By Steven Dooley, APAC Currency Strategist – Western Union Business Solutions
Forecasting the upcoming New Zealand election and its economic impact is likely to be more nuanced than comparing the policies of just the Labour and National parties.
Importantly, FX markets (like all markets) make judgements according to the polls. With Labour leading in the polls – a win by the incumbent, whether a majority or leading a coalition, might have only a small impact on markets. However, a National win could provoke the opposite.
As is the nature of MMP, the likely make-up of any coalition will be key. Of course, the economic recovery from Covid-19 will see a new government wanting to grow economic activity, however the ways in which they do this could have multiple effects on the NZD.
The three key areas of impact for the NZD will be expectations around foreign investment, the budgetary position and, of course, monetary policy.
Foreign investment
While the National Party has long been a proponent of this and would be expected to ease restrictions to enable increased overseas investment, this remains one of the most contentious parts of policy for the Labour Party.
With Labour well ahead in the polls, it is important to consider how the party could act as a majority government or with coalition partners. The current Labour-led coalition government restricted foreign ownership of residential properties after it was elected in 2017.
The reality is that additional foreign ownership does boost economic activity. The Labour Party has said it is open to ways of encouraging greater foreign investment, and an overall Labour majority could see this happen.
At a time of economic slowdown, could governments be more open to relaxing restrictions? The question is whether Labour would want to pay the political cost of going against the grain with some of its base. The Green Party, and New Zealand First, are more cautious to overseas investors, and this could result in a pull-back by a government in which either are a coalition partner.
An increase in foreign investment is likely to boost the NZD over the medium term, benefitting businesses importing goods from overseas but providing potential challenges for our exporters. With many variables at play, it’s important that businesses consult their currency provider early to mitigate these risks.
Central bank policy
The Labour-led coalition produced a significant shift three years ago, alongside the RBNZ’s introduction of a new Policy Target Agreement (PTA), which included employment outcomes as a key determinant of central bank moves.
The RBNZ’s move to keep focus on inflation and unemployment means the central bank is likely to remain supportive, with low interest rates or other policy action, for longer.
While this is usually a negative for the NZD, major policy moves from other central banks mean the negative impact on the NZD might be mostly negated. This includes the US Federal Reserve’s indication that it will keep rates near zero until at least 2023.
Budget and taxation position
Here in New Zealand, and globally, the Covid-19 pandemic has encouraged governments left, as well as right, wing to provide more monetary support to businesses and people.
These sorts of policies stem from Modern Monetary Theory, which encourages an increase in government money supply to maintain employment, spending and keep the economy moving.
Locally, a Labour-Green Coalition may pump more money into the economy to ease unemployment and keep small businesses afloat. However, this will likely mean increasing government debt levels and a weaker NZD.
Are endless budget deficits unthinkable? Maybe. But then again, we thought the same thing about negative interest rates a decade ago.
We might scoff at some of these ideas, and they may have a slightly negative impact on our currency. However, the boost it provides to businesses may outweigh the effects of more expensive imports caused by a lower NZD.
Additionally, the Labour Party is proposing tax increase on New Zealand’s highest two per cent of earners and a focus on multinationals might weigh on the NZD. Conversely, the National Party have pledge to hold taxes at current levels. This might provide some support to the NZD.
All in all, since both major parties are unlikely to rock the boat in any monumental way, the overall impact on the NZD might be muted. However, markets prefer certainty to unexpected surprises, and it has been a year full of them – and there might be more to come.
It’s important that businesses seek advice from their FX specialist, and take the right steps to avoid the negative impacts of currency lows, while still being able to benefit from the highs.
About Western Union Business Solutions
Western Union Business Solutions is a global leader in foreign exchange and international payments. We enable companies of all sizes to send and receive cross-border payments and manage their foreign exchange needs.
Our New Zealand team provides local expertise, with access to over 130 currencies, and a global financial network spanning more than 200 countries and territories, we help companies spend less time managing their international financial transactions and more time growing their businesses.
Through our experienced foreign exchange dealers, our proven bank-to-bank payment platforms and international payment tools, and our comprehensive cash and risk management solutions, we help clients to satisfy their foreign payment needs, improve cash flow, and manage risk.
Contact us at 0800 436 739 or click here
Western Union Business Solutions’ ultimate guide for companies navigating currency volatility and scenario planning, Are you ready for 2021?, can be read here.
