The New Zealand dollar traded at five-month highs today after
investors breathed a sigh of relief that America had reached
a temporary solution to its fiscal impasse, but the reaction
suggested the US dollar had suffered some long-term damage
from the experience.
Overnight, US politicians agreed to extend the US
Government's debt ceiling to February 7 and to reopen the
government until January 15. The Senate is expected to
formally approve the deal tonight.
The fiscal impasse came at a time when positive signs were
starting to emerge in the US economy after five years and
US$2 trillion worth of pump priming in the aftermath of the
global financial crisis.
The US stock market reacted to the news in a measured way,
with the S&P500 share index gaining about one per cent.
The local share market was also moderately firmer, the NZX50
index gaining 13 points to 4772.
The New Zealand dollar was at US84.25c by midday, up from
US83.89c in late local trade on Wednesday. Since the fiscal
standoff began, the Kiwi has been locked in a tight trading
range around US82c to US83c.
"You can certainly see the relief across asset markets
globally and the 'risk on' sort of theme dragged the Kiwi
higher thanks its high beta, high risk status," BNZ currency
strategist Mike Jones said.
The currency reaction was contrary to what investors would
normally expect - a firmer US dollar on the back of a
positive fiscal development.
"I think what that tells us is that the fiscal impasse has
done a lot of damage to the US dollar," Jones said.
The effect of the political stalemate was to push out the
likely time that the Fed would start to wind back its fiscal
"So it's kicked the can down the road, and all the while the
US recovery is looking less and less assured ," Jones said.
"And we already knew that the Fed was keen to take cautious
tack, so the uncertainty around the fiscal situation is not
going to inspire the Fed to taper any earlier," he said.
Jones said that while the US dollar remained on the ropes,
the Kiwi was likely to march higher to US85c before long.
Another consequence of the temporary shutdown of government
services has been the lack of official data on which the Fed
can use before its next FOMC meeting at the end of this
"Looking forward, we are now entering a period where it may
be harder than usual to gauge the performance of the US
economy, with some economic statistics still unavailable, and
others skewed by the temporary effects of federal workers
leaving and returning to the workforce," Wellington-based
Harbour Asset Management said in a commentary.