The New Zealand dollar has slid by almost 2% over the past two days as an inconclusive election result has opened the prospect of weeks of uncertainty as the main political parties attempt to form a coalition government. Saturday’s general election failed to give the ruling National Party the majority they were hoping for, instead losing three seats in the preliminary results, while the Labour opposition party gained 13 seats, leaving the New Zealand First party holding the balance of power.

With 15% of the votes still to be counted (comprising mostly of overseas votes and those who vote outside their home constituencies), the remaining share could sway the final result. The full vote count won’t be revealed until October 7, but it’s possible that a coalition could be agreed before then. The prime minister and leader of the National Party, Bill English, has said he plans to start talks within days with Winston Peters, the 72-year old leader of the New Zealand First party, and has given the negotiations a timeframe of "two to three weeks".

The National Party is the most likely choice for Peters, who himself once served as a National MP. Known for his populist views, Peters has less in common with Labour than with the Nationals. Another problem for Labour is that they will need the support of the Green Party in addition to New Zealand First’s in order to obtain a majority, and this could prove a deal breaker in the negotiations as the Greens and the New Zealand First disagree on many issues.

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However, Labour’s young and charismatic leader, Jacinda Ardern, who managed to reverse her party’s flagging fortunes with voters in less than a month after taking over, is confident that a deal can be reached with Peters, saying "We are willing and available when he is ready". Peters, who has twice before played the role of kingmaker (in 1996 and 2005), doesn’t seem to be in any hurry, saying "we do have the balance of political responsibility and we’re not going to be hasty with that".

The New Zealand dollar, which had already come under pressure during the unexpectedly tight election race, has taken a heavy hit from the indecisive election outcome. The kiwi hit a 1½-week low of $0.7187 today, a sharp reversal from last week’s six-week high of $0.7433.

Should Labour succeed in forming a coalition, this could fuel the kiwi’s downslide. A deeper fall for the New Zealand dollar that would push it below August’s three-month low of $0.7131 could potentially signal the start of a downtrend. Markets fear that a Labour-led government would raise taxes and introduce a dual mandate for the Reserve Bank of New Zealand, whereby the central bank would target employment in addition to inflation. Such a move would have ramifications for monetary policy decision making as well as have an impact on the country’s long-term interest rates.

However, a change at the RBNZ may be inevitable even with a National-led coalition as the New Zealand First party strongly supports giving the central bank more control to intervene in the forex market. Investors may take some comfort though from Prime Minister English’s opposition to such reforms. He was quoted as saying "we certainly wouldn’t want Mr Peters around monetary policy" during an interview back in August.

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