"I wouldn't be surprised to see the Kiwi a little more volatile on this result," Stuart Ive, dealer at OM Financial said on Sunday, referring to New Zealand dollar.
WELLINGTON: The New Zealand dollar is set for more volatility in coming weeks after a general election left New Zealand's major parties with no majority to govern, forcing them to enter negotiations with the nationalist New Zealand First Party.
The ruling National Party secured the largest number of votes in Saturday's election but two of its possible allies lost seats in parliament, making it rely on New Zealand First and its outspoken leader, Winston Peters, to form a coalition.
Labour could also still be in a position to rule, if together with the Green Party, it gets New Zealand First on board. Negotiations are likely to carry on for weeks, with a final tally, including a large number of overseas votes, not due until Oct. 7.
"I wouldn't be surprised to see the Kiwi a little more volatile on this result," Stuart Ive, dealer at OM Financial said on Sunday, referring to New Zealand dollar.
"Clearly when we open on Monday morning we're at the moment no better off – it's either going to be Labour or National leading the country."
Last month, the New Zealand dollar
POLICY IMPLICATIONS
The Kiwi, which was the 11th most traded currency in the world in 2016, has tended to fall when the Labour Party led in the polls due to their "unknown" factor and risen when it showed a lead for National, which has been in power for nearly a decade.
New Zealand has out-performed most of its developed market peers since the global financial crisis, with growth averaging 2.6 percent a year over the past 2.5 years and the government balancing its books.
Critics say much of the growth has come from immigration which has helped fuel a sharp jump in house prices that has in turn widened the gap between rich and poor.
Labour is planning to reduce immigration by up to 30,000 from a record 70,000 a year currently. It also plans to renegotiate certain trade deals to accommodate for a planned ban on foreign ownership of existing homes.
Some economists say those policies would stifle two key sources of New Zealand's robust growth of recent years, although the impact on growth could be somewhat offset by its plan to build 100,000 affordable home over 10 years.
Both National and Labour were expected to maintain a policy of fiscal prudence if they form the next government, with Labour aiming to cut net debt at a slightly slower pace.
But they are likely to differ on monetary policy, with Laour pushing to add employment to the central bank's inflation-targeting mandate which could mean more stimulatory monetary policy, weighing on the Kiwi at first instance.
MARKETS FAVOUR NATIONAL
Nick Tuffley, chief economist at ASB Bank, said markets were likely to put the odds in favour of another National-led coalition given its wide lead over Labour.
"Based off the way the NZD lifted in response to opinion polls that showed swings back to National, the NZD is likely to have a floor under it while the prospects of a National-led government remain," he said.
New Zealand's small stock market has performed strongly, with its benchmark S&P/NZX 50 Index <.NZ50> up 13.6 percent year to date. Volatility has increased around the election too, but it remains within striking distance of its August all-time high.
New Zealand First, which has worked under governments led by both parties, said it would not be rushed to decide with which party it would work.
"At this stage we have very little clue as to which way they will go," said Stephen Toplis, head of research at Bank of New Zealand. "With that in mind, I am not sure the market will have anything to come on. If there is anything, I guess it's uncertainty."
Reuters also reported that New Zealand Prime Minister Bill English said on Monday it could take weeks for the country to form a new government after a weekend general election left a nationalist minor party in the role of kingmaker.
The uncertainty around the make-up of the new government weighed on the New Zealand dollar, with the currency down 0.45 percent at $0.7306 midmorning, after falling as low as $0.7290.
The incumbent National Party took 46 percent of the vote on Saturday, well ahead of the challenging Labour Party's 35.8 percent, but New Zealand's proportional representation system means neither won enough seats in parliament to govern alone.
National secured 58 seats ahead of a possible coalition of 52 seats between Labour, which experienced a surge in popularity under new leader Jacinda Ardern, and the Green Party. That left both still needing NZ First's nine seats to reach the 61 seats required to form a government.
English said he had not yet spoken to NZ First's leader Winston Peters, a veteran maverick politician who has served as a cabinet minister in both previous National and Labour governments, but said it was likely talks would take "two to three weeks."
Peters, an outspoken critic of New Zealand's recent immigration boom, has previously backed the party with the largest number of votes.
While both National and Labour are expected to adhere to fiscal prudence, they will likely differ on monetary policy, trade and immigration.
Some expect Labour's plans to cut migration and renegotiate some trade policies will hurt two key sources of growth for New Zealand's small, open economy.
There is also some concern about what NZ First will demand in return for supporting the winning party. Peters has lobbied for more currency intervention by the central bank, which would weigh on the Kiwi, the world's 11th most traded currency.
"We now wait to find out who is going to form a coalition with NZ First and that may take some weeks," said Stuart Ive, dealer at OM Financial.
A final tally of the election results are due on Oct. 7, when "special votes", which will make up 15 percent of the total and which includes overseas votes, are released. English remains as prime minister in the interim. - Reuters
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