The New Zealand dollar tumbled in value as the Government changed but Westpac chief economist Dominick Stephens says sentiment can change again.
Between August and November of this year, the New Zealand dollar fell more than 7% against the US currency.
Some of the fall was due to the strengthening of the US dollar but the Westpac strategy team suggested the majority of the fall in the dollar was due to the election and subsequent change of government.
Presumably, markets were unsure of how a Labour-led Government would manage the economy.
``Given this has been a sentiment-driven change in the exchange rate, it is worth bearing in mind sentiment could easily shift again - and the exchange rate could shift with it.''
Markets had become sensitive to Government policy announcements, Mr Stephens said.
When the review of the Reserve Bank was announced and did not include any radical surprises, the dollar rose almost 1c.
When Finance Minister Grant Robertson indicated he wanted to appoint a Reserve Bank governor who would focus on employment, the dollar fell half a cent.
The other key driver of foreign exchange markets recently had been a consistently strong run of economic data from the United States, he said.
As the data strengthened, financial market expectations shifted towards earlier and sharper interest rate rises in the US.
Markets had now shifted in line with Westpac's long-held view the Federal Reserve would lift rates as early as December.
As US interest rate expectations had risen, the US dollar had strengthened against a wide range of currencies.
``We expect both of these trends - a strong US dollar and a weak New Zealand dollar - to continue over 2018.''
Westpac expected markets and the Reserve Bank to be surprised by low economic growth and a weak housing market next year, meaning the central bank would leave the official cash rate on hold all year.
Leaving the OCR on hold would produce a further downward trend in the NZD/USD cross rate, likely to average US63c in the final quarter of 2018 from about US68c now.
From late 2019, some recovery in the exchange rate was expected as New Zealand economic growth increased in response to fiscal stimulus and the Reserve Bank resumed lifting interest rates, Mr Stephens said.
The New Zealand dollar was expected to fall against the other major currencies next year, but by less than against the US dollar.
It was different for the NZD/AUD cross rate where there was no compelling reason to expect a change next year.
Australia's economic outlook was similar to New Zealand and both countries were expecting the pace of GDP growth to ease.
