Labour is set to form government - HSBC
|"Following two weeks of negotiations, the Labour party is set to form a government with the support of New Zealand First and the Greens," not HSBC economists.
Key quotes:
"FX markets dislike uncertainty so near-term weakness is warranted given this outcome is a departure from the National-led governments of the past nine years. Indeed, NZD-USD declined 0.8% today prior to the announcement, largely in anticipation of this outcome, and has fallen a further 0.5% since. An added weight on the currency is that New Zealand First leader Winston Peters has stated that he favours changing the RBNZ’s Policy Target Agreements towards potentially targeting a weaker NZD. However, even if Labour does make a concession on this, NZ First’s proposed 'Singapore-style' FX policy seem highly unrealistic for New Zealand (e.g. FX reserves are just 10% of GDP), and we think that the RBNZ's independence should limit the impact of any other mandate tweaks."
"Beyond the knee-jerk sell-off we expect the influence of politics on the NZD to diminish, leaving cyclical factors in the ascendancy. There are some positives here. The path of inflation remains crucial to our view that the NZD will gradually lift through 2018 and it should be noted that CPI printed at 1.9% in Q3, above both Bloomberg consensus and the RBNZ’s expectations. It’s also worth noting that, under this government, more fiscal spending is likely. Already the IMF had reflected some stimulus in its October Fiscal Monitor, increasing its estimate of New Zealand’s fiscal impulse (the change in the cyclically-adjusted primary balance) by +0.9% of GDP for 2018. This too should support a stronger NZD over the medium-term."
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