HiFX's Dan Bell on the Crimean crisis, US non-farm payrolls, Australia's Dutch Disease, and the RBNZ's interesting and challenging year

By Gareth Vaughan

Here's our monthly currencies outlook and review with HiFX's senior dealer Dan Bell including a look at the crisis in the Ukraine.

In what Reuters is calling Russia's biggest confrontation with the West since the Cold War, Russian forces have effectively seized the Crimea angering Ukraine's new pro-West government and leading to the United States threatening to isolate Russia economically.

The geo-political risk has seen international investors' money take the typical flight to the safety of the US dollar with the New Zealand dollar falling below US84 cents on Monday morning. This "de-risking" is likely to continue, Bell says.

"The US dollar in this type of environment will always strengthen. It is a major geopolitical event and who knows where it goes from here? I think investors are going to be very nervous over the next few days and that's going to be reflected in the equity markets and obviously in a stronger US dollar as investors prepare, I suppose, for some of that worse case scenario to develop," says Bell.

Non-farm payroll data awaited

Meanwhile, the latest monthly US non-farm payrolls report for February, due out Friday night New Zealand time, looms large on the horizon.

"It always gets a lot of focus because it's one of the most immediate reports on the US economy as opposed to looking at inflation or GDP, which is a lagging indicator," Bell says.

In January the Fed said it was reducing its monthly bond buying, or quantitative easing, programme by another US$10 billion to US$65 billion on top of December's initial US$10 billion taper. It also said the target range for the Federal Funds Rate (its OCR equivalent) of 0 to 0.25% would be appropriate at least as long as the unemployment rate remains above 6.5%.

The US economy is expected to have added about 150,000 new jobs in February with the unemployment rate steady at about 6.6%.

New Federal Reserve Chairman Janet Yellen last week told Congress the Fed wants a “firmer handle” on to what extent recent weak economic data, including January's non-farm payrolls, could be blamed on cold winter weather, and to what extent  it stems from a broader economic slowdown. However, Bell expects tapering to continue.

"In terms of tapering I think it's as steady as she goes. They've started the tapering exercise. They've got a long way to go before they actually start raising interest rates, and I think the market won't be expecting a rise in the Fed Funds Rate until the middle of 2015. They're just reducing some of the stimulus. They are effectively still printing money," Bell says.

The Federal Open Markets Committee next meets on March 18 and 19.

 Australia's Dutch Disease

With the Reserve Bank of Australia set to announce the result of its Cash Rate review on Tuesday afternoon, Bell says no change from 2.50% is expected. However, the market estimates there's a 40% chance of a cut this year.

Recent data out of the Australian Bureau of Statistics shows private capital expenditure fell a seasonally adjusted 5.2% to A$38.29 billion in the December quarter, which was more than expected.

"Overall if you dig into the data and some of the forward looking aspects of the intentions of Australian firms, it's looking really, really negative," says Bell. "So a lot of people are saying this is really starting to show the end of the investment in the mining and resources sector in Australia. And the big concern is they don't have another sector to pick it up."

"So it's the old classic Dutch disease where a lot of money has been guided into the mining and resources sector in Australia, and not a lot of other sectors have had much love in recent years.
It does seem that things could get worse (in the Australian economy) before they get better," Bell says.

Against this backdrop, and with the Official Cash Rate in New Zealand expected to be increased by 100 basis points to 3.50% this year, Bell says he wouldn't be surprised to see the Kiwi "well over" A95 cents, levels it got to in January.

"If New Zealand rate hikes unfold this year as expected we could easily see the Kiwi-Aussie cross rate up towards parity," Bell says.

In terms of the next OCR review on March 13, the market has priced in a 100% chance of an increase. A hike is viewed as "pretty much a forgone conclusion."

"I'm surprised that we've actually traded a little bit softer against the likes of the (British) pound and the euro recently given the outlook in New Zealand against the euro. We're sitting at around the 60.5 euro cent mark, and against the pound we're sitting just under that 50p level when the New Zealand dollar was up over 53p last year," Bell says.

"If we do really start to see these rate hikes kick in, I would say the New Zealand dollar is going to continue to trend up against most major currencies and it's going to be an interesting and challenging year for the Reserve Bank in light of that."

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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.