New Zealand Dollar Lifted by RBNZ Clarity as Jacinda Ardern's Maiden Budget Comes Under Spotlight


Monday's RBNZ appointment removes some of the NZD "uncertainty premium". Markets will now turn their attention to Thursday's budget. 

The New Zealand Dollar soared in London Monday after the Kiwi government announced it has filled the vacant seat at the very top of the Reserve Bank of New Zealand, removing some of the uncertainty around NZ monetary policy.

Adriann Orr, once a deputy governor at the RBNZ and currently the CEO of New Zealand’s sovereign wealth fund, will take the helm of the RBNZ from March 27, 2018 when acting governor Grant Spencer’s term expires.

His appointment is seen as a “market friendly” choice at a time when financial markets are on edge over some of the new government’s policies.

“Mr Orr has the technical and leadership qualities required to be Governor and CEO of the Reserve Bank. Further, I consider that he has the skills necessary to successfully lead the Bank through a period of change,” says Finance Minister Grant Robertson, in a statement Monday.

The hire comes amid a government review of the RBNZ and its mandate, which has left many uncertain as to the future direction of RBNZ monetary policy.

“Excellent choice. A person considered to be an ‘internal’ candidate given his extensive RBNZ experience, but also has widespread “outside” experience including a decade as the CEO of the successful sovereign wealth fund NZ Super Fund,” says Annette Beacher, chief Asia-Pacific macro strategist at TD Securities.

Historically, Kiwi interest rates have been set by the governor alone but the new Labour-led coalition government’s review is seen ushering in a shift to a committee based rate setting model, as well as a dual inflation-employment mandate.

The NZ monetary policy outlook has therefore, been subject to a greater degree of uncertainty in recent months than has been the case elsewhere across the G10 group of countries.

“NZD firmed 30pips to $US0.6889 on the headlines. We have no strong view as to whether he’s a dove or a hawk, but some of the “uncertainty” premium has been reversed,” says Beacher.

The New Zealand Dollar has borne the brunt of market angst over the outcome of September’s general election during recent months, falling sharply against the US Dollar, Australian Dollar and Sterling.

Monday, its three-month loss was -5.8% against the Pound and -4.5% against the Dollar. It has now gained just more than 2% against the Australian Dollar, although this is due in large part to the Aussie’s recent weakness.

“The pair [NZD/USD] popped through the .6900 figure on the news today and could trade all the way towards key resistance at .7000 as the week progresses and more investors become reassured on New Zealand's monetary policy,” says Boris Schlossberg, a managing director at BK Asset Management.

Above: Pound-to-New-Zealand-Dollar rate at hourly intervals. Captures fall on Monday.

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Week Ahead: NZ Budget in Focus

For economic data the week ahead in New Zealand is a quiet one however, Thursday’s budget announcement from the government will give traders and foreign currency buyers enough to keep busy with.

Fiscal stimulus was a key part of the Labour and New Zealand First election manifestos and it is in the budget that details of some of these election pledges are likely to be revealed.

The "Families Package" of welfare measures promised ahead of the election could see eligibility for certain benefits extended to include an additional 30,000 families. It may also introduce new benefits, such as a "Best Start" payment for new parents, the reinstatement of the "Independent Earners Tax Credit" and increases to accomodation subsidies. 

Labour also said it would legislate for 26 weeks of paid parental leave and introduce a winter energy benefit for people on welfare. It claimed the measures would cost some $890 million in 2018/19 but that this would be less than the $1.5 billion it could save by cancelling tax cuts announced by the previous National Party government. 

With welfare aside, markets will also listen closely for details of policies around the minimum wage and infrastructure investment.

Labour said previously it would raise the minimum wage by more than 30%, to $20 per hour, by 2020 and spend around $1 billion on regional development. It also promised to build 10,000 new homes, which is estimated to cost $2 billion.

"As there is going to be a material jump in government spending, eating into hard-earned fiscal surpluses and lifting debt outstanding over the forward estimates, this supports our out-of-consensus call for the RBNZ to turn hawkish soon," writes TD's Beacher. 

Thursday's budget pose a challenge to the current market consenus on the Kiwi Dollar. To date, investors have fled the currency in fear, given Labour's pledges to crackdown on inward migration, ban foreign purchases of residential property and reform the RBNZ. 

Fears have been that such measures would lead to lower growth over the longer term and lower interes rates in both the short and long term, than would otherwise have been the case. 

However, an early look at some of the measures that could be unveilled Thursday shows that, more than anything, the new government's policies are likely to provide a substantial boost to demand and possibly - an uplift in inflation.

This would be good for the Kiwi Dollar as it would be seen to bring forward the date at which the RBNZ might need to begin thinking about raising interest rates. 

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