Here’s my weekly ‘Never a Dull Moment’ chat with HiFX senior dealer Dan Bell about currencies and markets action in the week that’s gone and the week ahead.
We start off talking about China’s reserve requirement easing last weekend, which boosted sentiment somewhat for the commodity-linked and ‘risk on’ currencies such as the New Zealand and Australian dollars.
The New Zealand dollar rose to over 84.2 USc after that news, but was rangebound through the week between that high and 82.4 USc. We also talked about the New Zealand dollar-Renminbi/yuan exchange rate and its connection to the US dollar, given China’s crawling peg to the American currency and New Zealand’s fast growing trade with China.
The Greek bailout deal was also a focus over the last week, reinforcing the more settled nature of Europe’s debt markets and currency over the last two months since the European Central Bank lent €489 billion to European banks in its Long Term Refinancial Operation (LTRO). This settled nerves about the European financial system, for now, but is widely seen as simply buying Europe some time to deal with its underlying structural problems.
This settling of nerves has seen the euro appreciate against the New Zealand dollar. The kiwi fell to around €62c this week from its recent record highs of over €64c.
The next money dump
Dan pointed to the next (and possibly final) round of LTRO lending due next Wednesday night (February 29) as a focus for markets.
Market observers are expecting around €500 billion of three year loans to be made to European banks, given much of the stigma attached to the first round has evaporated and some may be wary this is their last chance to load up on the easy and cheap money.
I asked Dan whether a much bigger lending spree was possible.
“The European banks will probably go in boots and all on this one. I don’t think anyone will be shy this time around. 1% money is on the table and you can go and invest that how you please. Hopefully that will get back into the system in some productive way,” he said.
Some of this cheap money is expected to leak out into other currencies where interest rates are higher and banks can make a ‘carry trade’ profit from the difference between the 1% cost of the ECB money and the 3% plus offered by Australian and New Zealand government bonds.
British money printing
Dan also pointed to minutes from the Bank of England published this week showing two members of its monetary policy committee voted to print even more than the £50 billion extra announced earlier this month.
This reinforced expectations that Britain may increase its quantitative easing beyond the £325 billion already printed. That in turned weakened the pound vs the New Zealand dollar, which rose to near record highs over 53p.
Markets will also be watching testimony to the US Congress on Wednesday and Thursday nights from Federal Reserve Chairman Ben Bernanke for signs of America’s economic outlook and its likely monetary policy action. The Fed has already pledged to keep its official interest rate near 0% until late 2014 and has made noises about a third round of its own Quantitative Easing programme.
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.