POLITICAL RISK RISES
IAND nvestors in New Zealand’s financial markets are suddenly having to price in political risk after a decade of stability, as a nailbiting election race looks set to trigger a shake-up of economic and monetary policy. The New Zealand dollar slumped to a three-month low last Thursday after an opinion poll showed the opposition Labour party, had unexpectedly grabbed the lead from the incumbent National party ahead of the September 23 election. Labour’s support has been climbing since it picked 37-year-old Jacinda Ardern as its new leader last month.
“This election could have quite a dramatic impact on the economy, whereas most elections really don’t,” said Paul Dales, chief Australia and New Zealand economist at Capital Economics.
Labour’s platform includes cutting net migration by more than a third from record levels of 70,000 a year to reduce strains on infrastructure.
It has also proposed changing the charter of the Reserve Bank of New Zealand (RBNZ), the nation’s central bank, by ending its sole focus on inflation and adding an employment goal.
If the National party does get enough votes to form a government, it is likely to have to seek support from the minor New Zealand First Party, who also want lower immigration and changes to the way the RBNZ manages policy.
“Given the heightened domestic political uncertainty and prospects of significant policy changes by the next government, our base case for the kiwi dollar is to trade with a negative bias ahead of the elections,” ING’s London-based foreign exchange strategist Viraj Patel said in a report.
The currency had risen as far as $0.7557 in July, its highest level in more than two years, when the government’s re-election for a fourth term seemed likely.
But as the race tightened, and expectations of interest rate hikes have been pushed further out, the kiwi has taken a spill. Last month, it fell 4.5 per cent against the US dollar to be the worst performer amongst major currencies, and badly underperformed its Australian counterpart.
The New Zealand dollar was the 11th most traded currency in the world in 2016, according to the Bank for International Settlements.
Support for Labour has jumped to 43 per cent, its highest since 2006, overtaking National at 41 per cent, a poll commissioned by 1 News showed last Thursday.