NZD plummets on political change – BNZ

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.”