The New Zealand dollar was pummeled on Thursday after the New Zealand First party opted to form a coalition government with the Labour Party, led by newcomer and incoming Prime Minister Jacinda Ardern, rather than with the incumbent Nationalist Party led by current Prime Minister Bill English. Concerns surrounding this new government with respect to the New Zealand dollar center on fears that such a coalition would work towards more growth-oriented central bank reforms that will likely result in a sustained period of lower interest rates from the Reserve Bank of New Zealand (RBNZ).
After the news of this decision by NZ First on Thursday, the resulting plunge in the New Zealand dollar prompted NZD/USD to fall to a new depth just above the 0.7000 level, a low not seen since late May. This sharp NZD/USD drop occurred despite the US dollar’s relative weakness against other currencies on Thursday.
It remains to be seen if the new coalition government will indeed institute the noted RBNZ reforms, but the sheer prospect of an extended period of accommodative monetary policy in New Zealand would place the RBNZ in sharp contrast with the comparatively hawkish Fed outlook that currently prevails. This would highlight an increasing monetary policy divergence between New Zealand and the US that would likely place further pressure on NZD/USD.
From a price perspective, the currency pair’s plunge on Thursday broke down below the 0.7050-area lows of last week. Since late July’s multi-year high at 0.7557, NZD/USD has fallen sharply, breaking down below multiple key support levels. With further downside momentum on the latest breakdown, the next major downside targets are around the 0.6900 and 0.6700 support areas.
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