New Zealand Dollar: FX Analysts Digest the Inconclusive Election Result

The New Zealand Dollar (Kiwi) weakened by over 1.0% as markets opened on Monday morning after an indecisive election result on Saturday.

The Kiwi fell from a pre-election GBP/NZD 1.8400 to a post-election 1.8650 versus the Pound, with the number of NZ Dollars purchasable with a Pound rising, and from 0.7430 NZD/USD to 0.7252 low after the election versus the Dollar, with the number of Dollars purchasable with a Kiwi falling.

Despite the knee-jerk reaction lower the currency has staged a recovery since, with GBP/NZD making the most ground and almost returning to the pre-election level, with a current market level of 1.8554.

Uncertainty is a major component of the Kiwi’s weakness since no single party won an outright majority which means two or more parties will need to form a coalition or do a deal to get an outright majority to govern.

Until businesses know what the new government’s policies are they may put off making key decisions which could hurt investment, and this impacts negatively on growth, and therefore the currency.

Foreign investors also tend to put off making decisions until it is clear what the next government is composed off – all in all the sooner a deal is done the better for the Kiwi.

The party with largest number of seats is the current governing National party which has 58, followed by Labour with 45, the New Zealand First (NZF) party with 9, Greens with 7 and ACT with 1.

There are 120 seats in the New Zealand parliament in all so to have a majority the governing party or parties need 61 or more.

The result favours either a National/NZF coalition or a Labour/NZF/Green coalition.

According to Maybank’s Saktiandi Supaat, a coalition of Labour the Greens and NZF would be the most detrimental to the New Zealand Dollar, as it would produce a more inward-looking government since both Labour and NZF share policies which are negative for foreign investment, immigration and trade.

“We do not rule out the possibility that NZ First may wish to form a government with Labour – Green coalition. And this may be less positive on NZD outlook,” said Supaat.

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As an example of why a Labour-NZF coalition would be negative for the Kiwi, both NZF and Labour want to forbid foreign home ownership and if such a policy was introduced it would automatically lower demand for the Kiwi.

Both also want to reduce immigration: Labour to 30,000 and NZF to 10,000 – last year’s level was 72,000, and this is seen as detrimental to growth and therefore negative for the currency.

Labour also wants to renegotiate trade deals with China and Korea to make them more NZ-centric a la Trump.

On the upside, however, Labour fiscal policy would probably be more stimulatory, providing an injection to growth from increased government spending.

New Zealand’s low level of government debt, which stands at only 20bn means there is capacity for some amplitude in spending.

More positive for the Kiwi would be a coalition of the incumbent Nationals with NZF as the Nationals are more pro-trade, ‘outward-looking’ and have no policies curbing foreign investment.

The high level of uncertainty may be partly due to the lack of a clear sign from the leader or NZF, Winston Peters, as to which major party he would consider former a coalition with.

“Peters, 72, is fiercely independent and often unpredictable. Since Saturday’s election he has been holed up in his Northland home, which is only accessible by road during low tide. He has given no indication of who he intends to back,” writes Eleanor Ainge Roy of the Guardian.

Of all the parties in the election the policies of New Zealand First are seen as most negative for the currency as they include rules banning foreign ownership and investment and a huge reduction in immigration which is expected to hurt growth, however, these policies are expected to be watered down during coalition negotiations.

It is reported that Peters is a ‘tough nut to crack’, however, and will be resistant to jettisoning certain bottom line policies.

“Over the past nine years of National government, Peters has repeatedly opined on his many “bottom lines” if he were to form a coalition government with a major party at the next election,” said Ainge Roy, adding:

“These may include: plans to slash migration to 10,000 a year – a drop of more than 60,000 annually; a ban on foreigners buying land and establishing a foreign ownership register; moving public service jobs out of Wellington to regional areas; holding a referendum on the anti-smacking law; and installing New Zealand woollen carpets in all government departments, schools and agencies.”

Given another of NZF’s policies is to pull out of global climate agreements it’s policies are antithetical to the Greens which Jacinda Ardern’s Labour party would also need on board to have a majority, thus of the two possibilities it is seen as the less likely.

Which may the reason behind the Kiwi's recovery after the initial knee-jerk reaction lower.