NZ Dollar Falls as Labour RBNZ Reform Vow Saps Appeal

Talking Points:

• New Zealand’s Labour and First party signed a coalition agreement, it is now official
• The New Zealand Dollar first rallied but quickly turned lower against its major peers
• Labour is to review and reform the Reserve Bank Act and push minimum wage laws

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The New Zealand Dollar initially rallied against its major counterparts before quickly turning lower as the coalition agreement between New Zealand Labour and NZ First Parties was signed. Jacinda Ardern, Labour’s leader, presented a speech and said that they will prioritize regional economic development. She added that a significant increase in the minimum wage is ahead and promised to be fiscally responsible.

The Kiwi Dollar rallied at first. Prospects of fiscal stimulus, via wage increases, can help boost the economy by increasing consumer spending all else being equal. That may in turn boost inflation and cause the Reserve Bank of New Zealand to fight back by raising rates. However, Jacinda Ardern had more to say.

She reminded us that the new government will “review and reform” the Reserve Bank Act. According to Currency Analyst David Song, a material change in the decision making process is likely to sap the appeal of the New Zealand Dollar. That is what appears to have happened.