Market Watch: 'Peak inflation fear' as currency storm rocks investors

We might not be at peak inflation yet, but it is possible we are at "peak inflation fear", says Pie Funds chief executive Mike Taylor.

Those fears about US inflation prompted a global currency meltdown this week as investors piled into the Greenback on expectations that the US Federal Reserve will have to push interest rates much higher.

Sharemarkets took a hit with Wall Street's S&P 500 index touching a fresh low for the year.

The local NZX50 dropped 5 per cent across a week to hit its lowest level since mid-July.

For equity investors the currency market turmoil highlighted just how much everything hangs on the US inflation story, Taylor said.

This bear market was different to the previous two - in 2003 and 2009, he said.

Back then picking the market low was about waiting for interest rates to go to zero before getting back into equities.

"This time we're here because of inflation, so we should be looking for signs that inflation has peaked," he said.

"It's quite possible we are at peak inflation fear. The next step would be when central banks feel comfortable to pause on interest rate hikes. That could potentially be the point at which markets may bottom."

Even though there would still be some pain to flow through the real economy, markets could decide to look through that, he said.

The turmoil in currency markets was down to the increasing strength of the US dollar with everything else moving against that, Taylor said.

The strong dollar helped the US Federal Reserve in its inflation fight because it could effectively "export the inflation elsewhere".

"It means filling up the car is cheaper and other imported expenses are cheaper," he said. "Not so easy for the rest of the world because it means our costs go up."

While the kiwi dollar had taken a hit - falling from around US59c to a low of US56.2c at one point - it has fared much better than the British pound.

In the UK things really took an ugly turn when the new Conservative Party leadership decided to borrow more money to fund tax cuts.

Mike Taylor, founder and chief executive of Pie Funds. Photo / NZME

The pound slumped to the lowest level in its 230-year history against the dollar - at US$1.03.

The new fiscal policy was working against what the Bank of England was trying to achieve, which was to bring down inflation without putting the economy into recession, he said.

"But what they've had to do, in the last 24 hours or so, is go back into the market and start quantitative easing again, buying bonds to stop the bond yields accelerating too high. It's a crazy situation."

- The Market Watch video show is produced in partnership with Pie Funds.