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NZ dollar heading for weekly drop of 2.5%

NZ dollar heading for weekly drop of 2.5% on uncertainty over new govt

By Rebecca Howard

Oct. 20 (BusinessDesk) - The New Zealand dollar continued to fall and was headed for a weekly drop of 2.5 percent as investors digest news that Jacinda Ardern will be the next prime minister after NZ First leader Winston Peters said he would support a Labour-led government.

The kiwi dollar was trading at a fresh five-month month low of 69.92 US cents versus 71.29 cents before the announcement on the new government yesterday. The trade-weighted index fell to 73.71 from 75.18.

Investors are nervous due to the lack of certainty around certain policies and what concessions were made to NZ First. Ardern named 21 Labour Party ministers Friday but said the portfolios of ministers - including the New Zealand First and Green Party ministers - would be announced next week.

"The biggest thing is that we don't know what concessions she's given to NZ First around the Reserve Bank Act and a few other things which have major implications for New Zealand. Immigration as well. None of that has come out yet," said Tim Kelleher, head of institutional foreign exchange sales at ASB Bank. "Until we see the policy next week, it's hard to see any bounce in the currency."

Kiwibank chief economist Zoe Walls said there is "significant speculation around the policies expected to be rolled out by the incoming government, which are due to be unveiled in the coming weeks. In the forefront of our minds is monetary policy, migration, housing and fiscal policy," she said.

Wallis said the new government is expected to tweak the monetary policy framework toward a dual mandate - possibly via an amendment to the Reserve Bank Act 1989 and this is likely to mean a measure of full employment being added alongside an inflation target.

Kelleher said news that the US Senate voted to approve a budget blueprint that will pave the way for Republicans to pursue a tax-cut package without Democratic support, added to the US dollar strength, further dragging on the kiwi. "It's a bit of a perfect storm," he said. He expects the New Zealand dollar to push down to around 69-to-69.50 US cents ahead of any certainty but said there is strong support at 68.50. "That's really the line in the sand," Kelleher said.

He noted, however, the fall is starting to "snowball" against other currencies, with the kiwi trading 79.09 yen versus 80.34 yen and at 89.07 Australian cents from 90.80 cents. It was at 53.33 British pence from 53.96 pence and declined to 4.6309 yuan from 4.7273 yuan and to 59.15 euro cents from 60.40 cents.

New Zealand's two-year swap rate fell 3 basis points to 2.16 percent and 10-year swaps rose 2 basis points to 3.19 percent.

(BusinessDesk)

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