Bank of America has advised a bearish stance on the NZD/USD currency pair, attributable to near-term strength in the U.S. dollar bolstered by stable economic data and fiscal stimulus expectations, alongside an anticipated rate cut by the Reserve Bank of New Zealand (RBNZ) that may weigh on the New Zealand dollar despite signs of economic stabilization in New Zealand.
Key Points
- Bank of America issues a sell recommendation on NZD/USD, citing short-term U.S. dollar strength despite a bearish dollar outlook for 2024.
- The U.S. dollar exhibits resilience anchored by stable economic indicators and first-quarter fiscal stimulus expectations, possibly leading to higher near-term interest rates ahead of Federal Reserve leadership changes.
- New Zealand’s economy shows early signs of recovery; however, spare capacity is expected to keep inflation below forecasts, setting the stage for an anticipated Reserve Bank of New Zealand rate cut in May despite previous hawkish signals.
Bank of America analysts have recommended selling the NZD/USD currency exchange based on expectations that the U.S. dollar will maintain short-term strength despite an overall negative outlook for the dollar in 2024. This view is grounded in recent steady U.S. economic data and ongoing attention to fiscal stimulus efforts in the first quarter of the year, which together are viewed as factors that could enhance sentiment toward the dollar.
Moreover, the dollar’s robustness has persisted even amid concerns regarding potential risks to Federal Reserve independence. Market participants may be pricing in the possibility of higher near-term interest rates as the Federal Reserve prepares for a leadership transition scheduled in June.
While Bank of America retains a fundamental bearish position on the U.S. dollar for the year due to easing inflation pressures, labor market challenges, and an expectation of dovish monetary policy by the Fed, it recognizes room for temporary USD support relative to certain currencies. The New Zealand dollar is notably identified among those susceptible to this near-term USD strength.
In the context of New Zealand, the bank’s economists point out that although there are early signs of economic stabilization, characterized by improving sentiment and increased economic activity, ongoing slack capacity continues to suppress inflationary pressures.
They forecast that inflation rates in New Zealand will fall short of both Reserve Bank of New Zealand and market expectations by 2026. This inflation outlook underpins the projection of a rate cut by the RBNZ in May, notwithstanding prior hawkish rhetoric from the central bank last November that had triggered significant adjustments in market interest rate pricing.
This nuanced view highlights the intersecting forces shaping currency valuations: a resilient U.S. dollar potentially underpinned by stable fiscal policy and market positioning, set against a New Zealand economy experiencing inflation moderation leading to likely monetary easing. Investors and market watchers should carefully consider these dynamics, particularly those involved in foreign exchange markets and entities exposed to currency fluctuations between the USD and NZD.
Risks
- Near-term re-pricing of interest rates in the U.S. Federal Reserve could cause unexpected USD volatility affecting currency markets and sectors reliant on stable exchange rates.
- Potential undershoot of inflation in New Zealand could result in a monetary policy shift by the RBNZ, impacting sectors sensitive to interest rate changes such as banking and real estate.
- The Federal Reserve leadership transition in June presents uncertainty which could influence market expectations and currency valuations in unpredictable ways.