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New Zealand Dollar To Struggle If RBNZ Monetary Mandate Expands

New Zealand Dollar To Struggle If RBNZ Monetary Mandate Expands

David Cottle, Analyst

Just getting started in the NZD/USD trading world? Our beginners’ guide is here to help

Politics have been the New Zealand Dollar’s problem for months and their baleful influence on the currency probably isn’t over.

Back in late September NZD slipped as the country’s General Election provided no single party with an overall majority. Then it fell again harder as coalition horse-trading threw up an oddly shaped coalition of the centre-left Labour Party and the nationalist New Zealand First grouping, with the Green Party adding its votes to the mix.

This wasn’t the result markets had hoped for – NZD bulls would have liked a National-party led coalition. All the same they have been learning to live with it. NZD/USD has stabilised considerably since late October even if it has yet to break its post-vote downtrend.

New Zealand Dollar To Struggle If RBNZ Monetary Mandate Expands

But another wrinkle could be approaching. The new government wants to name a new Reserve Bank of New Zealand Governor by Christmas to replace retired Graeme Wheeler. When it does, there may very well be discussion of a broader mandate. Finance Minister Grant Robertson said last week that some sort of employment component may be added to the RBNZ’s current inflation-fighting task.

To be clear, inflation targeting will stay very much front and centre and there will be no explicit targeting of a certain employment rate. But judging by official pronouncements the RBNZ may very well end up with some sort of more nebulous assignment to do all it can to stimulate employment. It may find itself with a mandate similar to that of the US Federal Reserve. The Fed is required to hit its own inflation target with due regard to generating maximum employment.

An addition may very well lead to the view that New Zealand’s monetary policy would be looser going forward than might otherwise be the case. Coupled with the RBNZ’s antipathy to a stronger currency and a Fed still in tightening mode, it’s hard to see NZD/USD rising at the start of 2018.

The main risk to this view will kick in if the US economy should show signs of faltering.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter: @DavidCottleFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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