HiFX's Dan Bell on the chances of the NZ$ hitting parity with its Aussie counterpart, NZ$ outlook vs the greenback, and chickens coming home to roost in emerging markets

By Gareth Vaughan

Here's our monthly currencies outlook and review with HiFX's senior dealer Dan Bell, including a look at the likely trajectory for the Kiwi dollar against the Aussie and US dollars this year.

But firstly to the Reserve Bank of New Zealand. The RBNZ on Thursday left the OCR at its record low of 2.50% but hinted strongly it'll start a cycle of increases from its next OCR review on March 13.

Bell says the RBNZ's statement is clearly preparing the market for a rate hike.

"Pretty much 100% of the market is expecting a rate hike in March. The market is expecting 125 basis points of rate hikes this year," says Bell. "So some pretty aggressive tightening expected from the RBNZ through 2014."

With OCR rises expected in New Zealand, and the Reserve Bank of Australia expected to leave their cash rate at 2.50%, Bell sees potential for the Kiwi dollar to hit parity with the Aussie dollar.

"If we go 125 basis points this year the Kiwi-Aussie could be at parity and I think you're talking some serious damage to New Zealand's manufacturing sector that could take years to come right," says Bell.

The NZ dollar was at about A92.7c on Friday afternoon. The RBA reviews its cash rate on Tuesday afternoon.

Fed tapering goes up a gear

Meanwhile, the Fed's decision to reduce its monthly bond buying, or quantitative easing, programme by another US$10 billion to US$65 billion was broadly as expected, with Bell predicting additional tapering at upcoming Federal Open Market Committee meetings.

"The Fed are expected to continue that (tapering) by US$10 billion going forward, at every meeting I think is going to be the way it unfolds," Bell says.

"At the end of the day (US) interest rates are still pretty much zero there and they are still printing US$65 billion a month so it's going to be a gradual process,... which should continue to provide support to the US dollar against most of the major currencies."

Data out Friday showed US GDP grew 3.2% in the fourth quarter of 2013 and the most recent unemployment figures showed an unemployment rate of 6.7%, inching lower towards the Fed's 6.5% target.

"I would say that the trend there is going to be more favourable for the US dollar," Bell says. "And I think even though the Kiwi-US isn't going to collapse, I think at current levels around US81c to US82c, (these are) pretty good levels for importers. We may well see a range between US80c and US85c persist for a little while, but overall I think there's going to be more downside potential for the New Zealand dollar versus the US over the next 12 months."

Bell sees the Kiwi dollar under US80c "in due course."

"It's a stubborn thing. Last year we saw the Kiwi down into the mid to high US70c (the US75c to US80c range) for a period of time when the market started to expect the Fed to taper."

The emerging markets impact

Meanwhile, the Fed's tapering is causing ructions in emerging markets with interest rates hiked in India, Turkey and South Africa as capital flows out of such countries and their currencies shed value. (See more on this from Bloomberg here, and here,  and the FT here, and The Economist here).

"You've had this period of extremely low interest rates over the last few years so investors have been investing in emerging market economies and being quite happy with the risk because they haven't had a huge amount of alternatives," says Bell. "Now that the Fed are starting to tighten up a little bit, and the US economy is showing some strong signs of improvement, investors are questioning whether or not emerging economies are a good place to keep their funds and you're seeing funds leaving those economies."

"So it's creating a flight out of those economies, which is putting pressure on their currencies. The Turkish lira, for example, had about a 10% range over the last week or so against the US dollar."

The Turkish central bank raised its official cash rate by 4.25% to 12%.

Bell suggests, however, that some of the emerging economies have problems internally with high inflation and structural problems, which have been hidden by the "days of easy money", or at least investors haven't questioned these underlying issues, that are now starting to come into focus.

In terms of the global economy, Bell suggests these emerging market issues are "being a little bit overdone."

"It's going to be an ongoing story this year obviously in terms of what the Fed are doing. (But) that has been telegraphed for a while. We knew last year that the Fed were going to start removing the stimulus, or at least reducing the stimulus. They're doing it in a gradual fashion and the global economy is reasonably positive at the moment," says Bell.

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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.