NZ: Market has voted against NZD – Deutsche Bank

The market has greeted New Zealand’s new government by sending the NZD to an 18-month low vs AUD, and a 5-month low vs USD, points out Tim Baker, Strategist at Deutsche Bank.

Key Quotes

“What now? As our economist points out, a lot of policy uncertainty remains. A few thoughts: 

• Migration cuts. This seems to be one area of ready agreement across Labour, NZ First and the Greens. While this would obviously weigh on growth, there are mitigating factors to consider. Firstly, NZ’s population growth has been exceptionally strong, which can create issues of its own (eg, infrastructure constraints). NZ’s population growth has been more than double the G10 average in recent years. Secondly, the proposed cuts amount to less than 40% of net migration, and coupled with robust natural increase (delivering ½% population growth on its own), NZ population growth should still be quite solid – likely close to 1½%. Thirdly, lower population growth weighs on labour supply – wage growth may be more likely to emerge given the tightness of the labour market, with hawkish implications for the RBNZ. 

“The above notwithstanding, the historical evidence is that lower migration means a lower NZD. But the NZD is already entirely pricing the government’s planned cuts.” 

• Confidence and spending. The confidence channel is an important one to watch, as businesses generally don’t favour governments shifting to the left (though we’d note that left-of-centre parties often moderate their policies upon entering office). And in this case, the largest bloc of voters opted for National, suggesting consumer confidence could be affected. Offsetting this to some extent is a likely fiscal boost, which could entail higher minimum wages, support for students, and the building of affordable homes. Much of this would be focused on low/middle income earners, who have a higher marginal propensity to consume. 
• Restrictions on foreign investment in housing. This would weigh on capital flows, so again a negative for the currency. Still, NZ’s house price boom seems largely behind it anyway – national house prices have barely grown over the past year.”

“In sum, while it’s not hard to list policy changes that would weigh on growth and the currency, it’s not hard to exaggerate the ultimate effect either. And the currency is already down plenty – the worst performer in G10 by a large margin since end July. We see a consolidation around current levels, and ultimately see the NZD solidly higher as policy certainty emerges.”