1506310087159 - New Zealand dollar drops as markets fret over weeks of coalition talks

New Zealand dollar drops as markets fret over weeks of coalition talks

The New Zealand dollar dropped on Monday as markets entered a lengthy wait for the formation of a new government.

While Saturday’s election delivered a largely anticipated result – National with the largest vote and NZ First holding the balance of power – special votes and the fact Labour and the Greens could also form a coalition with NZ First mean weeks of uncertainty.

When the currency markets opened early on Monday the dollar briefly jumped, but slowly ground lower to be buying about US72.7c at 3:30pm, down more than half a cent.

ASB chief economist Nick Tuffley said markets had entered a “waiting game”.

* Market sees National in box seat, but ‘fundamental’ differences with NZ First remain
* Here’s what Winston Peters wants
* Election 2017: It’ll be alright, New Zealand

“We’re in a vacuum of uncertainty,” Tuffley said.

While the New Zealand dollar was likely to be stronger in the event that National emerged as the likely coalition partner, over greater policy uncertainty from Labour and the Green Party, Tuffley said the impact should not be overstated. 

“The reality is we’re not likely to have a dramatic move in markets with either outcome.”

National has claimed it has the “moral authority” to form a government by virtue of of it gaining the largest share of votes.

UBS economist Robin Clements said there was no constitutional basis for English’s stance, but maintained that NZ First was still more likely to opt for a coalition with National, although a coalition with the left remained “plausible”.

“[W]e still believe that NZ First is more aligned on fundamental principles (‘Less Tax’ for example) with National, despite policy disagreements about matters like immigration and the retirement age (where it’s likely a compromise can be found),” Clements said.

Other economists have pointed to stark differences with National on a wide range of economic issues, from immigration to trade agreements to the approach of the Reserve Bank.

While Labour has proposed broadening the mandate of the Reserve Bank in setting interest rates to include employment, NZ First has pledged wholesale changes which would adopt a model where the central bank would intervene in the currency.

NZ First leader Winston Peters has repeatedly pledged to weaken the New Zealand dollar in a bid to make New Zealand’s exporters more competitive.

BNZ head of research Stephen Toplis said Peters’ powers should not be overstated in the negotiations, as either Labour or National could baulk at the prospect of a government which gave too many concessions to NZ FIrst.

Toplis said National was unlikely to make substantial change to the Reserve Bank’s policy targets agreement “but it might agree to throw in some extra (relatively meaningless) words about the currency” as well as having interest rate decisions made by committee.

“They’re not going to target the currency.”

In any case, economists are now raising the possibility that at a time when some of New Zealand’s previous economic drivers could be coming off the boil, coalition concessions may add fresh stimulus to the economy.

“One upshot of the tight election race was the more generous lolly scramble, boosting future fiscal stimulus regardless of which major party comes into power,” Tuffley said.



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