The Kiwi dollar sank to US56.26 cents on Tuesday morning. Photo / 123RF
The Kiwi dollar sank to US56.26 cents on Tuesday morning. Photo / 123RF
The New Zealand dollar is taking even more of a walloping, as financial markets reject a massive package of tax cuts announced in the United Kingdom.
The dollar sunk to US56.26 cents on Tuesday morning – a level on par with where the kiwi was in March 2020, when Covid-19sent markets into turmoil, and in 2009, when the world was in the throes of a financial crisis.
ANZ senior strategist David Croy characterised the large spending package in the UK as the "straw that broke the camel's back".
The New Zealand dollar was already depreciating.
The Federal Reserve's tough talk on inflation had been sending interest rates in the United States north. This had been attracting yield-seeking investors that saw the US as a safe haven. The flow of capital into the US contributed to its currency appreciating.
What's more, the stimulatory fiscal package makes the Bank of England's job cooling inflation even harder.
Croy said it looked like the left hand wasn't talking to the right hand, as the Government effectively committed to issuing more debt (government bonds), as the Bank of England announced plans to start quantitative tightening – selling government bonds bought during the peak of the pandemic to loosen monetary conditions.
Economists say governments should learn from the havoc British Prime Minister Liz Truss has wreaked. Photo / AP
The Reserve Bank of New Zealand has started a similar quantitative tightening process. But rather than sell the bonds directly back to their issuer (as is being done in New Zealand), the Bank of England is selling them on the secondary market.
So, the UK bond market is set to be flooded by both government bonds being sold by the Bank of England, and newly-issued government bonds needed to finance the tax and spending package.
"It's really a bit of a perfect storm," Croy said.
"Financial markets have put fiscal policy on notice".
Croy believed the strong market reaction signalled to governments around the world that financial markets don't have an appetite for heavily indebted governments issuing more debt, potentially exacerbating inflation, as economic growth slows.
Similarly, ASB chief economist Nick Tuffley said, "[T]he events triggered by the UK are bringing a much greater focus on the fiscal fragilities of debt-laden governments in an environment of acute inflation pressures, rising interest rates, and consequent slowing of growth…
"New Zealand itself is starting from a position of relatively low public debt levels, though in total our country still has sizable net public and private external debt that requires a willingness for foreign investors to keep lending ongoing funding.
"What has happened in the UK is a reminder that fiscal credibility, such as realistic plans for returns to surplus and a focus on the quality of spending and tax policies, are important for governments."
The Herald put this warning to National Party leader Christopher Luxon, who is campaigning on providing income tax cuts by lifting tax thresholds for inflation, and reversing other tax changes made by the Labour-led Government.
He responded by saying his proposed package is different in "scope and scale" to that in the UK, which is also coupled with "massive stimulus".
Put to Finance Minister Grant Robertson, who is continuing to deliver relatively large Budgets to fulfil various government commitments on infrastructure, climate resilience and health reforms, he said: "I think it's a cautionary tale about the impact of an ideological policy to cut the top tax rate at a time that couldn't be worse.
"That's not a question you should be putting to me. That's a question for the National Party."
Coming back to the New Zealand dollar, BNZ senior markets strategist Jason Wong said its lurch south reflected a "pretty extreme" oversell.
He believed we "may see a bit of consolidation in the short term as things settle down", but cautioned, we're not out of the woods yet.
Wong said the question was, how much of the negativity (strong inflation prompting central banks to tighten monetary conditions aggressively) had been priced in?
As for ANZ's Croy, he believed the New Zealand dollar would remain relatively weak.
He said the US dollar's appreciation was understandable. Without a major policy shift or direct foreign exchange intervention by a central bank, he saw the US dollar remaining strong.
