NZD tumbles as New Zealand shifts to the left
The New Zealand dollar took a hit on Thursday, falling more than 1.70% against the US dollar as investors reacted to the outcome of the coalition government. The Kiwi started to tumble around mid-day local time following rumours that the Labour Party was about to form a coalition government. The official announcement came a few hours later as Winston Peter, leader of NZ First, announced his party will now back the Labour Party rather than the National Party. The Kiwi’s fall accelerated. Jacinda Ardern, leader of the Labour Party, is taking over William English’s seat as New Zealand’s Prime Minister. Winston Peters will most likely become Deputy Prime Minister.
Without surprise, the market did not welcome the news as investors expect more expansionist policies from the new government, such as an increase in living allowances and free tertiary education, which will led to an increase in expense.
There is plenty of room for further Kiwie depreciation as speculators have built massive long position over the summer. They already started to unwind their bullish bets starting in August as they felt the wind was shifting. As of last week, net long non-commercial future positions accounted for roughly 15.7 % of total open interest, compared to over 63% in July. The Kiwi has broken all of its supports and the road is now wide open towards $0.6818 (low from May 11th).
Catalonia fails to clarity and Spain suspend autonomy
The deadline for Catalonia to provide clarity on independence declarations has come and gone. In the eyes of Madrid the lack of a response was the same as maintained Catalonia demand for independence. Rajoy and the Spanish government have been unwilling to take their feet off the petal. The prime minister office stated that would meet to activate Article 155 of the constitution regardless. Article 155, although untested is expected to suspect Catalonia autonomy. EURUSD dropped immediately to 1.1770 before rallying right back. Despite the growing political crisis in Catalonia, as the regional feels even more directionless, market expect that Spain and EU will prevail. The faith in a dominate federalist system has limited political risk spillover into FX, yields or volatility. The situation remains fluid, with the next move likely to come from Catalonia regional government. However, we remain skeptical of any contagion given the strength of Europe and would fade headlines.
