UBS Global Research has sent a client note looking at the risks of the New Zealand election

I've pulled out the parts relevant to the New Zealand dollar and summarised. it's a pretty good run down.

First, in general:

UBS argue there is a risk of a change in government:

  • Current polls, economic indicators and an alignment of policies between Labour/Greens and NZ First all point to a heightened possibility of a Labour-led government
  • The greater risk to a change in government arises out of the balance of power being given to NZ First. ... As a result we are operating on the assumption that a change in government to a Labour/Greens government would only occur if they could form a majority with NZ First
  • We believe the likelihood of a Labour/Greens and NZ First coalition is all the more likely after Greens co-leader Turei stood down. ... Additionally, we believe there is an alignment of policies between Labour/Greensand NZ First.

Which leads UBS to contemplate what that would mean for the NZD:

(As background, UBS have been bullish NZD November 2016, citing:

  • recovering inflation has led the RBNZ to tone down its easing bias
  • the global macro backdrop of solid growth but contained interest rates has benefitted the NZD
  • New Zealand's terms of trade remain close to all-time highs
  • Expect NZD/USD to reach 0.76 by end-18)

It is possible that perceived political risk may weigh on the NZD in the near term

While all major parties contemplate changes to the RBNZ's mandate, we do not think that all suggested alterations would be material for the currency

In fact, most probably would not be

  • In practice, we doubt that an RBA board style decision making process, considered by both National and Labour, would have a material impact on monetary policy or the NZD
  • Similarly, Labour's proposal to add an employment objective to the RBNZ's mandate may not be significant for the market, as such an inclusion likely only would be relevant in unusual circumstances (e.g. stagflation)

However, the Greens' proposals of a more tightly controlled exchange rate and alternative targets for monetary policy (e.g. nominal national income) could have repercussions for the NZD

  • This is certainly also the case for NZ First's suggested policy of a Singapore style 'Managed Float Control' exchange rate regime. NZ First leader Winston Peters has in media interviews stated that he'd prefer a 15-20% devaluation of the currency

To be clear, we do not expect the RBNZ's mandate to be radically changed.

  • We find it likely that the smaller parties (the Greens and NZ First) would focus on their core policies.

Even if the RBNZ's Policy Target Agreement would be modified to include the need for a 'competitive' exchange rate, this may in practice not amount to a change from status quo (the RBNZ already has a mandate in place to intervene in the FX market under certain conditions).

  • Still, the notion that the RBNZ's mandate may be altered - even if only slightly - towards a more active FX regime may weigh on the currency until actual policy implications become clear.
  • Long positioning in the NZD also appears unhelpful in this regard
  • If the market additionally starts to price in a materially slower growth profile, it is possible that our downside scenario for NZD/USD of 0.68 would come into reach.
  • This would represent the lowest level the cross has traded at since Jun-16, though also briefly touched in May this year.

Bolding is mine.

I have been posting on the election and its impact in past weeks.

On the issue of changes to the RBNZ mandate and processes:

I posted this last week:

Labour's proposal for committee-based decision making at RBNZ. I've posted on this in the past, but ICYMI:

  • The Governor of the Reserve Bank of New Zealand is solely responsible for setting NZ interest rates
  • This has been the case since 1989
  • In effect, though, says current Governor Wheeler, the decision is made by him and the 3 deputy / assistant governors

More here

--

My other recent posts:

--

Just a few more thoughts from me. In the short term there are concerns that can weigh on the NZD, or boost it. Election polling has been a driver - watch these.

On a longer term perspective. NZ switching to a managed float? New Zealand does not have large currency reserves, which makes intervention by selling NZD, for example - to drive it lower (and therefore buying other currencies) not something than can be sustained. I'd be putting the NZ First 'managed float' proposal into the 'in your dreams' category.

Not.

Gunna.

Happen.

--

Create your survey with SurveyMonkey