NZ General Election: NZD is at risk

The once high-flying kiwi has been shot down by falling commodity prices, softer inflation expectations and an emphatic rally in the US dollar. NZDUSD is now only just managing to hold its ground around an important psychological support zone around 0.8000 as it awaits key economic data from both NZ and the US, a policy meeting at the FOMC, and NZ’s general election which is taking place on Saturday. The latter has taken a backseat to the former as investors revaluate the path of interest rates in both nations, with the market relaxing its expectations for tighter monetary policy in NZ while bringing forward its timeline for interest rate hikes in the US. And, given the direct implications of monetary policy on the FX market, it’s not surprising that it’s overshadowing what has looked like a fairly predictable race for the top job in NZ.

NZ’s election race warms up

However, the poles over the last six months or so have been tightening up and the electoral system in NZ gives plenty of room for surprises. Like Germany’s Bundestag, there is both an electorate vote and a party vote in NZ. This mixed member proportional (MMP) system means that electorate votes determine the local representatives for 70 seats in the House and party votes command the proportional picture across the entire House. Under this system there is usually a coalition government where no one party has enough seats to govern with an absolute majority. And, it can take a while for the full election results to be known, and past elections have shown us that the kiwi doesn’t like uncertainty.

In NZ, the National Party, led by PM John Key, governs with agreements with the ACT, United Future and Maori parties. Even with the recent tightening of poles in NZ, it still looks like the National Party will be elected for a third term. Yet, the allegation of spying by the government on its own population has thrown a spanner in the works. Key has repeatedly assured the public that the NZ government doesn’t spy on its own people, thus these claims could damage Key’s public image. And, considering that a lot of the National Party’s popularity is due to the popularity of its leader these allegations could significantly hurt them in the upcoming election.

A change of power at the top wouldn’t be good for NZD

Any indications that the National Party may lose some representation in the House could be bad for the kiwi. The other big force in NZ politics, the Labour Party, has very different policies to that of Key’s party and they are perceived to be less friendly to the market. One such policy is the Labour Party’s planned role for the RBNZ, which may see it give the bank the power to adjust workers’ compulsory contributions to the KiwiSaver program under a proposed Variable Savings Rate (VSR). This VSR tool would essentially give the RBNZ more room to leave its tightening cycle on pause, as opposed to lifting the official cash rate and placing further upward pressure on the NZD.

Overall, it looks like the incumbent party will be voted back into power. If it’s a clean victory the impact on the NZ dollar may be minimal. However, if the race is closer than expected and the National Party is forced to make a larger coalition, then the NZD may suffer. It’s also worth keeping an eye on the FOMC’s policy meeting tonight and NZ’s Q2 GDP figures tomorrow (expected 0.6% SA q/q).