Bank of America: New Zealand election too close to call, with near-term risks to AUD/NZD tilted lower

Why could a small party determine the formation of the government?

New Zealand will hold a general election on 7 November, and BofA considers the race too close to call. Polls show combined support for Labour, the Green Party and the centrist Opportunity party is higher than for the National Party, ACT and New Zealand First bloc, making a Labour-led coalition appear to have a more viable path to forming a government.
The key conditions are whether Opportunity can enter parliament, the results in individual electorates and post-election negotiations. New Zealand parties generally need to win at least 5% of the party vote or one electorate seat to qualify for list seats; the National Party leader has currently ruled out working with Opportunity.

Under a Labour coalition government, BofA expects AUD/NZD could rise to 1.26 and NZD/USD could fall to 0.55. Labour has promised to restore the Reserve Bank of New Zealand’s dual mandate of full employment and price stability; BofA also expects the coalition to provide greater fiscal stimulus, potentially steepening the yield curve.
If the National Party coalition remains in power, BofA expects the yield curve to flatten and AUD/NZD to fall toward 1.21. Investor feedback indicates crowded long positions in the exchange rate ahead of the election; if National wins, the unwinding of those positions could drive the rate persistently below 1.24.
BofA believes the National Party’s more restrained fiscal approach has no material impact on the path of the official cash rate: compared with a change of government, it would suppress demand to some extent while helping ease medium-term inflationary pressure.

BofA’s analysis shows that, after previous elections in which power shifted to a Labour coalition, AUD/NZD rose by an average of about 0.36% the following day, compared with an average gain of about 0.07% across all elections. But there have been only five changes of government since 1990, and some elections coincided with risk-off market moves, so the sample cannot support a definitive conclusion.
Currently crowded long positions would also limit the exchange rate’s gains after a Labour victory, potentially making them smaller than historical experience suggests.
A decline in the exchange rate after a National victory could also be limited over the longer term: coalition negotiations could change commitments on taxes or the central bank’s mandate; interest-rate differentials still suggest AUD/NZD is undervalued, and BofA believes a change in the central bank’s mandate is unlikely to substantially alter its policy response. The bank expects these factors are unlikely to be fully reflected in prices before 2027.