Dramatic turn in New Zealand’s politics is bearish for NZD
The sight of a coalition government led by the Labour party in New Zealand, which could lead to reforms of the central bank and to very different economic policies could see NZD shunned on the foreign exchange markets for some time.
The shock of the ‘king maker’ party, New Zealand First, going into coalition with Labour at the expense of the incumbent National Party, following September’s election, strained nerves on the FX markets on Thursday sending NZD down 2% against an assortment of currencies and 1.5% against USD.
The resulting uncertainty could see NZD/USD head towards historic support levels around 0.6800 (which could be breached) with concerns that the new coalition could pursue economically damaging policies and that reforms to the Reserve Bank of New Zealand may see it focusing on more than just inflation and may include a mandate on economic growth, full employment as well as managing NZD’s value on FX markets. That would likely make the central bank more dovish on interest rates and FX markets will want to see what this means in practice.
On the economic front, the coalition could pursue policies that lead to a sharp reduction in immigration, prioritising exporting (implying a need for a weak currency), clamp down on foreign ownership of land and then there’s the new Prime Minister Jacinda Arden, who is relatively untested and not so well known.
In other words while the new coalition sorts out its very different economic agenda to the last administration and reforms the central bank, a ton of uncertainty hangs over NZD. Until clarity emerges - these factors are likely to be a drag on the currency.
The negative drum beat for NZD comes on top of another bearish factor, the fall in milk prices, which is a key New Zealand export.
Milk prices will recover at some point and the coalition’s policies may not turn out to be so radical. What politicians say in opposition and what they end up doing once in power can be very different as their policies collide with reality. It’s possible that in the short-term NZD becomes over-sold due to high levels of uncertainty.
TECHNICAL ANALYSIS: NZD/USD - key support likely to be tested
NZD/USD had been working its way lower since August, but the fall was greatly accelerated by news of a Labour-led coalition taking power in New Zealand with radically different policies to the last government.
This seems to have set NZD/USD on a firm downward trend with a high chance of support levels bunched around 0.6800 being tested and even falls below that are now quite likely, also the 200-day moving average (turquoise blue) has been decisively breached. With the markets more or less digesting the shock news, it looks like there could be some consolidation this week (unless there are more shocks) with the daily RSI nearing oversold territory and the lower Bollinger band having been breached.
Support can be seen around 0.6909, 0.6868, 0.6868 and 0.6818 (this one is a key level and if breached could see NZD go much lower) while resistance can be seen at 0.6986, 0.7031, 0.7059 and 0.7094.
By Justin Pugsley, Markets Analyst, MahiFX