The NZD is down significantly after NZ First opted to support a Labour-led government, while the rates market reaction has been muted. A slight risk-off tone has enveloped markets overnight, with global equity markets showing a rare fall, a higher VIX and UST yields nudging lower.
The key market mover over the past day has been a much weaker NZD. Relative to the last NY close at 10am yesterday, it is down between 1.5% (vs GBP) and 2.3% (vs EUR) on all the key crosses. The overnight low on NZD/USD was 0.7012, with the currency finding a base close to that mark since midnight. As I write, NZD/AUD is still drifting lower and sits near it low for the session around 0.8910.
So what have we got to go on? No policy details have been announced. A coalition agreement will be signed today and publicly released early next week. NZ First will get four Ministerial positions within Cabinet and an under-secretary. Greens will get three ministerial positions, outside of Cabinet and an under-secretary role. The lack of policy detail at this stage means that we are wary of jumping to conclusions for the market. Key on the agenda will be reductions in immigration (students, rather than skilled workers), modifications to the RBNZ Act (more cosmetic than real and unlikely to change much what drives RBNZ policy decisions), a greater-than-otherwise increase in the minimum wage, easier-than-otherwise fiscal policy, and a higher projected bond programme.
While everyone expected some sticker-shock from a Labour-NZ First-Greens government formation, any further fall will be moderated to the extent that the result was half-expected and recent NZD underperformance over recent weeks reflected a reasonable chance of the outcome. Winston Peters’ talk of fighting capitalism and his (and Labour’s) more populist agenda don’t sound market-friendly at face value, but the reality is that we’ll likely see only a minor shift in economic direction.
A cloud will overhang the NZD until we get more policy detail over the coming week, but we’d expect the negative impulse from domestic political forces to quickly fade before more important global forces take over. Our currency forecasts can be considered under review until we get more policy detail, but we already had the NZD lower at 0.70 by year end and into the high 0.60s next year.
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