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Further New Zealand Dollar Weakness to be Limited as Fears Over Politics Overdone: Barclays

A steady economy, rising wages and a supportive global growth backdrop could all help to offset political uncertainty and support the NZD ahead. 

New Zealand Dollar weakness should be limited during the months ahead, according to foreign exchange analysts, as fears over the new Labour government’s policy platform are overdone.

Analysts at Barclays have released their latest set of foreign exchange forecasts in which they believe the planned expenditure policies of the new government mean the NZ economy has scope to continue a healthy rate of expansion, undeterred by recent financial market volatility.

“We maintain our view that further weakness should be limited and think that market concerns about potentially growth-negative policies of the Labour-NZ First coalition are overdone,” says Dennis Tan, an analyst with Barclays.

The New Zealand Dollar has fallen nearly 5% against the greenback since late August as the idea of a Labour and New Zealand First coalition emerging triumphant from September’s general election turned from a fear into a reality.

“The prospect of a change to the RBNZ’s mandate to include employment may increase uncertainty about the path of interest rates and the ability of the RBNZ to achieve price stability,” says Tan.

Plans to shake up the Reserve Bank of New Zealand, cut back the number of working visas available to migrants each year and place restrictions on foreign ownership of residential property were all party to market concerns.

However, we have seen the analyst community curtail concerns of late with ANZ telling us recently that they see a change in the RBNZ's mandate as offering little substantive concern.

“It is not clear to us that additional objectives and a move to a committee-based decision making approach would result in materially different monetary policy settings and a weaker NZD,” Tan notes.

Labour has already announced a ban on the foreign ownership of existing residential property, which is set to come into force early in 2018, while firing the starting gun on a review of the RBNZ mandate.

However, the worst of fears around RBNZ reform have been allayed by the Finance Minister having eschewed investigating the merits of a hard employment target, in favour of a looser employment mandate.

“The NZ economy remains in a position of strength relative to its G10 peers, with a closed output gap and relatively low unemployment,” says Tan.

A migration cap remains a concern for markets that has gone largely unaddressed by the new government, which is thought to be pursuing Labour’s manifesto policy of a 40% reduction in net migration. Although this is seen impacting the economy over the longer term, rather than the short term.

“Inflation expectations remain above the 2% midpoint of the RBNZ’s target band, and the new government is looking to raise minimum wages,” adds Tan.

The minimum wage will rise from $15.75 to $16.50 in April 2018 as part of a coalition deal, which is set to see the minimum hourly rate rise to $20 before the year 2021 is out.

“The currencies of commodity exporters with solid fundamentals and higher interest rates than the rest of the world should perform well in a solid global growth environment, which is why NZD has featured in our carry baskets throughout 2017,” says Joakim Tiberg, a strategist at UBS.

Kiwi unemployment fell faster than was expected in September, dropping 20 basis points to 4.6%, while inflation expectations have returned to levels not seen since before the commodity price collapse that began in 2013.

“We think NZD can continue to benefit from a generally supportive global backdrop but upside may be reduced, at least as long as political uncertainties linger and cloud the outlook for growth,” adds Tiberg.

The RBNZ has held the cash rate at 1.75% since November 2015 but unemployment is now at its lowest level since the financial crisis, inflation expectations are stable and wages among the lower paid are set to rise. 

It remains to be seen how long this can go on before markets begin betting on an interest rate hike from the RBNZ.  

The UBS team forecast the NZD/USD rate to end 2018 at 0.7300, which implies upside of more than 6% from Tuesday’s price of 0.6822.

The NZD/USD rate was quoted 0.20% higher Tuesday while the Pound-to-New-Zealand-Dollar rate was marked 0.19% lower at 1.9400.

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