RBNZ Rate Cut Wagers Leave New Zealand Dollar Eyeing 2022 Low

(Bloomberg) -- The New Zealand dollar is forecast to weaken around 6% in the coming months as a slowing economy prompts investors to price in aggressive interest rate cuts from the nation’s central bank.

The currency weakened to a one-year low versus the dollar last week as the Reserve Bank of New Zealand’s downbeat view of the economy and concern over the impact of potential tariffs under Donald Trump’s administration spurred traders to bet on large rate cuts. The swaps market is pricing in a 50-basis-point cut this week, with some seeing a small chance of a 75-basis-point reduction.

“This isn’t going to offer the New Zealand dollar any support in the context of what Trump 2.0 might deliver in the first half of 2025 regarding tariffs and what that means for China and the global growth outlook,” said Ray Attrill, Sydney-based head of FX strategy at National Australia Bank Ltd. “Hence we aren’t ruling out NZD dropping to as low as 0.55 next year.” 

The kiwi has fallen about 8% so far this quarter aided by the RBNZ’s 75 basis points of rate cuts since August. The greenback’s surge on so-called Trump trades, concern over the knock-on effect of potential US tariffs on China, and paring back of Federal Reserve rate cut bets in the face of a resilient US economy have also weighed on New Zealand’s currency.

Westpac Banking Corp.’s base case is for the kiwi to fall 58 US cents by year-end, with an “extreme low target” of 55 this year or in the first quarter, according to Imre Speizer, a market strategist at the bank. 

A decisive breach of support at 57.74 US cents its Oct. 26, 2023 low would open the door for it to fall toward 55.12, its 2022 low, given there is little technical support in between. It closed last week at 58.33.

Bearish kiwi investors should still be wary of pullbacks in the currency with it trying to retreat from oversold territory, according to slow stochastics a momentum indicator. The other risk for them would be that the RBNZ sounds less dovish than the market expects.

“With services and core inflation still running above the RBNZ’s 1-3% target band, the central bank will be reluctant to take the official cash rate close to its estimate of neutral,” said David Forrester, senior FX strategist at Credit Agricole CIB Singapore Branch. “So the RBNZ could disappoint doves in the coming meetings.”

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