NZD Fundamental Value
The NZD is expected to see a moderately bearish influence upon its fair value throughout the upcoming seven weeks.
The NZD is expected to see a moderately bearish influence upon its fair value throughout the upcoming seven weeks.
This report delves into the primary factors anticipated to shape the New Zealand Dollar's performance over the next seven weeks. We will explore the interplay of domestic fiscal and monetary policies, the trajectory of economic activity, and the significant impact of global geopolitical events and risk sentiment, drawing insights primarily from recent developments and forward-looking expectations.
The key drivers influencing the NZD's fair value are expected to be the market's anticipation of further monetary easing by the Reserve Bank of New Zealand, largely fueled by concerns over domestic growth, coupled with persistent uncertainty in global risk sentiment dominated by US trade policy narratives. The consequent narrowing of interest rate differentials and the NZD's inherent sensitivity to negative shifts in global trade dynamics are projected to exert a moderately bearish pressure, though considerable volatility is likely given the unpredictable nature of international trade developments.
GOVERNMENT and FISCAL POLICY Fiscal Prudence Amidst Trade Winds
The government's measured, stability-focused reaction to external economic pressures, particularly US tariffs, is the key driver within this area influencing the NZD over the coming seven weeks. Having opted against retaliatory tariffs and refrained from announcing significant new domestic fiscal initiatives, government policy is anticipated to exert a largely neutral influence on the NZD's fair value, unless unexpected major policy shifts occur in response to deteriorating global conditions.
New Zealand's government, led by the National Party, is focused on addressing external economic challenges, particularly volatile US trade policies, while maintaining domestic fiscal stability.
Looking ahead over the next seven weeks, the market anticipates New Zealand will maintain its cautious fiscal approach. With the decision made not to implement retaliatory tariffs to shield consumers from increased costs, the government is unlikely to introduce major stimulus measures unless global trade conditions worsen dramatically, significantly impacting key export sectors. The primary focus will likely remain on monitoring external risks and providing targeted support only if essential, rather than employing broad fiscal actions.
Fiscal policy over the preceding seven weeks was mainly reactive to international events. The most notable action was the government's confirmation, via Finance Minister Nicola Willis, that it would not impose retaliatory tariffs following the US implementation of a 10% baseline levy on New Zealand imports (effective April 5th). This decision was explicitly based on avoiding additional cost burdens for consumers.
ECONOMIC ACTIVITY AND GROWTH Charting the Course
Given the economy's reliance on international trade and cautious global growth forecasts, particularly for major partner China, this economic environment is expected to have a moderately bearish influence on the NZD.
New Zealand has a developed, open economy heavily reliant on international trade, particularly agricultural commodities (dairy, meat, fruit) and tourism. Major trading partners include China, Australia, the EU, the US, and Japan, making its economic performance sensitive to global demand shifts and geopolitical events. This sensitivity is reflected in the S&P/NZX 50 index, featuring major companies in healthcare, dairy, telecommunications, energy, construction, and finance.
Market expectations for New Zealand's economic growth in the upcoming seven weeks are subdued, with forecasts pointing to only modest quarterly expansion following the Q4 2024 exit from a technical recession. The potential for sustained growth appears limited by weak domestic consumer and business confidence, compounded by significant uncertainty surrounding global trade and its potential impact on demand for New Zealand's key exports. Key data points to watch include March Trade Balance (Apr 22), April ANZ Business Confidence (Apr 30), Q1 Employment figures (May 06), the RBNZ Financial Stability Report (May 07), April PMI (May 15), April Trade Balance (May 20), the RBNZ Rate Decision (May 28), and May ANZ Business Confidence (May 29).
The economic narrative over the previous seven weeks presented a mixed picture. Although Q4 2024 GDP growth surpassed expectations at 0.7% QoQ (reported Mar 19th), pulling the economy out of recession, subsequent indicators suggested underlying fragility. Domestic demand remained weak, as seen in declining annual electronic card spending (Mar data, Apr 14th) and low consumer confidence (Mar data released Mar 27th/Apr 4th). While the manufacturing PMI remained positive (Mar data, Apr 10th) and trade surpluses were recorded (Feb data, Mar 20th), the services sector contracted again (Mar data, Apr 14th), and annual building consents decreased (Feb data, Apr 1st), indicating a vulnerable recovery.
MONETARY POLICY AND INFLATION
Navigating Policy Currents
The primary driver influencing the NZD's fair value in the coming weeks is the market expectation of further monetary easing by the Reserve Bank of New Zealand.
