Capital Economics revises down its forecast for the NZ dollar this year and sticks to its view the Reserve Bank will need to cut the OCR further than currently expected

Economists with independent global economics researcher Capital Economics (CE) are forecasting that the Kiwi dollar will continue to perform badly this year and reiterate their view that the Reserve Bank (RBNZ) may still be forced to lower the Official Cash Rate further than is generally expected.

CE's head of markets, Asia Pacific, Thomas Mathews says the Australian and New Zealand dollars have fared worse than almost every other currency over the past few months.

"We think they will continue to do so."

CE has revised down its estimates of where the NZ and Australian currencies will finish up at the end of 2025.

Mathews thinks CE's previous forecasts, "while bearish, were nonetheless too conservative, especially for the NZ dollar".

"As such, we’re revising our end-2025 projections to US62c for AUD and US53c for NZD (previous figures were 63c and 55c, respectively).

At time of writing the NZ dollar was worth about US57.2c, while the Australian dollar was US63.4c.

"The US dollar has been on the back foot lately, unwinding some of its earlier Trump-era gains as US Treasury yields have edged a bit lower. But not all of the currencies that plunged the furthest during the greenback’s late-2024 rally have led the charge on the way back up.

"In particular, the Australian and New Zealand dollars, which suffered more than most when the US dollar was rallying, have been in the middle of the pack, at best, since the greenback began to slide in mid-January," Mathews said.

"The result is that they’ve fared worse than almost every major currency, developed or emerging market, over the Trump era (measured here as from when Trump’s odds of winning the Presidency began to shorten in early-October 2024). Only in Korea, where there was an attempt by the President to impose martial law, as well as a dovish central bank shift, has the currency fared as poorly."

Mathews says at face value that’s arguably quite surprising, given that neither Australia nor New Zealand is directly in Trump’s firing line.

"But while monetary policy might not explain much of their weakness over Trump’s term so far, we nonetheless expect it to be a headwind, especially for the NZ dollar, over the remainder of this year," he said.

"We think the Fed’s hiking cycle is done; since investors still expect a cut or two that would push US yields up a little. So, even though the [Reserve Bank of Australia's] rate cuts are more or less priced in at this point, we still think relative yields will move against the Australian dollar.

"And the picture is worse, in our view, for the New Zealand dollar, where we suspect a deteriorating economy means the RBNZ could end up cutting far deeper than investors seem to expect."

In its February Monetary Policy Statement (MPS) released last week, the RBNZ implied the Official Cash Rate (OCR) could be lowered to 3.00% by the end of this year, and the markets currently see that as the cycle low point. It's currently at 3.75%.

However,  CE senior Asia Pacific economist Abhijit Surya, last year predicted an OCR low point of 2.25%, and he's sticking with it. Surya said last week after the RBNZ cut the OCR by 50 points to 3.75% that "we still think there’s a compelling case for a lower terminal rate than most are predicting".

"...If we’re right that the Bank [RBNZ] will encounter further downside surprises in the incoming [economic] data, there remains a strong case for it to cut rates further than it is currently signalling. All told, we’re sticking to our view that the RBNZ will eventually slash the OCR to a below-consensus 2.25%," Surya said last week.

Mathews says there's probably two key reasons why the NZ and Australian currencies have performed so poorly.

He says both are among the more exposed G10 currencies to swings in investors’ risk appetite.

And they’re more exposed to China than many, especially among developed market currencies. 

"We suspect monetary policy will be the decisive factor over the remainder of the year. But, unfortunately for the Australian and New Zealand dollars, we don’t see much good news in these other drivers either. We suspect investors are still a bit too optimistic about a trade war reprieve. And we’re especially downbeat on the medium-term prospects for China’s economy," Mathews says.