(Bloomberg) -- New Zealand's dollar dropped the most in five months after the opposition Labour Party won the support of smaller players to form a new government, raising questions over policy direction for the central bank and on immigration.
The kiwi fell as much as 1.6 percent to 70.38 U.S. cents as New Zealand First Party, which holds the balance of power after last month's inconclusive elections, backed Labour to form a coalition government.
Investors are concerned the economy would slow under a Labour-led government that wants to boost social spending and have the Reserve Bank of New Zealand add full employment to its mandate of price stability. Both Labour and New Zealand First want to cut immigration from record levels, which would risk exacerbating a skills shortage and curbing growth, according to an earlier report by Standard Chartered Research economists.
“The market is selling the New Zealand dollar on the risk that a new Labour government, supported by New Zealand First in parliament, would change the RBNZ's mandate from solely targeting inflation,” said Mansoor Mohi-uddin, head of currency strategy in Singapore at NatWest Markets, a unit of Royal Bank of Scotland Group Plc.
What initially seemed like an easy win for the National Party turned into a close contest after Jacinda Ardern became leader of Labour in early August. Ardern's party also promised to ban property sales to non-resident foreigners and consider a capital-gains tax. New Zealand First leader Winston Peters said Thursday he sees fewer immigrant arrivals and also expected legislation governing how the central bank operates to be amended.
Peter said that adopting a “Singapore-style” monetary policy model wasn't one of the concessions he had extracted from Labour. He had argued on the campaign trail that the New Zealand dollar has been persistently overvalued.
The policy changes “should be a kiwi negative,” said Peter Dragicevich, a currency strategist at Nomura Singapore Ltd. “In addition to the unknown quantity this creates, the broader macro environment is turning, with growth patchy, inflation subdued, and signs dairy prices are also turning down.”
With the additional support of Labour's ally the Green Party, the new government will control 63 of the 120 seats in parliament. There's a risk that the Aussie will test the top of its two-year range of 1.03 to 1.13 against the kiwi, according to Mohi-uddin. The pair surged 1.8 percent to 1.1173 at 5:48 p.m. Sydney time.
To contact the reporters on this story: Netty Ismail in Singapore at nismail3@bloomberg.net, Michael G. Wilson in Sydney at mwilson176@bloomberg.net.
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Patricia Lui
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