- NZD supported by decisive election outcome
- But focus to return to RBNZ policy
- Risk to NZD outlook is a tightening in U.S. polls
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The outlook for the New Zealand Dollar has improved on the result of the weekend's general election that saw the incumbent Labour Party secure an unexpected all-out majority, however analysts maintain a view that domestic interest rates policy and the U.S. election will remain key factors for the Kiwi over coming days and weeks.
The New Zealand Dollar went higher at the start of the week against the U.S. Dollar and a number of other majors, "with the market approving of the clear-cut election result and continuation of the status quo, which has generally been a period of NZD strength," says David Croy, Strategist at ANZ Bank.
New Zealand's Labour Party has won an outright majority, a first under the MMP electoral system which was first introduced in 1996.
Labour won 49% of the vote and secured a majority by taking 64 out of the 120 available seats.
While the victory for Prime Minister Jacinda Ardern and her party was expected, the scale of that win and the implications of what a clear-cut majority means for economic and financial policy is the surprise element that markets must now consider.
Ardern has indicated she will form a government in 2-3 weeks, which may or may not include the Greens in some capacity, but markets will ultimately welcome the fact that no haggling and backdoor dealing is required to form a government.
The MMP system means no one party has been able to form a government by itself, without the need for compromise and negotiations over policies. This means there has typically been some degree of uncertainty around the time of elections. Removing that uncertainty with an all-out majority removes some element of uncertainty and the foreign exchange playbook says a currency typically appreciates when uncertainty is removed.
"Regardless of whether Labour enters into any arrangements with other parties, it will retain full control," says Nick Tuffley, Chief Economist at ASB in Aukland. "The COVID-19 pandemic needs decisiveness, which the outright majority can deliver."
The New Zealand Dollar went higher against the U.S. Dollar by a third of a percent to quote at 0.6638. The Pound-to-New Zealand Dollar exchange rate is however a quarter of a percent higher at 1.9576 amidst a broad based rally in Sterling exchange rates on the view that the UK and EU remain on course to secure a post-Brexit trade deal, despite the inevitable political rumblings.
While there might be some upside to be had from the eradication of any election uncertainty premium, most analysts are of the view that the effects on the New Zealand Dollar will be relatively short-lived.
"On the policy front, despite the crisis backdrop, the election campaign was light on clear specifics from either major party on what the future vision for NZ will be and how to get there," says Tuffley.
Looking ahead, the New Zealand Dollar's focus will likely return to the dual issue of further Reserve Bank of New Zealand easing (rate cuts and increased quantitative easing) and the broader market backdrop.
"The strong prospect of more RBA and RBNZ easing means AUD and NZD will struggle to develop interest rate support, despite their Covid outperformance," says Richard Franulovich, a foreign exchange strategist with Westpac in Sydney.
Markets expect the RBNZ to cut interest rates in early 2021, an expectation that has seen the New Zealand Dollar underperform its peers for much of 2020.
However, analysts are questioning whether this narrative is close to being fully absorbed by the New Zealand Dollar, therefore limiting the prospect of any major downside going forward. "More monetary easing is coming, but to be fair, that’s largely priced in and New Zealand has done extraordinarily well to contain COVID, and has more fiscal flexibility than most," says Croy.
Another element of support for the New Zealand Dollar at the start of the week is the backdrop of positive global investor sentiment, which typically lends itself to a higher New Zealand Dollar.
"We're starting with equity futures on the front foot. That provides relief for AUD and NZD, and maybe this week's top currency will end up being CAD, the clear regional winner when it comes to coping with Covid. AUD is helped by good news in the virus, and maybe all the RBA dovishness is now in the price?" says Kit Juckes, Global Head of FX Strategy at Société Générale.
A strong start to the new week for global equity markets and commodity prices are meanwhile helping to limit some of the New Zealand Dollar's downside potential given the 'high beta' the Kiwi Dollar embodies. 'High beta' refers to the currency's correlation with equity markets (the S&P 500 being the preferred reference point), meaning when markets rise the New Zealand Dollar rises too.
"Most equity markets have made a positive start to the week ... buoyed by optimism around the prospect of further US stimulus. This follows lengthy discussions over the weekend between House Speaker Pelosi and Treasury Secretary Mnuchin, which have increased expectations that a stimulus package will be forthcoming in one form or another, irrespective of who wins the Presidential election," says Nikesh Sawjani, Economist at Lloyds Bank.
Aiding sentiment was news the Chinese economy meanwhile expanded by 2.7% quarter-on-quarter which is below market expectations for a 3.3% rise. However, China's September industrial production and retail sales beat expectations "pointing to the economy ending the quarter with much firmer-than-expected momentum," says Sawjani.
The market meanwhile retains a bid tone on polling that suggests the Democrat Party will sweep both the White House and Senate in the November elections, an outcome that would allow for a strong pro-market stimulus in early 2021.
Market sentiment could therefore be challenged if the polls start to tighten in favour of Donald Trump, as this opens the door to a less clear-cut result and introduces the potential for a disputed election.
"The main risk for markets now would be a tightening in polls, which would reduce the likelihood of a large Democratic fiscal stimulus package and could raise the likelihood of a long contested election," says a weekly currency note from Barclays.
Softer markets and increased investor anxiety surrounding the U.S. vote therefore remains a potential headwind for the New Zealand Dollar going forward.
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