NZ dollar rises to highest level this month

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The New Zealand dollar has risen to its highest level this month and the benchmark stock index has gained from yesterday's close, suggesting little risk premium has been added for the resignation of Prime Minister John Key and the likelihood of a new finance minister should Bill English become PM.

English says he won't be able to retain the portfolio if he's successful in his tilt to be New Zealand's next prime minister, meaning the country will also be greeting a new minister in charge of the Treasury. He's up against factions of the caucus who may support Health Minister Jonathan Coleman and Corrections Minister Judith Collins to be PM, making it a three-horse race.

The loss of Key, a popular prime minister who has dominated in most-favoured leader polls during his terms, has the potential to sway the outcome of next year's election if, for example, a weakened National ends up having to form a coalition with NZ First or a Labour-Greens grouping seeks to form a government.

"We would see it increasing the risk premium at the margin," said Chris Green, director, economics and strategy, at First NZ Capital. "Obviously it depends how the PM position evolves and the finance position. There are risks around the potential for a less clean election going forward, if Peters emerges as kingmaker and what would his price be."

Green predicts a heightened sensitivity in financial markets to New Zealand political polls. First NZ's central scenario is that there will be a National-led government after the next election and that English as PM would keep a sense of continuity in government policy.

He said Key was probably more of a gifted politician "but people probably underestimate the role English has been playing behind the scenes".

Risks around a tie-up with Winston Peters would include possible curbs on migration, which has been at record levels this year, contributing to about one-third of New Zealand's economic growth, Green said. That could cause an "abrupt change" in a driver of economic growth which would be transmitted through to headline GDP and housing demand. Peters may also demand a less favourable climate for foreign investment.

An urgent debate on Key's resignation announcement is underway in Parliament this afternoon, at the request of Peters and Andrew Little, leader of the Labour Party. Peters has been critical of John Key's legacy, saying he has not delivered on economic growth he promised.

The kiwi dollar recently traded at 71.48 US cents, up from as low as 70.65 cents yesterday, after Key's announcement. It has traded in a range of about 69.70 US cents to 74 cents in the past month. The S&P/NZX 50 Index rose 0.5 percent to 6,889.12 and has gained 8.9 percent year to date.