America's temporary solution to its fiscal impasse is good news for New Zealand which exported a lot to the United States, says Prime Minister John Key
US politicians agreed overnight to extend the US Government's debt ceiling to February 7 and to reopen the government until January 15. The Senate is expected to formally approve the deal tonight.
Mr Key said while the result would only delay the negotiations until January or February, it was good for New Zealand.
"It is good news that the United States have a temporary reprieve from their issues in terms of their shutdown and renegotiation of their debt ceiling. In reality, this only kicks the can down the road until January or February next year, but it's still a welcome result.
"For New Zealand, it is good news. The US is one third of the global economy. We sell a lot of goods and products into the US, and we want them to be strong. It's hard to be strong when the Government is shut down."
The New Zealand dollar traded at five-month highs today after investors breathed a sigh of relief that America had reached a temporary solution, but the reaction suggested the US dollar had suffered some long-term damage from the experience.
The fiscal impasse came at a time when positive signs were starting to emerge in the US economy after five years and US$2 trillion worth of pump priming in the aftermath of the global financial crisis.
The US stock market reacted to the news in a measured way, with the S&P500 share index gaining about one per cent. The local share market was also moderately firmer, the NZX50 index gaining 13 points to 4,772.
The New Zealand dollar was at US84.25c by midday, up from US83.89c in late local trade on Wednesday. Since the fiscal stand-off began, the Kiwi has been locked in a tight trading range around US82c to US83c.
"You can certainly see the relief across asset markets globally and the 'risk on' sort of theme dragged the Kiwi higher thanks its high beta, high risk status," BNZ currency strategist Mike Jones said.
The currency reaction was contrary to what investors would normally expect - a firmer US dollar on the back of a positive fiscal development.
"I think what that tells us is that the fiscal impasse has done a lot of damage to the US dollar," Jones said.
The effect of the political stalemate was to push out the likely time that the Fed would start to wind back its fiscal stimulus measures.
"So it's kicked the can down the road, and all the while the US recovery is looking less and less assured," Jones said.
"And we already knew that the Fed was keen to take cautious tack, so the uncertainty around the fiscal situation is not going to inspire the Fed to taper any earlier," he said.
Jones said that while the US dollar remained on the ropes, the Kiwi was likely to march higher to US85c before long.
Another consequence of the temporary shutdown of government services has been the lack of official data on which the Fed can use before its next FOMC meeting at the end of this month.
"Looking forward, we are now entering a period where it may be harder than usual to gauge the performance of the US economy, with some economic statistics still unavailable, and others skewed by the temporary effects of federal workers leaving and returning to the workforce," Wellington-based Harbour asset Management said in a commentary.