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Election result sends cloud over dollar

20 October 2017 4:03 PM
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Fresh uncertainty about overall economic policy to be implemented by the new Government has caused what economists are calling "sticker shock" to the New Zealand dollar.

BNZ currency strategist Jason Wong said the uncertainty was to be expected and also represented an opportunity.

"Judging by the nudge down in New Zealand interest rates at the same time, the market’s assessment is the New Zealand growth outlook is much weaker as a result of the new Government.

New Zealand First leader Winston Peters announced on Thursday his party would form a coalition with Labour. The Green Party would provide supply and confidence and have ministers outside Cabinet.

The kiwi dollar fell as low as US70.07c from US71.29c before the announcement of the new Government on Thursday.

Mr Wong said NZ First and the Greens would have disproportionate representation in the Government — the former within Cabinet and the latter outside. The lack of policy released to date meant Mr Wong was wary of jumping to conclusions for the market.

Key on the agenda would be reductions in immigration — students rather than skilled workers — and modifications to the Reserve Bank Act. Any changes to the Act would be cosmetic and unlikely to change much of what drove Reserve Bank policy decisions.

Other key agenda items were a greater-than-otherwise rise in the minimum wage, easier-than-otherwise fiscal policy and a higher projected bond programme.

Importantly for the currency, NZ First’s policy of adopting a Singapore-style management exchange rate mechanism was a non-starter, he said.

The lingering uncertainty about policy and positions meant any further fall in the value of the dollar was likely to be moderated to the extent the result was half-expected. The dollar’s underperformance over recent weeks reflected a reasonable chance of the outcome.

"Winston Peters’ talk of fighting capitalism and his — and Labour’s — more populist agenda don’t sound market-friendly at face value. In reality, we’ll likely see only a minor shift in economic direction."

A cloud would hang over the dollar until there was more policy detail released in the coming week, Mr Wong said.

The negative aspects from domestic political forces were likely to fade quickly as more important global forces took over. Forsyth Barr broker Damian Foster said a big issue to clarify was Labour’s proposed industrial relations policy.

A move back to centralised bargaining, with employers having very little influence in the process or outcome, was a key Labour policy but was unlikely to have the support of NZ First.

However, the policy alone was likely to create uncertainty for New Zealand businesses until it was clarified.

As Labour’s Budget had limited "wiggle room", there would be a bigger spending government and borrowings were likely to increase. Fiscal expansion was not necessarily negative given consumption should be higher under the new coalition. Talking down the New Zealand economy, and anti-foreign investment policies, might hurt investment.

"With high levels of both government debt and equity ownership, this is a major concern," Mr Foster said.

ASB chief economist Nick Tuffley said Mr Peters was keen to stamp his mark and provide a legacy in which foreign investment and immigration were checked and in which the regions and export activity thrived.

He was unlikely to have received all he wished for and only time would tell whether his vision would come to fruition.

In the next few months it would be interesting to see how long the "honeymoon period" of the new Government and new prime minister Jacinda Ardern would last, he said.

"A slim parliamentary majority and a large National Party Opposition suggest the new administration will need to exercise considerable discipline to retain control and advance its ambitious policy agenda.


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