Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including markets were stable but on tenterhooks overnight as they watch politicians trying to solve gridlocks over mounting debts.
US President Barack Obama said he was considering a US$3.7 trillion deficit reduction plan and would also look at a temporary increase in America's debt ceiling to avoid a default by the world's biggest economy after August 2. See more here at Bloomberg on Obama considering a short term increase.
But Republicans and Democrats remain far apart on a long term solution to America's ballooning deficit and ratings agencies may downgrade America's AAA credit rating even if a short term deal is done. The longer this drags on the more nervous markets will get as the August 2 deadline approaches. See more here at Reuters on the debt ceiling impasse and the countdown to 'Armageddon' if it is not passed.
Meanwhile across the Atlantic, European politicians meet tonight in a crisis meeting to try to fix the European debt crisis. Some are describing the meetings as crucial to the future of the Euro. See Ambrose Evans Pritchard at The Telegraph on why Europe must agree a common fiscal policy and debt pooling or risk a run on Southern Europe's bond markets and the ultimate collapse of monetary union.
Markets were relatively steady overnight with the US debt ceiling and the European debt crisis meetings the focus of attention.
NZ$ at ruinously high levels for exporters
However, without much fanfare, the New Zealand dollar continues to trade near record highs against the US dollar, the Euro and the pound. It is also stronger vs the Australian dollar, which has pushed the Trade Weighted Index (TWI) over 73 to three year highs.
This is despite continued falls in commodity prices in the last four months. Milk powder prices have fallen 20% since March 1 yet the New Zealand dollar has strengthened 14% vs the US dollar over the same time.
Claims from Reserve Bank Governor Alan Bollard and Prime Minister John Key that the currency strength is all about higher commodity prices no longer wash.
The currency strength is as much about our foreign borrowing (mostly by the government), the reinsurance inflows and the US dollar money printing in both America and China.
In my view Bollard and Key are comfortable letting the the currency rise to do their own dirty work. Key likes a strong currency because it is good in the short term for consumers by keeping petrol prices, import prices and overseas holiday prices down. It helps him get elected on November 26.
Bollard likes a strong currency because it helps him control inflation in the short term without having to increase the Official Cash Rate. It means he can delay a rate hike until December 8. Key likes that too because any rate hike would be after the election.
In my view this is short term thinking that will stop the long term transformation needed to turn New Zealand into a producing, exporting and saving nation from a consuming, importing and borrowing nation.
In my view, our government needs to stop borrowing so much for a start and encourage much more domestic savings. Cutting KiwiSaver incentives and cutting income taxes while still spending large on middle class welfare doesn't do that.
The Reserve Bank needs to crack down much more on domestic borrowing funded through foreign borrowing. It is investigating macroprudential controls, but needs to move faster and do more.
How on earth are we going to export more high value, high wage-producing goods with a currency headed for parity vs the US dollar?
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