlook is for the Reserve Bank of Australia to cut its Official Cash Rate by around 75 basis points by June next year, while the Reserve Bank of New Zealand is expected to leave its Official Cash Rate on hold.

He also said New Zealand's soft commodity prices for dairy, meat, fish and logs were doing better than the 'hard' commodity prices that Australia relied on such as iron ore and coal.

"The drought in the US has supported a lot of the food commodities out there, but the slowdown in China is seeing quite a significant pullback in metals prices in Australia," he said.

"There is reason to believe the New Zealand continues to trend up against the Australian dollar over the next few months."

Weak vs the euro...for now

The euro has strengthened against the US dollar and the New Zealand dollar in recent days as the markets welcomed the European Central Bank's plans to also buy bonds in unlimited way. Bell said a reversal of short positions had helped the euro bounce against the Kiwi and the US dollar.

"(However) we're going to find some strong support against the euro because ultimately their central bank is undertaking their own form of money printing, while ours is not," he said.

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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.