New Zealand Dollar Falls Sharply As NZ First Backs Labour Led Government

The New Zealand Dollar slumped Thursday after NZ First shunned the incumbent National Party in favour of a coalition government with the Labour Party, raising fears over central bank policy and long term growth.

The New Zealand Dollar slumped Thursday after New Zealand First shunned the incumbent National Party in favour of a coalition government led by Labour, raising fears over central bank policy and growth.

The New Zealand Dollar fell over 1.5% versus the Dollar and a similar amount versus the Pound after the announcement, trading at 0.7044 and 1.8740 at the time of writing.

The Kiwi currency dropped nearly 2% against the safe haven Japanese Yen and Antipodean rival, the Australian Dollar, touching lows of 79.44 and 0.8943 respectively.

New Zealand First emerged as kingmaker from the September election, with the third largest share of the vote, after the National and Labour Parties failed to garner enough support to form a government alone.

The coalition agreement is between NZ First and Labour although the latter has also entered a looser confidence and supply agreement with the Green Party, in order to secure a parliamentary majority sufficient enough to advance its policy platform.

The result deals a blow to incumbent Prime Minister Bill English, who has served three terms and whose party secured a greater share of the vote than Labour and Greens put together.

It also propels Labour leader Jacinda Arden, a relative newcomer in NZ politics, into the very highest office as NZ Prime Minister.

Reserve Bank and NZ Interest Rates In Focus

Thursday’s announcement follows a three weeks long period of negotiations between New Zealand’s political heavyweights, which now look to have yielded the least favourable outcome for the Kiwi Dollar.

Market’s had feared a Labour, New Zealand First and Green Party coalition the most because this grouping is likely to pursue more aggressive reforms of the Reserve Bank of New Zealand and a sharp reduction in the number of migrants who are granted work visas.

This reform is thought to include a more “growth friendly mandate”, widening the bank’s policy focus to cover more than just inflation, which could result in interest rates remaining lower for even longer.

NZ First leader Winston Peters appeared to confirm the worst of all fears for Kiwi Dollar bulls at a press conference Thursday.

“I hope it means that we’ll start returning to an economy that understands we live or die by exporting. That exporting against GDP has been in decline and we’ve got to turn it around,” Peters told reporters when asked what the coalition decision would likely mean for the economy.

The NZ First and Labour coalition also comes armed with the most restrictive policies on migration, much more so than those put forward by the National Party, which are expected to lead to lower growth over the longer term.

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Milk Prices and NZD Are Headed Lower

The Kiwi had already been on a weakening streak, falling back toward a year-long low against the Pound over Tuesday and Wednesday after prices of milk, a key NZ export, fell and analysts at ANZ Bank downgraded their forecasts for the commodity over the coming year.

Recent price action in the milk futures market and ongoing political uncertainty meant more pain for the New Zealand Dollar.

“The curve for WMP and SMP/milkfat both remain in backwardation suggesting either reasonable near-term demand for the Chinese free-trade window or the market feeling future supply will be more plentiful – we suspect it is a bit of both,” says Con Williams, an economist at ANZ.

Williams has cut his forecasts for the price of milk, a key export for New Zealand, due to the depressed level of current milk futures.

“Combined with higher than expected milk flow from Europe in the New Year and possible unfavourable changes to the European intervention scheme, we believe this warrants some caution,” Williams writes in a note to clients Wednesday. “Hence we downgrade our milk price forecast to 6.25-$6.50/kg MS for 2017/18.”

A recovery in commodity prices helped lift the New Zealand Dollar throughout much of 2016 but it has fallen sharply against the G10 basket in recent months, as uncertainty over the shape and policy bias of the future government set in.

“As the cycle turns with an improvement in supply conditions we expect some further moderation in export prices into the first half of 2018,” says Williams. “This, alongside a slower growth pulse, will weigh on the NZD.”