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New Zealand Dollar Soars as Budget Reveals Plans to Cut Foreign Debt

New Zealand Dollar Soars as Budget Reveals Plans to Cut Foreign Debt

2010-05-20 04:52:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

• NZ Dollar Soars as Budget Reveals Plans to Cut Foreign Debt
• Japan’s GDP Report Shows Worst Deflation in Three Decades

Critical Levels

euroopen052020101

The Euro and the British Pound slid 0.4 and 0.2 percent against the US Dollar as stocks slid for the fifth consecutive day in Asian trade, boosting the greenback on safety-seeking demand. We remain short EURUSD at 1.4881.

Asia Session Highlights

euroopen052020102B

The New Zealand Dollar soared after the government’s Budget Statement revealed plans to raise the sales tax for the first time since 1989 while slashing all income taxes across the earning spectrum starting in October in a bid to encourage saving and trim the national debt. The plan also includes provisions to cut the corporate tax rate as well as duties on trusts and savings. Finance Minister Bill English said “New Zealand’s largest single vulnerability is now its large and growing net external liabilities,” adding that this vulnerability will increase over the next five years as government debt rises to 27 percent of GDP from 14 percent this year. Overall foreign debt – including private and public liabilities – accounts for close to 90 percent of GDP.

Japan’s Gross Domestic Product added 1.2 percent in the first quarter from the three months through December 2009 while the annual growth accelerated to 4.9 percent. Exports drove the expansion, adding 0.9 percent to output growth while private consumption contributed a mere 0.2 percent. The outcome marks the fourth consecutive quarter of growth since the economy emerged from recession a year ago but persistent deflation continues to threaten the overall outlook. Indeed, the GDP Deflator (a measure of the price level) declined at an annualized pace of 3 percent, the most in nearly three decades, hinting the government will keep pressure on the Bank of Japan stick with an ultra-loose monetary policy stance for the time being.

Euro Session: What to Expect

euroopen052020103

UK Retail Sales headline the economic calendar in European hours, with expectations calling for core receipts (excluding auto fuel sales) to declined 0.1 percent in April, marking the first drop in three months. On balance, the release may not prove especially market-moving considering the downturn was telegraphed in an analogous report from the British Retail Consortium released last week that chalked up the result to seasonal factors linked to the timing of the Easter holiday as well as uncertainty heading into the UK general election.

The outlook for risk sentiment looks uncertain with equity index futures mixed ahead of the opening bell in Europe though the cues coming out of Asia are distinctly bearish, with the MSCI Asia Pacific regional benchmark index down 1 percent after Japanese deflation accelerated (see above) while concerns about the debt crisis in Europe and its implications for economic growth continued to linger.


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