Fundamental Factors Weighing on NZD

Oct 11, 2:57 pm
NZD_Inflation_New Zealand

New Zealand Dollar Under Pressure

The New Zealand Dollar continues to trade on a weak footing and has now moved to its lowest level since May as a combination of factors continue to exert downward pressure. The domestic economy is still experiencing patchy momentum as late-cycle challenges are appearing; indicators are showing a declining contribution from residential investment as well as a moderation in credit growth. This dynamic, alongside subdued inflationary pressure, is likely going to see the RBNZ refrain from joining the hawkish tide in G10 central banks. The divergence between the policy and outlook of the RBNZ and other central banks is weighing on New Zealand’s yield advantage which is especially damaging at the moment given that the flow backdrop has shifted and the country’s terms of trade, which is near record highs, is set to moderate. Another important aspect to highlight in the current environment is that New Zealand’s broad basic balance of payments has moved back into deficit after being in surplus over H2 2016, over which period the New Zealand Dollar outperformed.

Political Uncertainty Weighing

Continued political uncertainty is also putting pressure on NZD. While this theme isn’t likely to persist as a driver as investors are expecting to receive clarity on the political situation this week. However, the composition of the next government could have an impact on the growth outlook as well as market expectations for RBNZ policy and as such is being closely watched at the moment.

Given the current perception, and indeed, implications of some of the key election policies it appears that a shift in government away from the incumbent Nationals would result in a notable bearish NZD reaction. Similarly, although a government led by the Nationals will likely result in a relief rally, this should be seen as an opportunity to sell NZD at better levels as the current fundamental picture still points to further downside.

Election Anxiety

The final count of the 2017 general election revealed a two-seat swing against the incumbent National Party when compared against preliminary results. As the National Party holds 56 seats and the Labour/Green alliance holds 54 seats, it is feasible that either party could form a government with a comfortable majority with the help of NZ First who hold 9 seats.  In fact, given the current split, NZ First will have a considerable amount of bargaining power as it stands to be the party who effectively crown the government. Negotiations between the parties continue at this moment, but NZ First leader Winston Peters has indicated that a decision will be made by October 12th.

There are still a number of options when it comes to the composition of the new government. Indeed, NZ First’s Peters as previously highlighted nine possible options. However, the tight time schedule in this instance encourages the idea of a confidence and supply agreement which, in the medium term might exacerbate the uncertainty for some businesses and consumers as policy decisions can become a protracted process.

Potential Election Scenarios

Although a National-led government will likely be viewed in a positive light by FX markets, NZD’s medium-term outlook is unlikely to change. The involvement of NZ First and their focus on tighter immigration is likely to see a negative impact on growth along with its protectionist views on foreign ownership of domestic assets. Indeed, the economic importance of immigration is pivotal for New Zealand as over recent years, a boost in immigration has positively impacted the country’s GDP.

Alternatively, the unknown territory of a Labour, Greens, NZ First government would likely be viewed in a negative light by FX markets fuelling a pronounced sell-off. Although the Labour’s fiscal policy is actually expansionary and should be a positive for growth, markets are likely to remain focused on theirs and NZ First’s drive to curb immigration.

Technical Perspective

As the sell-off from the failed breach of the 2016 high continues, one area which bulls will be looking at to provide support will be the .70 – .6990s level which is the completion of an ABCD pattern as well as a larger symmetry swing objective. Below there, the next key support will be a test of the 2017 low around .6812

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With over 6 years’ experience analysing currency markets, James is now a well-known industry analyst focusing on price action trading and fundamental drivers. Beginning as a private retail trader, James developed a strong interest in understanding the fundamental aspect of the market before pursuing technical trading capabilities which he now uses to identify opportunities over a short-term horizon. Alongside his market experience, James is also IMC certified having achieved the qualification to help further his understanding not only of the markets but the industry as a whole. James has a strong interest in both fundamentals and technicals and uses both forms of analysis in generating and executing trade ideas, with trades generally lasting from a few hours to a few days.