NZ elections: Implications for financial markets - Westpac

Sunday’s election has left NZ First in a monarch-maker position between National and Labour/Greens, according to the analysis team at Westpac. However, the details of the result suggest that a National / NZ First deal is more likely, they further add.

Key Quotes

“The housing market is likely to experience a short bounce now that capital gains tax is off the table for at least another three years.”

“We may look to reduce our net immigration forecasts.”

“Financial markets were broadly unmoved by the election result, although any coalition announcement could produce a further market reaction.”

“Market reaction

• There was little initial reaction in the NZD when markets opened this morning. A few hours later persistent selling emerged. It is possible that this was a delayed reaction to the election, but it could just as easily have been related to other factors – for example, Germany’s election result was announced at 6:00am New Zealand time.
• NZD/JPY (somewhat isolated from the impact of the German election on the EUR and USD) closed on Friday at 82.16, and rose slightly to 82.33 after markets opened this morning. Several hours later, it was 0.4% lower. Similarly, NZD/AUD did not start a persistent decline until several hours after the open, falling from 0.9215 to 0.9140.
• We expect the NZD will remain weighed down by uncertainty until a government is formed. If a National / NZ First government emerges, as discussed in the sections above, then the NZD would probably rise a little on the passing of uncertainty. Beyond that, the medium term implications appear NZD-neutral, so long as the market is satisfied about the durability of the Government.
• NZ interest rates for longer maturities may rise slightly if projections for fiscal surpluses are lowered and for public debt are raised, and the spread between swap and NZGB yields could narrow.
• Short term interest rates, which react to implications for the OCR, might rise initially, as the risk of a capital gains tax reducing house prices passes for now. Beyond that, the medium term implications for the OCR are uncertain. The combination of slightly higher long-maturity rates and relatively stable short-maturity rates should result in a steeper yield curve.”