Morning Commentary: New Zealand: The Other Election

Foreign Exchange - Morning Commentary
New Zealand: The Other Election 
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
New Zealanders will head to the polls for the country’s general election on Oct. 17. Unlike elections in the U.S., the elections in New Zealand haven’t been an important topic in the markets because of the low uncertainty around the outcome. 

At its peak level in August, Labour Party support surpassed the 50% mark, consistent with an outright win. Since then, support has pulled back slightly and indicates another minority government as the most likely outcome. Despite this slight pullback in support, the key takeaway is that polling data has consistently projected a wide advantage for the incumbent Labour party — the latest polling data shows 46% support for Labour versus 31% for the National Party. 

As a result of these stable polling trends, markets have priced very little risk premium around the possibility of a political surprise on Election Day. With all reasonable outcome possibilities unlikely to trigger a material change in New Zealand’s growth outlook and fiscal policy, monetary policy remains the key driver for the New Zealand dollar. A notable development on this front has been recent comments from the Reserve Bank of New Zealand (RBNZ) Chief Economist Yuong Ha, who stated that the central bank preferred “to do too much too soon than too little too late.”  

This statement should put greater attention on the RBNZ’s Nov. 11 meeting. This Nov. 11 meeting was already important, as it is expected to bring clarity to the recently announced Funding for Lending scheme. But now, markets will also be watching for the possibility of further dovish developments. Of course, the Reserve Bank of Australia’s (RBA) Nov. 3 meeting will also merit monitoring given the link between New Zealand and Australia and recent dovish comments from the RBA that have raised expectations for further easing. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • U.S. stimulus headlines continue as Treasury Secretary Steven Mnuchin told House Speaker Nancy Pelosi that President Donald Trump would personally lobby Senate Republicans to support any deal reached between the White House and Democrats. Despite these headlines, it appears unlikely that Senate Republicans will be convinced to spend more, as they are set to vote on an even smaller package than their previous $500 billion proposal. 
  • U.S. retail sales blew away expectations by rising 1.9% month over month against expectations for a 0.8% increase. Conversely, industrial production contracted 0.6% month over month against expectations for a 0.6% increase.
  • Brexit talks have turned negative again, with Prime Minister Boris Johnson warning that the U.K. was ready to leave without a deal. Given this, talks planned for next week will still go ahead, with Prime Minister Johnson indicating he will listen if EU leaders table a new option. The pound whipsawed on these headlines and ultimately ended up where it started, illustrating the high level of uncertainty around talks.
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