Kiwi Dollar Takes Fright at New Government

By James Glynn Features Dow Jones Newswires

The surprise emergence of a Labour-led coalition government in New Zealand has pummeled the kiwi dollar as global investors contemplate a raft of potential changes to economic policy, including the targets of the country's central bank.

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Despite finishing second in an inconclusive general election, 37-year-old Labour leader Jacinda Ardern emerged victorious after smaller parties agreed Thursday to form a government. The coalition ends nearly a decade of conservative rule that helped propel the island economy to one of the fastest growth rates in the developed world.

The uncertainty created by the prospect of a switch in policies and the likelihood that the new government will favor a weaker currency sparked a fall of about 2.8% in the kiwi dollar against the U.S. dollar between lunchtimes on Thursday and Friday, pushing the currency below 70 U.S. cents for the first time since May.

"The New Zealand dollar has given an initial thumbs-down to the new Labour/NZ First/Greens government, representing sticker-shock to fresh uncertainty about the macroeconomic outlook," said Jason Wong, senior market strategist at BNZ, based in Wellington.

Based on election pledges the new-look parliament could limit immigration--which has helped fan strong economic growth--curb foreign ownership of housing and change the mandate of the Reserve Bank of New Zealand.

But while the local currency slid, New Zealand's stock market recovered from a 1% drop to gain ground, as investors expressed relief that they now at least know who will run the country and considered the benefits of a weaker currency.

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"There's a lot of inexperience there in government, but the currency drop-off will be a good thing for exporters," said Grant Williamson, a director at Hamilton Hindin Greene, a brokerage based in Christchurch.

New Zealand's stock benchmark eked out a 0.1% gain Friday.

Of particular concern to market participants is the influence of Winston Peters, the leader of the New Zealand First party, who effectively became kingmaker after the ruling party failed to gain a majority.

"Winston Peters makes the markets nervous, and it's easy to understand why. He is on the record with longstanding controversial policy ideas," said Annette Beacher, head of Asia-Pacific research for TD Securities, based in Singapore.

Mr. Peters has talked about the need for a weaker kiwi dollar, and has flagged interest in Singapore's exchange rate-based monetary policy as a potential way to prevent damage to the economy from an overinflated New Zealand dollar.

Sean Callow, currency strategist at Westpac, said the political environment means there is scope for the slide in the New Zealand dollar to continue down as far as 68.5 U.S. cents in the first instance.

"A weaker kiwi is a particular policy priority for NZ First and it is now in position to work with Labour on revising the Reserve Bank of New Zealand's mandate to lessen the focus on inflation," Mr. Callow added.

Labour wants to introduce a dual mandate that includes employment and inflation objectives. Economists warn it has the potential to make the RBNZ more unpredictable in its signaling on interest rates.

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

October 20, 2017 03:01 ET (07:01 GMT)