The Aussie dollar felt the turbulence from the global currency crisis yesterday as it again fell under 64 US cents in the wake of continuing controversy about the economic policies of the UK government of Prime Minister Liz Truss.
At the same time the increased volatility was again reflected in trading on the ASX where prices again came under pressure even though there’s a belief the Reserve bank will lift rates by another half a per cent at its meeting next week which should really have steadied local sentiment.
The currency crisis has seen the value of the pound sterling plunge to record lows against the US dollar this week and last as investors, analysts and foreign governments and policy groups gave the thumbs down to the radical UK government policy of £45 billion of unfunded tax cuts and other spending.
That triggered an unprecedented attack on the idea from the International Monetary Fund and leading ratings group, Moody’s.
The policy, announced last Thursday added to the weakness of the pound against other currencies, especially the US dollar and saw a record low of $US1.0327 hit in trading early on Monday amid a storm of criticism of which the IMF’s intervention has been the most notable.
The Australian dollar has been caught up in the volatility in the markets caused by the UK policy, as well as the continuing rise of the US dollar against the euro and the yen in particular.
The Aussie dollar was trading around under 64 US cents late on Wednesday near 63.75 down nearly 1% over the day. It had been as low of 67.73 US cents, the lowest since April, 2020 in the first wave of the pandemic.
Kwarteng cut the top rate of tax from 45p to 40p and promised a 1p cut in the basic rate of tax from April next year. He also said he would retain UK corporation tax at 19% – scrapping a planned rise to 25% – and reversed a recent rise in national insurance payments, saying that the near £45 billion cost would be added to the UK’s rising debt.
Kwarteng calmed markets on Monday by saying he would set out medium-term debt-cutting plans on November 23, alongside forecasts from the independent Office for Budget Responsibility (OBR) on the full scale of government borrowing.
His statement was not a mini-budget because it did not contain any forecasts from the OBR on growth, debt, inflation, labour market and consumption, as they normally would do.
On Wednesday the pound stood at around $US1.065 after dipping by 0.8% in Asia trade.
In a statement, the IMF called on the government of Prime Minister Liz Truss to reconsider the unfunded cuts to prevent stoking inequality in the UK.
The Fund said the financial policy changes announced by Chancellor, Kwasi Kwarteng’s risked undermining the efforts of the Bank of England to tackle rampant inflation and the cost-of-living emergency that was causing, particularly rising energy costs.
It said a statement planned by Kwarteng for November 23 presented an “opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners”.
The intervention from the IMF was swiftly followed by sharp criticism from the credit rating agency Moody’s late on Tuesday.
While Moody’s did not change the UK’s current credit rating it did say in a statement that the UK’s plan for “large unfunded tax cuts” was “credit negative” and would lead to higher, persistent deficits “amid rising borrowing costs [and] a weaker growth outlook”.
“A sustained confidence shock arising from market concerns over the credibility of the government’s fiscal strategy that resulted in structurally higher funding costs could more permanently weaken the UK’s debt affordability,” Moody’s said.
Debt-funded fiscal stimulus would only add to already sky-high inflation, particularly if sterling remained near record lows, and could prompt a more aggressive tightening cycle from the Bank of England, the agency said.
Moody’s did not change the UK’s credit rating of Aa3 (stable) but given the use of the phrase ‘credit negative’ that ’stable’ outlook will change in the near future if the government doesn’t change its policy and help support the pound.
Moody’s said while it had lifted its forecast for UK economic growth to 3.3% for 2022, from 3.0%, it had also cut its 2023 forecast to 0.3%, from 0.9%, and did not expect growth to return to potential (around 2.5%) until 2026.
On Tuesday, the Bank of England signalled that it was prepared to ramp up interest rates in response to the slump in the value of the pound.
Bank chief economist Huw Pill said the central bank “cannot be indifferent developments of the past days. He said the Bank would have to deliver a “significant monetary policy response” to protect sterling” (ie lift rates).
But at the moment, the Bank of England and monetary policy and the Government and fiscal policy are at odds, the markets are confused and wanting to get out of sterling and into the greenback, anything but the pound.
