Labour-led, Conservative-led or hung UK Parliament – what will happen to the kiwi dollar?

The kiwi dollar is likely to jump to record high levels against the British pound if Labour leader Jeremy Corbyn wins the UK election.

ASB institutional FX sales head Tim Kelleher says if Mr Corbyn pulls off an upset, the kiwi dollar could rise to 59p against the pound – the highest the kiwi has been against the pound since November when it hit an almost 20-year high.

He says the markets are skittish about the Labour leader as he’s a bit of an unknown.

BBC News reported a survey taken at polling stations across the UK suggested sitting Prime Minister Theresa May's Conservatives could get 314 seats, short of an absolute majority, while the opposition Labour would get 266.

The result, if confirmed, would mean Ms May would have to form a coalition or attempt to govern with the backing of other smaller parties.

The kiwi jumped almost a cent after the news broke.

The New Zealand currency jumped to 56.69 British pence and was trading at 56.42 pence as at 10am from 55.74 pence as at 8am and ahead of the poll.

The pound fell about 1.6% against the greenback to $US1.2704.

Source: ex.com

But Mr Kelleher says that looks to be a bit of a knee-jerk reaction.

“[The hung Parliament prediction] is based on exit polls – the British polls haven’t been that good lately.

In the days leading up to the Brexit vote last year, polls were suggesting the UK would stay in the EU.

“Until the results come in, it’s going to be hard to see where [the kiwi/pound cross rate] will settle down.”

Mr Kelleher says the kiwi will also bounce if the exit polls are right, and there is a hung Parliament. Then, he says the kiwi could jump to 57.5p.

Brexit implications
The pound’s tumble would make Ms May’s position harder, says OMF private client adviser Stuart Ive.

“It would just make it a lot more difficult to progress anything through Parliament.”

Critically, Ms May might run into obstacles regarding her plans for Britain's departure from the EU.

“Not only will every move of Brexit have to go through every member of the EU, it will also have to go through every member of the UK parliament," Mr Ive says.

For New Zealand, any delays in Brexit and a hung parliament in the UK could create difficulties for New Zealand when it comes to negotiating a bilateral trade deal.

“It just leads to more uncertainty about how Brexit is going to work. As exporters into that market, there would be some challenges,” says Phil Borkin, an economist at ANZ Bank New Zealand.

Mr Ive says the picture would become clearer near 1pm local time as official results roll in.

If Ms May retains the prime ministership and the Conservative party wins the election with a majority, the kiwi dollar will fall back down to around 54.5p, Mr Kelleher says.

“It’s going to be a long night [in the UK] for the pollsters.”

(With additional reporting from Business Desk)