- Posted by Jason on September 22, 2014 in Global Economies
Any time there is a major political controversy – including an election – exchange rates are likely to seesaw a bit. The recent success of John Key’s National Party in retaining the reigns of power in New Zealand is likely to mean the value of the NZD will remain strong against the USD.
Three More Years of National Government
The markets like consistency and they also like market oriented politicians. The combination of John Key and his finance minister, Bill English, has proven to be a winning recipe for the New Zealand economy in the past. The fact that they have won with a significant amount of public support will put them in a strong position to push economic reform without being hindered as much by other parties, something which has caused them problems in the past.
Mr Key himself was a senior currency trader with Merrill Lynch in Singapore before returning to New Zealand to take the reigns of the country. Unlike many other New Zealand leaders this means he has a very real understanding of how the forex market works and what is good for the value of a currency in general.
Monetary Policy in the US
The NZD has, along with many other currencies, been on a downward trend against the USD in recent weeks. The resurgence of the USD in the past few weeks is a result of substantial changes to general monetary policy that are being made by the Federal Reserve. These changes are set to have a big impact on money supply in the US economy. The Americans are also set to increase interest rates later in the year, something which generally has a positive impact a currency’s value.
Ties to Major Trading Partners
Another thing that needs to be noted about the New Zealand economy is that it is very reliant on the strength of the Australian economy. The recent issues with the Australian dollar and the adjustments that are occurring within the Australian mining sector are likely to have a trickle down effect for New Zealand. This may well result in further weakening of the NZD against the USD in the short to medium term. All of that aside, analysts generally agree that Mr Key having won such a convincing victory will be good news for the New Zealand economy and that will mean that the Kiwi Dollar is likely to remain in demand and will be in a good position to hold its ground at what is a historically high value.
There is some nervousness in the markets about the upcoming termination of the Fed’s quantitative easing programme. This nervousness is not unfounded. Making major adjustments to the availability of money can have a drastic impact on the strength of an economy. This is one of the reasons that Janet Yellen made it very clear in last Wednesday’s announcement that any adjustments in American interest rates will be data driven and not rolled out as part of a fixed calendar. The end of QE is going to be a potentially difficult time for the American economy and it is a process that needs to be managed very, very closely.
All of these factors aside, the New Zealand economy is in a strong position to keep domestic growth happening and the consistency of government is certainly going to have a number of people wiping their brows in relief.
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