NZD/USD: The formation of a Coalition between NZ’s Labour Party and the nationalist New Zealand First party surprised investors and forced a rapid and steep NZD sell off. The Labour government, as expected, has announced they will introduce changes to the RBNZ’s mandate and the Reserve Bank Act. The changes are expected to include an employment objective which could mean a prolonged period of lower interest rates, subsequently dampening the attractiveness of the NZD as a carry trade and higher yield option and highlights a bourgeoning gap between US FOMC and RBNZ monetary policy outlooks.
The NZD has suffered as a result and the fair value outlook has changed considerably. Having fallen below 0.70 and 0.69 the kiwi now holds marginally above supports at 0.6820. As the USD continues to gather upward momentum the door is open to further losses, especially if the GoP can push through wide reaching US Tax reform.
NZD/AUD: The recent shift in the NZ political environment and announcement the new government will look to amend the Reserve Bank act and the RBNZ’s mandate to include employment objectives has forced a significant shift NZD/AUD. The change in the mandate could see a prolonged period of accommodative monetary policy in NZD created a gap between RBNZ and RBA monetary policy expectations.Having run through 0.90 the NZD/AUD will be increasingly vulnerable to labour market data and updates on labour market conditions when governing direction into 2018.
NZD/GBP: GBP/NZD is largely driven by UK political and central bank objectives at present and while ongoing Brexit negotiations hamper any significant GBP gains a floor sits under the currency thanks to monetary policy expectations. The Bank of England is expected to raise its benchmark cash rate this Thursday and in doing so signal whether this is part of a wider reaching monetary policy tightening or a simple reversal of the August 2016 rate cut.
There is significant level of scepticism within the market that the BoE can effectively implement a program of gradual hikes without crushing the fragile British economic recovery and if this is indeed a single rate hike the floor will likely drop out from below the GBP and a correction to the medium term GBP weakening is likely. However in a bid to stave off further transitory inflation caused by a lower GBP the BoE may opt to proffer a gradual tightening facility that would maintain the floor beneath the currency and help keep the medium to long term inflation outlook below 3%.
NZD/EUR: The NZD, despite giving up 2 -3 Euro cents throughout October, has remained largely flat through the last 2 weeks while suffering widespread losses against other major counterparties. The NZD has benefited from extensions in the ECB’s quantitative easing program through September 2018 and a largely dovish monetary policy outlook. The ECB largely shut the door on any amendments to its zero interest rate policy in 2018 and given widespread market expectations for a hawkish shift in QE programming the Euro has suffered heavily through the last week. We expect the NZD/EUR to remain relatively range bound given expectations for accommodative monetary policy.