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.
24 Comments
There is a real risk kiwi may go much lower if US Equities go full on risk off...
Carry trade could go nuclear....
Carry trade could go nuclear....
The peso and AUD tend to do well when the JPY carry trade is running on all cylinders so watch the BOJ. Their actions in recent days have been interesting.
I was thinking unwind if we have a big equities event......
NZD gets weaker and JPY stronger.
I was thinking unwind if we have a big equities event......
NZD gets weaker and JPY stronger.
Naturally. Nothing the BOJ can do in this event (my reckon). Watch the Nikkei get rekt (remember the BOJ owns a good proportion on the Nikkei.
lol. seriously?
Drop the OCR too far and then the dollar drops and inflation increases (fuel, imports etc)
The reason for the currency drop is the interest rate differentials between countries, not the inflation rate.
This reserve bank has a history of under and over shooting.
The dollar drops if the world loses faith in it's value via feel that the economy will continue to sink. A simple view of course, but worthy of note for the perceptions of our currency and it's relativity to others.
IMO the big problem seems to be how much lower NZs OCR is compared to Oz. Oz is far more attractive. Yes this RB has a history of overshooting, or not reacting fast enough. Especially when inflation initially went out of control, they sat on their hands and watched and said it was just transitory which was proven to be incorrect. They also printed all that money and we are now paying for all this.
Isn't the key reason the dollar is dropping because our economy, particularly balance of trade is way out of whack. Infact surely an argument could be made that the $NZ has performed magnificently all things considered.
Our $ is dropping because
1) We are a "relatively" low wage economy with a high cost of living and are hemorrhaging talent and wealth to Australia at an unprecedented rate
2) We have high energy prices together with being geographically isolated
3) Are an undiversified primary producer reliant on dairy prices and immigration
4) Have poor productivity and high sonsumer debt as a result of prioritising consumption over capital goods and investment
5) Have a tax system that incentivises property investment over starting a business
6) Have underinvested in infrastructure
7) Have lower quartile political and corporate leaders
8) Have actively pursued the Net Zero agenda despite ... Read more
Our $ is dropping because
1) We are a "relatively" low wage economy with a high cost of living and are hemorrhaging talent and wealth to Australia at an unprecedented rate
2) We have high energy prices together with being geographically isolated
3) Are an undiversified primary producer reliant on dairy prices and immigration
4) Have poor productivity and high sonsumer debt as a result of prioritising consumption over capital goods and investment
5) Have a tax system that incentivises property investment over starting a business
6) Have underinvested in infrastructure
7) Have lower quartile political and corporate leaders
8) Have actively pursued the Net Zero agenda despite being one of the most negatively impacted.
We are within a few years of having to open our entire property market up to foreign investors IMO, it's really all we have left.
Read less
The Aotearoa economy is driven by asset price appreciation and the impacts of that on credit-driven consumption. I know you cover this.
That's why the Peso is vulnerable.
See 5) & 1) & 4)
Yes I know. Corrected.
Throw in a capital gains and wealth tax if Labour/Greens get elected next time, and we will lose many more professional people to Oz. End to much foreign investment, and much local investment. NZ may not recover for decades.
CGT on investment property is fine - same as Oz and UK. Good policy.
Wealth tax would be a big step towards socialism.
CGT won’t net much revenue unless backdated perhaps a decade. People would moan, but those that bought 10yrs ago will be creaming it currently if they are smart and can afford to make less on a sale. If not selling, then all cashflow and no issues at all but it would get paid eventually.
Or.... it will incentivise productive business and innovation rather than sitting on one's pile of gold until bequeathment - to then be sat on by the next generation.
Don't assume everybody is so fretful of paying their fair share, or that that's even a consideration for young professionals venturing abroad
That's what I said. ;)
"We are within a few years of having to open our entire property market up to foreign investors IMO"
ACT definitely want to do that. Nats hovering and only held in check by Winston for the time being. Labour close to National on this.
ACT/DS would sell mother. father, brothers and sisters to the highest bidder.
National/CL only the mother and father
Labour/CH just the brothers and sisters
Greens/CS wouldn't sell anything but would invite all uncles, aunts and cousins to join in at no cost
TPM too drastic to print.
So those that invested in the property casino of NZ from overseas cash are seeing the value of the asset decline, and also value decline against the currency swap. Double winning right there. Hope the debt is in NZ Peso's and not appreciating foreign borrowings.
By COB 2025?
OCR will be < 3%, or about to be.
NZD? Probably about the same as now.
Kiwi Inc's mood? Pretty damn grumpy.
Just like our economy, performing badly. We have $360 billion in housing related debt with much of the profits from the banking sector going overseas and no hope of paying it back let alone maintenance of it without growing it at a greater rate than inflation and certainly GDP growth which is negative. We need a substantial amount of land to be made available for cheap houses and businesses that doesn't include the banking sector financing it and start our economy again in a fiscally responsible manner. Not our current model that resembles a property Ponzi scheme.
If the land becomes available, how will people get the money to start a business if their home is in negative equity, or if the banks are tight on business lending given the economic climate.
Trump era gains
What a load of BS! The Dollar strength was mainly down to good economic management by the previous govt (near-full employment, roaring economy, reduction of the deficit).
Yes, post election the Dollar has risen further but it's actually Trump-era decision making that has led to a correction.
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