Some Thoughts about the Kiwi

The New Zealand dollar continues to fall in the wake of the electoral results.   While most other high income economies appear to be shifting to the right, New Zealand has lurched to the left.  

A look at the New Zealand dollar's performance and one might conclude that investors are scared.  Today's 0.6% decline in the Kiwi, brings the loss since October 13 to 3.6%.  

However, New Zealand stocks and bonds have fared better.  The 10-yield is flat since the currency's depreciation accelerated and while the two-year yield is slightly lower.  The equity market has been stellar.  New Zealand's Exchange 50 Gross Index of the top 50 companies by free-float adjusted market cap extended its winning streak it 15th consecutive session with today's small advance.   It is up a little more than 4% over the past month, a little more than Australia, and more than most major bourses save Japan, where the Nikkei is up 7.4%.  

Among the first two initiatives that the new government advocated are a hike in the minimum wage and changing the central bank's mandate to be more like the Fed's with full employment given its due alongside price stability.  Allied with the New Zealand First Party, Labour leader  Jacinda Ardern, who will be sworn in on Thursday as the new Prime Minister summarized the thrust of her government:  "We are committed to being fiscally responsible and growing the economy while ensuring all New Zealanders share in our economic prosperity."  

The new government intends to progressive raise the minimum wage to NZ$20 an hour by early 2021 from NZ$15.75 currently.   In addition to adding a full employment mandate, the new government will seek to change the formulation of policy to a committee that includes non-central bank members, like the Bank of England's Monetary Policy Committee, rather than the Governor being the sole decision maker.  

There were several concessions to Winston Peters and the New Zealand First Party.  Peters will become Deputy Prime Minister and Foreign Affairs Minister.  The New Zealand First will also have the portfolios for the defense, regional development, and forestry.  Previously Labour favored the introduction of resources rents on water, but Peters was opposed.  Labour backed down and instead will introduce a royalty on exports of bottled water.  Peters is interested in shifting the Ports of Aukland possibly to the Northland region, which would facilitate more regional development.  Labour has endorsed a study of this, and it is consistent with its priority on regional economic integration.  It will earmark NZ$1 bln to a regional rail and other infrastructure projects. Fourth, qualification for state pensions will remain 65 years.  Labour has also agreed with Peter's push to re-enter the Pike River Mine.  

A potentially divisive issue of immigration was resolved in Labour's favor.  New Zealand First wanted substantial cuts, while Labour is more interested in regulating it to ensure work visas address genuine skill shortage within New Zealand.   However, Labour did concede to Peters the desirability of adding 1800 new police officers over the next three years.  

The technical outlook for the New Zealand dollar looks poor.  After recording a two-year high in July, the Kiwi turned lower.  It reversed after making a marginal high above the 2016 high, which essentially matched the 50% retracement objective of the down move from the multi-year high set in July 2014.  The year's low was set in May near $0.6820, and a band of support may extend toward $0.6840.  A break would be ominous and bring the $0.6675 into view and possibly $0.6470.  

That said, we wonder if the charts and market sentiment are not too negative.  It is a bit reminiscent of what happened in Canada in 2015 when Trudeau's Liberals unexpectedly won.  Going against the prevailing wisdom, Trudeau offered modest fiscal stimulus.  At first, the Canadian dollar sold off.  There were other factors at work, as the first Fed hike in December 2015, and we are not trying to offer a monocausal explanation.  Rather, the point is the pessimism toward the Canadian dollar proved excessive, and we suspect that New Zealand may prove to be similar.  

To that end, we will be monitoring the price action with an eye toward a reversal pattern.  It is not clear when it will occur, but it is not today.  The New Zealand dollar has traded in both sides of yesterday's range, which may have been narrowed by the holiday in local markets.  A close below yesterday's low (~$0.6930) would constitute an outside down day, which in a bear market, is not a particularly powerful signal, but it does illustrate the downside momentum.  

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