New Zealand Dollar's Election Jitters Overhyped say Barclays
The New Zealand General Election on September 23 is building up to becoming a major event for the New Zealand Dollar.
Analysts have been saying for a while that the New Zealand Dollar is likely to weaken regardless of the outcome of the election since both major parties have policies which are inimical to a strong Kiwi.
Indeed, growing concerns about currency volatility have led to a rush by vulnerable companies to hedge their exposure to the event.
Recent data from ASB, who run a quarterly survey of importers and exporters, appears to support this theory.
"Among reporting enterprises, 44.5% already had increased their hedging activities, with a further 38.5% intending to increase hedging; only 17% cited the election as not having an impact," said ASB.
The hedging instrument of choice appears to be the FX Option because it combines leverage and limited risk: the maximum the option owner can lose in the premium whilst upside is unlimited.
"FX options were clearly the risk mitigation product of choice to managing election-related currency volatility, with 70.5% of enterprises having already increased or intending to make increased use of FX options. Intentions were the strongest for enterprises with large FX exposures and for exporters," said ASB.
Yet despite the clear concerns of the market, and previous analysts' arguments, foreign exchange analysts at Barclays are skeptical that the election will have a major impact on the currency at all.
"We retain our view that the election outcome does not hold significant implications for the NZ economy or monetary policy and the highly elevated concern we observe in currency markets is unjustified," says Barclays' Shinichiro Kadota.
Barclays See Little Risks to the NZD
Barclays dismiss an overhyped focus on what the election outcome poses to the economy and the Kiwi.
Labour have overtaken the New Zealand National Party in recent polls and look more likely to win.
The latest election opinion poll conducted by One News Colmar Brunton over 26-30 August shows that support for Labour has risen significantly to 43% from 37% in the previous survey over 12–16 August. In contrast, support for the National Party slipped further to 41% from 44%.
Labour's gains in polls are already having a negative reaction on NZD, as per the hedging decisions being made by businesses as reported by ASB, but according to Kadota this is unjustified and therefore unlikely to last:
"The negative reaction in the NZD to the Labour Party’s lead could have been somewhat related to a populist tilt in its new fiscal plan unveiled last week.
"The Labour Party said it plans to offer free post-secondary education and boost student allowances. Although it plans to fund the expenditure partly through the imposition of a tourist tax, it has said its fiscal plans mean smaller operating surpluses and more debt over the next five years."
Kadota suggest the weakness in NZD due to Labour's policies is due to the fiscally expansive nature of the policies, which are likely to increase the country's debt burden and may be fiscally unsustainable.
However, the analyst argues the New Zealand government's low levels of debt are unlikely to be threatened by a Labour government.
If anything the policies are more likely to, "support consumption and GDP growth," says Kadota leaning on the central pillar of Keynesian economic theory.
Indeed, fiscally expansive manifestos in other elections, for example, in Canada led to gains for the currency as the pressure to drive growth shifts from the central bank to the treasury, resulting in less pressure for the central bank to keep policy accommodative (and rates low).
It may well be that both the concerns about Labour's reforms to the RBNZ's mandate and the increased fiscal motive of the current lead party in NZ election polls will have antagonistic flows on the Kiwi, and could temper moves in either direction by offsetting each other.
But, Kadota does not focus much on Labour's proposed reforms to the RBNZ, and that could be an important ommission as it is the RBNZ that is a key guardian of NZD value.
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A Lose-Lose for NZD?
Previously we have reported that analysts, such as ING's Viraj Patel, have focused on the negative impact the elections are likely to have on the Kiwi, regardless of the outcome.
As recently reported by Pound Sterling Live here, Patel says that the incumbent is most likely to be re-elected, which is the Nationalist party government.
However, their loss of a majority probably means they will have to make a coalition to retain power with the ultra-right New Zealand First party.
New Zealand First has anti-immigration policies and if they manage to cap the number of migrants Patel argues it will have a detrimental impact on the economy, which will pull the Kiwi down.
On the other hand, if the other major party, Labour get into power, then the threat is more from central bank reform because Labour wants to end the custom of the Reserve Bank governor having sole responsibility for policy decision-making and replace it with a committee like most other central banks.
Indeed, the New Zealand Dollar has been falling just as the Labour party's improvement in the polls continues.
More detrimental to the Kiwi, however, is that they wish to add a further mandate to the Reserve Bank of New Zealand's (RBNZ) Charter, which is to encourage conditions for 'full employment' as is the case in the US.
Such a change would be expected to keep policy more accommodative for longer since unemployment is currently above the long-term average and the considered 'full' of 3.5-4.00%, standing as it does at 4.8%.
Patel, who wrote the report at the end of August, also mentions how the NZD has yet to absorb all the political risk associated with the event, and that there is a probable further 1-2% decline expected in the run up to the election.