With markets pricing in a high probability of another rate cut at the May 28th meeting, this outlook is expected to exert a moderately bearish influence on the NZD through narrowing interest rate differentials.
The RBNZ, New Zealand's central bank, aims to maintain price stability and support maximum sustainable employment. Its MPC sets the Official Cash Rate (OCR). Christian Hawkesby recently replaced Adrian Orr as Acting Governor.
Market expectations over the coming seven weeks are strongly oriented towards further RBNZ easing. Following the release of Q1 CPI data, conviction solidified around another 25 basis point OCR cut at the May 28th meeting, which would lower the rate to a potential 3.25%. Projections indicate the easing cycle might extend further, possibly reaching 2.75% by year-end, as the RBNZ appears focused on mitigating growth risks stemming from global trade tensions and subdued domestic conditions. The RBNZ's interest rate decision and subsequent press conference on May 28th will be critical events.
Significant monetary policy actions marked the previous seven weeks. The RBNZ initiated its easing cycle with a substantial 50 basis point cut to the OCR in February (Week 8), bringing it to 3.75%, citing weak employment data and falling inflation. This was followed by an additional 25 basis point cut on April 9th (Week 15), lowering the rate to 3.50%. This latter move explicitly acknowledged downside risks from global trade barriers, alongside the existing concerns about targeted inflation levels and domestic economic weakness. Q1 CPI data (Apr 17th) showed headline inflation at 2.5% YoY, slightly above forecasts, but core measures suggested underlying softening, supporting the RBNZ's easing stance despite a temporary spike in food inflation (Mar data, Apr 15th).
GEOPOLITICS, CAPITAL FLOWS AND RISK Gauging the Global Pulse
Global risk sentiment, which remains acutely sensitive to developments in US trade policy and US-China relations, is the key driver within this section expected to impact the NZD's fair value over the next seven weeks. Given the NZD's status as a high-beta currency closely tied to global growth perceptions, ongoing trade uncertainty and the potential for negative shocks are likely to maintain a moderately bearish influence, favouring flows towards safe-haven assets away from the Kiwi, although temporary risk rallies on positive news remain possible.
Typically, capital flows into New Zealand show a correlation with global risk appetite, commodity price cycles (particularly dairy), and the relative attractiveness of its interest rates compared to global peers. During periods of heightened risk appetite ('risk-on'), the NZD can benefit from carry trades seeking yield, whereas 'risk-off' periods often trigger capital outflows towards traditional safe-haven currencies and assets. The NZD is often categorized as a 'risk-on' or 'high-beta' currency, meaning it tends to amplify moves seen in broader global risk sentiment.
Expectations for capital flows over the next seven weeks suggest continued caution among investors. The anticipated rate cuts by the RBNZ diminish the NZD's yield advantage, which is likely to discourage portfolio inflows seeking higher returns. Persistent global trade uncertainty may also suppress overall risk appetite, potentially leading to further outflows or subdued inflows. Trade-related flows will remain dependent on the stability of commodity prices and sustained demand from key partners like China. Domestic risk events to monitor include the RBNZ's May policy decision and its Financial Stability Report (May 7), along with crucial Q1 employment data (May 6).
Capital flows exhibited high volatility over the preceding seven weeks, driven primarily by sharp swings in risk sentiment directly linked to headlines concerning US tariff policies. The NZD experienced both steep declines during periods of escalating trade tensions and rapid rallies when tensions appeared to ease temporarily. Notably, CFTC positioning data indicated that large institutional short positions against the NZD were significantly reduced recently (as of Apr 15th), suggesting potential short-covering flows occurred despite the broadly bearish fundamental backdrop. Risk aversion notably peaked in early April as US tariffs escalated, leading to sharp falls in both the NZD and the NZX 50 index, followed by relief rallies mid-April on news of temporary tariff pauses for some allies.
Conclusion
In summary, the outlook for the New Zealand Dollar over the next seven weeks leans moderately bearish, primarily influenced by expectations of further RBNZ interest rate cuts aimed at supporting a fragile domestic economy, and the pervasive uncertainty surrounding global trade policies which tends to dampen risk appetite.
For forex traders, this suggests maintaining a cautious stance on the NZD. Key events to watch closely will be the RBNZ's policy decision and communication on May 28th, incoming domestic data releases particularly Q1 employment figures, and any developments related to US trade policy or US-China relations. While the underlying bias appears bearish due to narrowing rate differentials and growth concerns, the NZD's sensitivity to global risk means traders should be prepared for potential volatility and sharp reactions to geopolitical news flow.