The New Zealand Dollar is showing signs of weakness possibly prompted by a fresh bout of political anxiety, days before a decision on the composition of the next government looks to be finally made.
Two weeks after the official result of the election and the New Zealand people might soon know the shape of their future government.
The final batch of votes bolstered the opposition Labour party but leaving neither National nor Labour with enough votes to form government.
Counting of the 17% of ballots considered “special votes” showed the incumbent National party has lost two seats while Labour and the Greens have each picked up an extra one. These are votes from New Zealanders who live overseas mainly, but also include postal voters.
In this election they account for a whapping 15% of the vote, the highest on record.
From a currency perspective, uncertainty remains elevated as the leader of the third largest party, Winston Peters, still holds the balance of power.
"NZD remains soggy amid political concerns," says a currency briefing to clients issued by Maybank in Singapore, .
Peters has not said which of the two largest parties he would join with yet, saying he wants to wait until after the special votes are counted, with a deadline for a final decision of no later than October 12. Expectations were he would back National, but the decision to be courted by Labour this past week gave the NZ Dollar a knock.
NZF's Peters might be leaning towards a "confidence and supply arrangement" rather than a full-blown coalition, according to a previous Prime Minister Jim Bolger adding it is almost impossible to see a detailed coalition agreement hammered out in time for the 12th.
"That suggests very strongly that he and New Zealand First are leaning towards sitting on cross benches in ... confidence and supply or some other arrangement ... and not formally joining the government," said Bolger in an article on Radio New Zealand website RNZ.
A 'confidence and supply' arrangement would mean each policy would be negotiated when it came up, an arrangement which might appeal to the Labour leader Jacinda Ardern.
Although it would mean more uncertainty it is not uncommon around the world and is the basis for the UK Prime Minister’s mandate.
We now have the real possibility of a coalition between Labour, NZF and the Greens which would be less positive for trade, inbound investment and immigration - three key areas which could put pressure on the New Zealand Dollar.
"We cautioned a grand coalition involving Labour, Green and NZ First will likely point to a more inward looking, nationalist-focused agenda and may weigh further on the NZD and its economy outlook," say Maybank.
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Charts Show Potential For GBP/NZD Reversal
Whether it is just a coincidence or as a result of the political procrastination, the New Zealand Dollar has started to lose ground again.
It had been doing quite well in the aftermath of the election as the most likely outcome seemed to be a coalition with the more outward looking National party.
Early gains were built on, especially against the Pound, helped no doubt by the UK's own - not inconsiderable - political woes.
However, the trend for the pair now looks potentially like it is at a cross-roads, and whilst we have not yet witnessed a fully-fledged reversal that is still a potential outcome.
From a technical perspective we note it is early days yet to fully endorse a bullish GBP/NZD reversal.
The chart is showing that a double bottom has formed on the hourly chart which is a strong bullish reversal pattern.
The pair has already broken above the top of the double bottom - or through its neckline as it is called - activating the bullish target.
The exchange rate is now highly likely to rise up to the initial target at 1.8505 followed perhaps by the next target at 1.8530.
These correspond to the height of the pattern (A) projected up from the neckline.
These give the official targets for the pattern - the 'C' target is the more conservative as it is based on a 61.8% of the full height (A).
61.8% is a Fibonacci ratio based on the 'Golden Ratio' a mathematical concept which corresponds to shapes, patterns and outcomes in nature and financial markets.
The 100% target is the full length of 'A' extrapolated higher and is labelled 'B', in the chart below.
Smaller price patterns such as these, on lower timeframes, are often precursors to broader reversals of trend.
Anti-immigration Policies Could Exacerbate Labour Shortage, Says Westpac
In a recent economic analysis of the drivers behind the New Zealand Dollar, Aussie bank Westpac, retained a bearish long-term view of the currency.
One of the things they highlighted as a barrier to growth for the economy was a shortage of labour brought on in recent economic surveys, which has a bearing on the anti-immigration policies and broader themes under consideration in the election.
"Notably, 41% of firms in the building sector reported that labour is their biggest constraint on growth, compared to 32% who cited lack of demand," said Westpac's Research Department, discussing the results form one of its surveys.
"The QSBO also provides an array of information about capacity constraints and price pressures. The indicators from the September quarter survey were mixed. On the stronger side, the difficulty of finding workers rose to its highest level since 2007. Capacity utilization fell slightly for a second quarter, but it remains at one of the highest levels on record," it added, reiterating the problem of lack of spare capacity.
Clearly a crackdown in immigration, which NZF leader Peters is suggesting and to a lesser degree Labour's Jacinda Ardern, would further exacerbate the spare capacity problems hindering growth.
"If special votes cause a swing from National to Labour, this could spark a change in government, which would be negative for NZD as the coalition pursues immigration and “anti-business” tax reform," said Westpac.
Interestingly we get a further analysis of the same stubborn lack of relationship between tighter labour markets and wages - which normally would be expected to rise, prompting rises in inflation - as the rest of the G10 is suffering.
"However, these apparent capacity pressures haven’t translated to a similar lift in the rate of inflation," says Westpac.
Clearly a lack of inflation will mean the Reserve Bank will be less likely to raise interest rates which will further depress the Kiwi Dollar.
Westpac note that growth may have peaked in June:
"June quarter GDP is likely to mark the high point for growth this year. The June quarter benefited from a range of temporary factors that won’t be repeated in the
September quarter figures: a boost to tourism spending from two major sporting events, and a rebound from earlier disruptions in dairy production and rail transport."
Unfortunately for Dairy farmers a fall in Dairy production due to poor weather conditions has not translated into higher prices.
"The surprise 2.4% fall in auction prices served as a reminder that supply is only one half of the story, and that the strength of world demand shouldn’t be taken for granted."