The New Zealand Dollar outlook darkened mid-week amidst a conspiracy between falling milk prices and political uncertainty in the wake of September’s inconclusive election led strategists to predict further pain ahead for the currency.
The Kiwi fell back toward a year-long low against the Pound overnight after prices of milk, a key NZ export, fell and analysts at ANZ Bank downgraded their forecasts for the commodity over the coming year.
Meanwhile, a statement from New Zealand First in the early hours of Wednesday, confirmed an announcement regarding the formation of a government is not imminent, also helped to keep pressure on the currency.
New Zealand First emerged as kingmaker from the September election, with the third largest share of the vote, after the National and Labour Parties failed to garner enough support to form a government alone.
Winston Peters, NZ First’s leader, had been expected to back one party or the other by a self-imposed deadline last Thursday. But the 72 year old politician has steadily kicked the can down the road after a meeting of the party’s leadership showed an they couldn’t make their minds up as to which party to back.
Currency’s hate uncertainty, and this is surely a good dose of uncertainty being injected into the New Zealand Dollar complex.
NZ First To Come Off Fence Thursday
“We will be in a position tomorrow afternoon to make an announcement on the result of negotiations following the 2017 General Election,” says Winston Peters, in a statement posted on his party’s Facebook profile on Wednesday.
Leaders of the Labour and National parties have been advised that an announcement is imminent. Market’s have feared a Labour, New Zealand First and Green Party coalition the most.
This grouping would pursue more aggressive reforms of the Reserve Bank of New Zealand and its mandate, which could result in interest rates remaining lower for even longer.
An NZ First and Labour coalition would also impose the most restrictive policies on migration, which economists say will lead to lower growth over the longer term.
NZ First held extensive talks with both Labour and National parties but it might not go for a coalition with either. It is equally possible that, if a shared policy platform cannot be agreed with either party, then NZ First could “sit on cross benches”.
This would see the party lend its 8 votes in parliament to whoever it sees fit, on a case by case basis.
Milk Prices and NZD Are Headed Lower
Wednesday’s price action in the milk futures market and ongoing political uncertainty could mean there is still more pain ahead for the New Zealand Dollar.
“The curve for WMP and SMP/milkfat both remain in backwardation suggesting either reasonable near-term demand for the Chinese free-trade window or the market feeling future supply will be more plentiful – we suspect it is a bit of both,” says Con Williams, an economist at ANZ.
Williams has cut his forecasts for the price of milk, a key export for New Zealand, due to the depressed level of current milk futures.
“Combined with higher than expected milk flow from Europe in the New Year and possible unfavourable changes to the European intervention scheme, we believe this warrants some caution,” Williams writes in a note to clients Wednesday. “Hence we downgrade our milk price forecast to 6.25-$6.50/kg MS for 2017/18.”
A recovery in commodity prices helped lift the New Zealand Dollar throughout much of 2016 but it has fallen sharply against the G10 basket in recent months, as uncertainty over the shape and policy bias of the future government set in.
“As the cycle turns with an improvement in supply conditions we expect some further moderation in export prices into the first half of 2018,” says Williams. “This, alongside a slower growth pulse, will weigh on the NZD.”
The New Zealand Dollar was quoted 0.39% lower against the Pound at 0.5416 Wednesday, making for a Pound-to-New-Zealand-Dollar rate of 1.8457.