Budget 09: S&P's revision from negative to stable catches market on the hop

A three-quarters-of-a-cent jump by the New Zealand dollar was the most noticeable market reaction to yesterday's Budget, with money markets generally taking the well-anticipated news in their stride.

The kiwi suddenly spiked 70 basis points a couple of hours after the Budget was released, with the catalyst being a surprise revision to Standard & Poor's outlook on New Zealand's AA+ credit rating, from negative to stable.

The sharemarket's benchmark NZX-50 index fell 1.72 per cent.

Westpac market strategist Imre Speizer said up until S&P's announcement around 4pm the market had interpreted the Budget as marginally increasing the likelihood of a rating downgrade, given it projected the Government's accounts to remain in the red for longer than S&P this week said it was looking for.

"It would have been a very mild positive surprise to keep the rating but to have the outlook changed back to stable was an incredibly huge positive surprise and really caught the market on the hop and you can see that in the kiwi's reaction," Spezier said.

By 5pm the kiwi had eased somewhat from its highs to close at US61.72c but Speizer said further gains were possible overnight.

"We may see some follow-through in London tonight so we get over a cent out of this move."

There was also some surprise, albeit much milder, around the amount of Government debt that will be issued in coming years to fund the deficits.

The Government's Debt Management Office said it would sell $8.5 billion of bonds in the June 2010 year rising to $11.5 billion the following year and $15 in each of the two subsequent years.

While the initial $8.5 billion will be the largest nominal issuance in one year, it is less than anticipated by some market commentators.

However, ING head of fixed interest Graham Ansell noted the DMO had built up financial assets in the past couple of years which had the effect of reducing its borrowing requirements in the short term.

AMP Capital Investors head of fixed interest Grant Hassell said the muted overall reaction in debt markets suggested the Government had done a good job of managing expectations.

"The debt programme is a little bit lower to begin with, tracking up to the number we were expecting at around $15 billion per annum," he said.

"The interesting thing is how we deal with the next couple of years, which will be tough. We're not getting the fiscal stimulus we were looking for and monetary policy is becoming less effective because banks are competing for funds."