NZD: New regimes - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that NZD/USD has plunged below its early October lows on the news that kingmaker Peters has decided to back the Labour party to form New Zealand’s next government. 

Key Quotes

“His decision follows protracted talks since the final result of the September 23 election handed Labour and Greens collectively 54 seats compared with 56 for the National Party.  Peter’s New Zealand First party won 9 seats having campaigned on a platform that includes slashing immigration, reforming the Reserve Bank and stopping foreign ownership of New Zealand’s land and assets.  The 63 seats controlled by the new government is just 2 more than the 61 majority that it needed.  It has been reported that while the Green Party will continue to have a confidence and supply agreement with the Labour Party that NZ First will be a full coalition partner.  Peters has indicated that he has been offered the role of deputy PM as well as various portfolios which will be decided over the coming days in consultation with new PM Jacinda Ardern.” 

“This morning Peter told the press that “we had a choice to make for a modified status quo or for change... that’s why in the end we chose a coalition government of New Zealand First with the New Zealand Labour Party.”  Both Labour and NZ First had campaigned heavily on a pledge to cut immigration.  Ms Ahern’s Labour have proposed cutting net arrivals by up to 30,000 annually.  This morning, the Stats NZ population clock was counting 4.83 mln and estimating that the number increases by one person every 4 minutes and 51 seconds.”

“In the year to August 2017 statistics NZ reported that the net gain from immigration rose to 72.1 mln up from 3k y/y.  Since late 2012 there has been a strong uptrend in net immigration into New Zealand and this has created stress most specifically on housing.  Although house price inflation has recently cooled, partly on the back of election uncertainty, consumer’s debt to incomes ratios have already risen to heady levels as household’s chased rising house prices.  Ahern, aged only 37, tapped into the former government’s perceived failure to build enough homes and campaigned heavily “to make sure my generation can get into housing”.”

“Ardern’s success has strong resonance with the populism that has been seen elsewhere in recent years.  Charisma and personality are widely considered to be strong elements behind her ability to knock former PM English out of his post as well as her ability to connect with voters.  Echoing Macron’s steep rise, she only took control of the Labour leadership in August and some commentators view her presence as single-handedly reigniting the party’s potential after nine years in opposition.” 

“While Labour’s policies can be seen as a move to the left, the addition of the NZ First party as a coalition party will be seen as raising the risk of a hard lurch.  The policies championed by Peters raise uncertainties about inward investment and the openness of the NZ economy. There are also questions over the shape of reform at the RBNZ.” 

“Both Labour and NZ First want changes at the central bank. Labour favours adding full unemployment to the RBNZ’s current inflation targeting mandate.  It would also like to see policy decisions made by a committee that would include external members.  This draws comparisons with the system used by the BoE and clearly has merit.  Former RBNZ Chief Wheeler, whose term ended on September 26, did reportedly use an internal committee to reach policy decisions, though there was no a formal arrangement.”

“The RBNZ was one of the world’ first central banks to adopt an inflation target.  Specially, the RBNZ is mandated to target CPI inflation between 1% and 3% on average over the medium term.  That said in practice central banks that target inflation also have a strong regard for growth and employment levels.  Overall the change in the mandate as proposed by Labour are unlikely to have a significant market impact.  New Zealand First, however, campaigned to “replace Inflation Targeted Monetary Policy with monetary policy based on the Singaporean model.” 

“Monetary policy in Singapore is centred on the management of the trade-weighted exchange rate.  The Monetary Authority carries out FX operations to ensure that the Singapore dollar remains within a policy band.  Any changes to the RBNZ that err towards those proposed by New Zealand First are likely to have a depressive impact on the NZD given speculation that the RBNZ would be mandated to targeted a weakened value for the currency.” 

“The uncertainty about the RBNZ’s mandate and more widely about the treatment of overseas investors is likely to weigh on the NZD going forward.  We maintain our forecast of a move towards 0.68 on a 6 mth view.”