NZD plummets on political change

The New Zealand dollar has tumbled, which largely reflects a combination of heightened uncertainty surrounding the policy mix of the incoming government coupled with fears that New Zealand First leader Winston Peters will push for a change in monetary policy settings such that a weaker NZD becomes a focus of policy, explains Stephen Toplis, Head of Research at BNZ.

Key Quotes

“We had cautioned ahead of the election that this was a likely reaction to a change in Government. However, we also cautioned that there was a real risk that any such reaction would get overdone. We may well be reaching that point with the NZD stretching further below our fair value model estimate of USD 0.73.”

“But fixed interest markets unfazed . . .

Interestingly, fixed interest markets have actually rallied modestly. This means there is currently something of a disconnect between the interest rate and foreign exchange markets. At current levels, the TWI is 5% below that assumed by the RBNZ when it produced its August MPS. All things being equal, this would argue for a 0.5 percentage point increase in its year-ahead CPI inflation forecast and an interest rate track around 50 basis points higher. Clearly, all things are not equal but it goes without saying that the longer the NZD stays at these levels, the greater will be the upward pressure on interest rates. It seems then that the initial market reaction is to price in a lower growth outlook. Something we are not, at this stage, subscribing to.
So, we know that we now have a Labour-NZ First government, with the Greens supporting that government in confidence and supply. But there remain a huge number of questions as to what the policy mix of that government will be. We know that Labour will be the dominant party and what the broad thrust of its policy is. What we don’t know is the full extent of the concessions it has had to make to operate alongside New Zealand First. We will get more information on this across the course of the day and substantial detail has been promised for early next week.”

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.