Bank of America (BofA) has released a recommendation to sell the New Zealand dollar against the US dollar, citing the potential for short-term appreciation in the US currency despite an overall pessimistic perspective on the greenback throughout 2024.
BofA notes that recent US economic data have remained stable and that attention to first-quarter fiscal stimulus efforts could support bullish sentiment on the US dollar. Moreover, the currency has shown notable resilience in the face of uncertainties related to Federal Reserve leadership changes. Market participants may anticipate an upward adjustment in near-term rates prior to the Fed’s scheduled transition in June.
Despite maintaining a fundamental bearish outlook on the US dollar for the year - driven by expectations of easing inflation pressures, labor market concerns, and a probable dovish Fed stance - BofA acknowledges possible short-term support for the US dollar against specific currencies, with the New Zealand dollar particularly at risk.
Turning to New Zealand's economic conditions, analysts at BofA point out emerging indicators of economic improvement, including better sentiment and rising economic activity. However, excess capacity in the economy persists and continues to exert downward pressure on inflation.
Based on these factors, the bank’s economic team forecasts that inflation rates are likely to fall short of projections made both by the Reserve Bank of New Zealand (RBNZ) and market consensus in 2026. This scenario paves the way for a probable rate reduction by the RBNZ in May, notwithstanding the central bank’s previously hawkish messaging in November that had prompted a significant adjustment in market pricing.
These dynamics collectively suggest that the New Zealand dollar could face depreciation pressures against the US dollar in the near term, affected by both internal economic slack and external currency strength. Investors and market observers should remain attuned to developments in fiscal policy stimuli in the US and monetary policy signals from the RBNZ moving forward.
Bank of America projects downward pressure on the NZD/USD currency pair due to expected near-term US dollar gains driven by stable economic data and anticipated monetary policy shifts. While maintaining a generally bearish stance on the US dollar for 2024, the bank highlights the dollar's recent strength ahead of a Federal Reserve leadership transition. Simultaneously, despite signs of New Zealand’s economic stabilization, persistent spare capacity and subdued inflation outlook point towards an RBNZ rate reduction next year, further challenging the New Zealand dollar.
Key Points
- Bank of America advises selling NZD/USD due to anticipated short-term US dollar strength despite a longer-term bearish outlook on USD.
- Stable US economic data and upcoming first-quarter fiscal stimulus are key drivers bolstering near-term US dollar sentiment.
- Persistent spare capacity in New Zealand and an inflation outlook below central bank and market expectations support forecasted RBNZ rate cuts in 2026 impacting NZD weakness.
Risks
- Potential re-pricing of near-term US interest rates related to Federal Reserve leadership transition in June could trigger volatility in USD-related pairs.
- Uncertainty about the trajectory of New Zealand's inflation and economic activity may affect the timing and extent of monetary easing by the RBNZ.
- Market sentiment may shift if US fiscal stimulus efforts or economic stability falter, impacting the USD’s short-term strength.