The New Zealand Dollar Firmer Amid Market Hopes of Policy Detente

The Labour-led government's policy platform is not yet known but, for the time being, the direction of travel appears consistent with an administration stepping back from its more contentious policies.

The New Zealand Dollar staged a recovery against the G10 basket Monday, following steep losses in the previous week, amid signs the new Labour-led coalition government is stepping back from some of its more contentious policies.

Market fears of reforms to the central bank, a hard clampdown on inbound migration and curbs on foreign ownership of property made a Labour coalition, propped up by New Zealand First, the market’s least preferred outcome from the September election.

“We had nominated an NZ First/Labour/Green result as worth 2% off NZD in the absence of material policy changes to Labour’s baseline,” says Ben Jarman, a strategist at JPMorgan.

Thursday’s press conference by kingmakers New Zealand First saw the party’s 72 year old leader, Winston Peters, express fears of a possible economic slowdown and admit to reporters that not all of either Labour or NZ First’s policies had survived coalition negotiations.

“For markets, this outcome is not the expected one, following National’s first past the post result in the election,” says Jarman. “This suggests not much risk premium had been built back in for a change of government after the election outcome a month ago.”

It transpires that NZ First’s desire to cut net migration from 70,000 down to just 10,000 was among the first policy casualties as Prime Minister elect Jacinda Ardern has said since that the government will pursue Labour’s manifesto policy on migration.

This involves a much lesser reduction of around 30,000 and a clampdown on “migration by the back door” in the form of student visas.

“For the change of government alone to make this result hold and extend (NZD), there would need to see more growth- or capital-flow-negative policies come out than we have heard thus far,” says Jarman.

The New Zealand Dollar rose 0.38% to 0.6971 against the US Dollar Monday and by 0.39% to 0.8928 against the Australian Dollar. The Pound-to-New-Zealand-Dollar rate dropped around 0.08% to 1.8931.

Nonetheless, the coalition government has still unveiled itself while draped in promises of change, with the by-now obligatory anecdotes about making capitalism work for everybody.

Among those changes likely to make it off the drawing board are reforms to the Reserve Bank of New Zealand, which may see it move to a committee model of setting interest rates and adopt a dual mandate that incorporates an unemployment target.

“What changes to the Reserve Bank Act will mean is that the crafting of the new PTA and selection of the new governor could take longer, and last deeper into caretaker governor Spencer’s term,” says Jarman.

This comes at a time when the central bank is in the hands of a caretaker government after Graeme Wheeler departed his role in September.

“Even if the RBNZ do not become any more dovish per se due to mandate changes, fiscal stimulus is important in propping up growth next year in the RBNZ’s forecasts, so if it arrives later under Labour’s policies, that could be decisive for monetary policy settings,” says Jarman.

Markets have previously bet that the incorporation of an unemployment target into the RBNZ mandate could lead interest rates to remain lower for longer than they will have done otherwise.

“Over the longer term, the central bank doesn’t choose rates so much as the performance of the economy and markets do, and in this way the dual mandate could matter most through an effect on inflation risk premia,” notes Jarman.

In addition to reforms of the RBNZ it remains to be seen to what extent the new coalition government will want to impose curbs on the foreign acquisition of residential property and farm land.

However, for the time being, the new government appears moving in a direction consistent with stepping back from the brink of its more market-negative policies.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.