NZD: Are New Zealand First and Labour About To Backpedal on Their Migration and Property Curbs?

Only time will tell whether Peters’ statements mean an NZ First and Labour coalition, under the stewardship of newly minted Prime Minister Jacinda Ardern, will step back from the policies markets have feared the most.

The Kiwi Dollar remained under pressure as the clock struck noon in London Thursday after three weeks of horse trading among New Zealand’s political heavyweights yielded the worst possible outcome for markets.

The Labour-led coalition is yet to unveil the full policy agenda it will go forward into government with now that horse trading has concluded.

But statements from New Zealand First leader Winston Peters appear to have opened the door to a possible climbdown on some of the more contentious policies to have been pledged by coalition members.

In a speech Thursday morning, Peters flagged a looming slowdown in the economy, damaged confidence among retailers and investor concerns over property ownership having gone into the determination of which NZF and Labour manifesto pledges make it onto the coalition policy agenda, and which ones don't.

“The agreement we have reached is a summation of the policies that survived the negotiations. As the song says, “You can’t always get what you want.”,” says the 72 year old leader of New Zealand First. “Our negotiations have taken place against a backdrop of changing international and internal economic circumstances which we cannot ignore.”

Investors and traders had feared a Labour, New Zealand First and Green Party coalition the most ahead of the 2017 election for a number of reasons.

This grouping was not only likely to pursue more aggressive reforms of the Reserve Bank of New Zealand, it has also campaigned on pledges of an aggressive clampdown on migration into the country as well as curbs on foreign ownership of residential property.

“We in New Zealand First believe that an economic correction, or a slowdown, is looming, and that the first signs are already here,” says Peters. “Awareness of looming consensus has affected our decision. Our choice today relates to how best we mitigate, not worsen, their impact on as many New Zealanders as possible.”

The New Zealand Dollar fell more than 2% versus the safe haven Japanese Yen and Swiss Franc over the course of the morning session, trading at 0.7913 and 0.6862 at the time of writing. 

The Kiwi currency also fell more than 2% against Antipodean rival, the Australian Dollar, touching lows of 0.8932. It was down close to 2% and quoted at 0.7024 against the greenback at noon.

Even the Pound Sterling, which was hit Thursday by a sharp fall in retail sales and ongoing concerns over an absence of progress in Brexit negotiations, managed to eke out a sizeable gain over the Kiwi currency when it traded 1.29% higher at 1.8694.

“When we construct the formal agreement summating those matters we have negotiated, these policies will be published,” says Peters. “It is not my privilege or responsibility to summarise them today.”

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Only time will tell whether Peters’ statements mean an NZ First and Labour coalition, under the stewardship of newly minted Prime Minister Jacinda Ardern, will step back from the policies markets have feared the most.

Admittedly, there are also reasons to think that they might not as Peters’ speech did also contain some rhetoric that would contradict the above interpretation.

“Far too many New Zealanders have come to view today’s capitalism, not as their friend, but as their foe. And they are not all wrong,” Peters says. “We’ve had to make a choice, whether it was with either National or Labour, for a modified status quo, or for change....We choose a coalition government of New Zealand First with Labour.”

Reserve Bank Shakeup Points To Weaker NZD Regardless

Another reason why market’s had feared a Labour, New Zealand First and Green Party coalition the most ahead of the 2017 election is because this grouping is likely to pursue more aggressive reforms of the Reserve Bank of New Zealand.

Such reform is thought to include a more “growth friendly mandate”, widening the bank’s policy focus to cover more than just inflation. This has been interpreted to mean NZ interest rates might remain 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.

NZ exports are only likely to draw a sustainable boost from fiscal, tax and education policies. It is possible these are the tools Peters and a Labour-led government intend to use in their push to drive a return to export growth.

However, a hawkish and inflation-focused central bank could take the wind from the coalition’s sails in this regard and so such a policy agenda might mean a “pro-growth” reform of the RBNZ mandate is more likely.

Milk Price Forecasts Downgraded, Futures Fall

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.”