The Day of reckoning approaches

16 October 2013

The Day of reckoning approaches

By Andrew May (Sales Trader, CMC Markets New Zealand)

As the House of Representatives once again head back to basics to vote and try and reopen the US government later today, the New Zealand and Australian dollars remains eerily highly priced as if in some ‘sixth sense’ they believe a deal is imminent. NZD opens today at US 83.80 pushed higher towards US 84c as an increase to local inflation levels for the September quarter rose 0.9% or 1.4% annually. Expect to see greater levels of risk volatility against growth currencies as we head into the last 24hrs of US negotiations. It's the “Final countdown!”

However taking cues from an extremely volatile nights trading in the US, market sentiment is incredibly frayed and entrenched in reactionary measures that will bend either side dependent on scent of an imminent decision to increase debt levels - or not.

With 3rd quarter earnings season almost a forgotten feature of US market mandate imploring tech heavy magnates Yahoo surpassing forecasts, The Dow Jones has closed down another 133 points on the continuing debt debacle with credit ratings agency ‘Fitch’ also making their opinion known by placing the world’s strongest economy’s credit rating on negative watch.

And let’s face facts, if the US government does default on its debt obligations, it could be catastrophic for global markets. Economies will not be immune. Our New Zealand dollar will literally plummet from already artificially high levels as ‘flight to safety’ measures will drastically be undertaken as investors flock to safe haven depots as US government bonds (as per the exact scenario played out in 2011), the precious yellow metal and defensive currencies such as the CHF and JPY.

If this game plays out due to political wrangling, our small yet robust New Zealand economy would struggle to buffer and distance itself as global lenders of debt to NZ such as China, Japan and Australia would immediately be affected by a US debt default sending shock waves across the ocean to NZ. Markets may be forced to ‘think the unthinkable’. Let us hope that Congress act on prudent measures to safe guard global economies.
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