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New Zealand Dollar – upwards into the elections?

Similarly to the United States, New Zealand has its elections coming up in 25 days. What's the future of the New Zealand dollar once a party is enacted?

Prime Minister Jacinda Ardern on the left, National Party Leader Judith Collins on the right

Generally speaking, there are two "main" parties in New Zealand – national and Labour. From a thousand miles away, National vs. Labour would be compared to Democrats vs. Republicans. National can be categorized as "pro-business' – Lowe taxes, fewer benefits. Labour can be known to people for having "socialist" policies – higher support for students, higher taxes for the rich, etc.

Therefore, if National wins, this would provide a push for the New Zealand dollar. Similarly, a possible push downwards if Labour wins.

NZD/USD over 4 years

The New Zealand dollar is currently sitting around 0.65, firmly rejecting that 0.68 cent level forming a double top before firmly falling. We can see that 0.68 cent level has been a healthy historical support/resistance level since 2016.

Therefore the question becomes, who is poised to win the election?

An article in the Financial Times regarded New Zealanders for their "humility" and their "[tendency] to view the mass Euphoria that characterizes US political campaigning with suspicion," suggesting that New Zealanders tend to steer their eyes towards the center-left Labour party.

The party leader of the Labour Party, Prime Minister Jacinda Ardern, has been praised for her empathic response to the horrific Christchurch Shooting, which killed 51 Muslims, a deadly volcanic eruption on Whakaari Island, and her handling of the Coronavirus.

On the other side of the aisle, we have the National Party with Judith Collins at the helm. Judith has been struggling with the National party's misfunction's initial tailwinds, having switched leaders three times in the past year. Judith Collins has been struggling against the popularity of Ardern lately. Their attack on the economic damage of Labours' "go hard, go fast" approach to totally eliminate the virus has been met with fierce criticism due to the public being generally approving the policy. To date, there have only been 25 deaths regarding the virus.

As of the current polls, Labour is set to win with a wide margin. 1 News poll showed yesterday that Labour was on 48%, with National party on 31% - this could see Labour forming the first single-party government since 1996 – the year New Zealand moved from the First past the post system to MMP.

However, does it matter who wins in the long term?

In the United States, the difference between the constituents in Democrats and Republicans are quite polarizing. However, in New Zealand, the difference is not as great as that of the United States. Some even question whether National and Labour's policies are much different in the first place. If you look at their social media presence, they attach each other like what the other party is doing would destroy the country.

However, an article from the Spinoff, a news provider in New Zealand, summed up the politics between the two parties greatly – "How did we end up with two parties that are pretending to do things differently?" Hotelling's Law, created by Harold Hotelling in 1929, helps explain why this happens. In summary, both Labour and national policies end up near the middle, to appeal to the most voters, which is why they look very similar.

Therefore does it matter who gets into power if the policies are quite similar? In the long run, probably not. For New Zealanders? Again, probably not. But for the markets? Most likely, yes.

NZD/USD plunges on Lockdown, S&P500 surges

The New Zealand dollar has fallen against the US Dollar as New Zealand records new community transmitted cases since the last time 102 days ago.

New Zealand Dollar pushing down against the U.S Dollar as lockdown bites

After a rally in risk-on currencies, the New Zealand dollar has fallen over 0.75% over the past two days from its high from 0.6175 as the largest city in the country, Auckland, was put into a mandatory level 3 lockdown for three days. For reference, New Zealand uses a 4 level system, with four being the most severe of lockdowns imposing a mandatory stay at home order for all citizens, with only essential workers such as nurses and doctors allowed to work.

New Zealand citizens gearing up for another lockdown

Level 3 is less severe; however, it still imposes mandatory work from home orders if it is possible to do so. Schools and restaurants are closed. However, takeaways are allowed. Furthermore, only gatherings of 10 are permitted, with police roadblocks around the Auckland area to catch people going in/out of the city.

