HiFX's Dan Bell looks ahead to 2013 and names five key issues set to make waves in the currencies markets

Here's our weekly currencies outlook and review with HiFX's Senior Dealer Dan Bell. This is the last one for 2012 so we thought we'd take a look ahead to 2013. I asked Dan for five key issues to watch out for in the currencies markets next year. Here they are;

Number 1: Keep an eye on US monetary policy.

"In the most recent Fed statement they've put an unemployment rate and an inflation target on their stimulus measures. I think that's really important because what they're saying is if unemployment gets to 6.5%, they will start to remove some of the stimulus. The really interesting take out from that is the market will not wait for the unemployment rate to get to 6.5% to start pricing that in," says Bell.

"If we do see a meaningful improvement in US unemployment and in jobs growth, I think you'll start to see the market anticipate the Fed removing some of that stimulus and that will be, I think, very important for the US dollar and for global currencies in general. It will in fact see the US dollar strengthen against most major currencies."

"As we know the market has a saying 'don't fight the Fed.' So in this environment everyone has been selling the US dollar, or been more inclined to sell the US dollar. The New Zealand dollar traded to a 12 month high last week around US84.75 cents, but I think next year, if we do see employment improve in the US, it's going to be a different story. And I don't think the conditions that keep the New Zealand dollar on this uptrend are going to remain in place."

Number 2: The Kiwi-Aussie cross rate and its importance for New Zealand.

"As we know Australia is New Zealand's largest trading partner. Some analysts have recently come out to predict Australia will cut their cash rate next year to a low of 2%. Their cash rate is currently set at 3% so actually higher than our cash rate," Bell says.

"If the Reserve Bank of Australia (RBA) was to cut the cash rate to 2% I think you will see quite a significant drop in the Australian dollar against the New Zealand dollar, potentially we could get the Kiwi-Aussie cross rate over A85 cents. If you look at the 10-year average it is closer to around A84c. At the moment we're trading just a shade under A80 cents."

"I think that will have a big impact on our export competitiveness into Australia and also on our own central bank's policy, because naturally if the RBA is cutting interest rates, and the Reserve Bank of New Zealand is either keeping rates steady at 2.5%, or potentially talking about raising interest rates, we're going to see the New Zealand dollar rally significantly. So that's going to be a major concern for the central bank and for our economy next year."

Number 3: The NZ dollar on a Trade Weighted Index (TWI) basis:

"There are a few things happening in the New Zealand economy which are considered good news stories. We've got the Christchurch rebuild, (and) we've got the housing market providing some form of stimulus to the economy. So on that basis our central bank does have a challenge next year.  The New Zealand dollar from a trade weighted point of view could in fact be one of the strongest currencies in the world," Bell suggests.

"So the challenge there is even if we weaken against the US dollar, the weighting against the Australian dollar, the euro, the Japanese yen, and pound, which are still quite major trading partners of ours, could have quite a significant impact on the TWI."

"And as we know the Kiwi on a TWI basis was (very recently) up at the same levels as when the Reserve Bank intervened back in 2007. So if we see the Kiwi-Aussie cross rate continuing to go up, that TWI is going to look even worse, and potentially that might have an impact on our central bank policy."

Number 4: European sovereign debt crisis woes to continue.

"They continue to kick the can down the road in Europe. The euro has been quite strong over recent weeks against a lot of currencies and I think that's due to positioning more than anything. This time of year you're starting to see traders square up and the euro has benefited from that."

"But the reality is Europe is expected to remain in a recession next year and I think the challenges, the political challenges, across that region will continue to be a problem for them," says Bell.

"Austerity isn't working, we've still got huge unemployment rates across the region, we're not seeing enough growth, so I think Europe has still got a lot of challenges next year."

Number 5: The critical role of governments and central banks in the global economy.

"As we know the US are currently going through this negotiation about their fiscal cliff (see more on the fiscal cliff here and also MarketWatch's countdown here). I think they're going to get it sorted. A lot of the negotiations are occurring behind closed doors at the moment," Bell says.

"They'd be absolutely stupid not to get it sorted because everyone knows the US will enter another recession if they don't. That's the first major government or political issue that we're facing. We've mentioned the ongoing issues in Europe, and we've also seen a leadership change in Japan and China."

"I think you could start to see governments talk about protectionist issues and how global central banks are having an impact on currencies and on trade flows. So governments will continue to play quite a critical role next year," Bell says.

"And it's whether our government and our central bank actually want to perhaps be a little bit more proactive about how they manage and assist the New Zealand economy to get to where we need to be as opposed to letting the market do it. Because we're pushing against a bunch of interventionalist policies from other central banks and governments that's making it very difficult for us to be in a better spot for our economy to grow."

A Merry Christmas and Happy New Year to all our readers and viewers!

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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.