Prime Minister Jacinda Ardern urges citizens not to panic and panic buy at the supermarkets. However, queues have been seen stretching out the door at many supermarket chains, with police being required to be present to control the crowd of shoppers.

Queues at the supermarket as shoppers react to the late night bombshell from Prime Minister Jacinda Ardern.

New Zealand markets sell-off may be reactionary

In terms of the New Zealand dollar and New Zealand equities, this sell-off may be purely reactionary. New Zealand is doing far better than essentially every other country, including its bigger brother Australia. This may be a good time for bulls to enter the market. As we’ve seen with many other securities as of late, the market is quick to pounce on a beaten asset for the rebound.

S&P 500 and NASDAQ soldiering forward

Meanwhile, in the United States, we see the market edge higher, with the NASDAQ and Dow Jones climbing back to their all-time highs on useful US inflation data. However, the outperformer was the SP500 with cyclical assets such as energy stocks help push the index past its all-time highs.

S&P 500 pushes into positive territory year to date

The S&P 500 broke the 3,386 level, finishing the US trading session just under 3390, an all-time high.

This is a familiar picture with investors and traders who have been following the markets for the past couple of months – the market rallies on good news regardless of the relevancy, with the market discounting the bad news citing Fed liquidity propping up assets. Regardless, the rally in equities has been astounding, proving the wrong unbelievers of the “V-shape” recovery.

Barry Jones, manager at the James Investment research, stated that the rally in the equity markets has been “absolutely amazing” and that the market has “done the V-shape recovery that the economy has not” with the “stock market [plowing] right ahead.”

Futures pulled back slightly at the end of the US session, most likely gearing up for the retail sales figure this Friday. A better than expected result will most likely see the NASDAQ push up above its record high of 11,286 and solidifying the S&P 500’s push above its all-time high.

New Zealand dollar to 70c?

As the dollar continues, it's a downward spiral, risk-on currencies such as the New Zealand dollar have seen a rise in value. I have talked about how the market is slowly pricing in the long-term effects of the Coronavirus on macro-environments, and it seems like the Currency markets are gradually displaying this.

NZD/USD in Blue, CAD/USD in Teal, EUR/USD in Orange, GBP/USD in Red

New Zealand returns higher than it's peers

The New Zealand Dollar is up 9.06% against the USD. However, at the same time, we see the Pound, Euro, and Canadian dollar only up 4.76%, 7.45%, and 5.35%, respectively. We can interpret the returns in the light of the Coronavirus and the respective geographical macro environment. The United Kingdom has been hit hard with the Coronavirus amongst battling with Brexit woes. Canada has had a relatively successful Coronavirus response, without having to resort to a strict lockdown, and Europe having hot spots of the pandemic, however, have had a cohesive response to the pandemic, coming up with a 750 Billion Euro recovery fund to fight the economic damage caused by the Coronavirus.

However, no nation has gone as hard and fast as New Zealand, going from citizens have relative freedom to lockdown in less than a week. New Zealand's relatively quick response may have come at an economic cost. However, it is similar to ripping the band-aid off as quickly as possible. This high initial cost may prove beneficial for the nation down the line, and the market is pricing this in accordingly with the appreciation of the New Zealand Dollar.

An increase in demand for the New Zealand Dollar may come from being one of the first countries to reopen their borders to foreign nations, with talks of an Australian bubble coming by the end of this year and a Cook island Bubble as soon as next month. Furthermore, as equities slowly price in the effects of the Coronavirus in the future, overseas investors may find New Zealand equities favorable.

However, investors should watch out for further rate cuts from the Reserve Bank of New Zealand, which currently hold interest rates at 0.25%. If the RBNZ continues to purchase bonds at the current rate they are now, they will run out of bonds to buy by the end of this year unless they lower their standard on the bonds they purchase. If not, they will have no other choice but to dip into negative rates.

Currently, the NZD/USD pair is consolidating in the 0.66 range. A push to 70c, a level not reached since June 2018, would require both an increase in demand for the New Zealand dollar and a decrease in demand for the US Dollar.