Market Musings: AUD/NZD: RBNZ downshift continues

The cavalier Reserve Bank of New Zealand continues to spread its ‘dovish’ wings. The RBNZ announced another 50bp interest rate cut today, the third straight meeting it delivered an outsized reduction. The move lowers the Official Cash Rate to 3.75%, after being as high as 5.5% last-July. As shown, outside of the GFC, the 175bps worth of rate cuts delivered by the RBNZ over the past 7 months has been the most abrupt policy U-turn in several decades (chart 1).

The rapid-fire reduction in the level of the RBNZ OCR follows the very abrupt hiking cycle that was unleashed on NZ households and businesses which has hit the economy and jobs market very hard. The NZ economy has effectively been in a recession type environment for several quarters with unemployment jumping from 3.2% to 5.1% quite quickly (chart 2). Indeed, after stripping out robust population growth, NZ GDP on a per capita basis is almost 5% smaller than its late-2022 peak.

With inflation pressures contained and core CPI moving towards the target midpoint, the RBNZ now remains squarely focused on trying to revive growth and absorbing the created spare capacity. NZ GDP growth momentum is projected to pick up over the next 12-18 months as “lower interest rates encourage spending”, although global uncertainty may create headwinds for business investment. Notably, the RBNZ also noted that when it comes to providing support it is not done yet with it outlining “there is scope to lower the OCR further through 2025” if things evolve like it expects. The RBNZ’s updated projections have the policy rate falling to ~3.1% by Q4 '25 with Governor Orr stating that more traditional 25bp cuts at the April and May meetings are assumed (chart 3). We would argue that the risks are skewed to the RBNZ delivering even more interest rate relief as the current outlook still only has the OCR falling to around the ‘neutral’ equilibrium zone.

In the wake of today’s RBNZ decision the NZD has dipped modestly (now ~$0.5703) and AUD/NZD has ticked up a bit (now ~1.1140). Further bouts of intermittent NZD and market volatility are likely over the coming months as US tariff measures are implemented and global risks are navigated. But with NZD sentiment/positioning metrics already very ‘bearish’ and the step down in NZ interest rates largely discounted, we think downside in the NZD may be limited (chart 4). That said, we believe the increasingly negative NZ-US yield differentials and challenges NZ may face in funding its external imbalance (the NZ current account deficit is ~6.5% of GDP) should also act to cap NZD upside potential. On net, we are forecasting NZD/USD to nudge up towards ~$0.59-0.60 later this year as the USD loses some ground.

However, on a relative basis we see more upside in AUD/NZD (downside in NZD/AUD). FX is a relative price and the diverging macro trends between Australia and NZ have been on show again over the past 24hrs. In contrast to the RBNZ, the RBA delivered a more measured 25bp rate cut yesterday and pushed back on the idea a substantial easing cycle is in the pipeline (see Market Musings: RBA: Gradual 'relief' cycle kicks off). In our judgement, interest rate spreads and other fundamentals are pointing to a higher average AUD/NZD level over the next few quarters (a lower NZD/AUD average level). We are projecting AUD/NZD to rise to ~1.13 by mid-2025 (NZD/AUD falling to ~0.8850) (chart 5). Based on the signal from our ‘fair value’ model the risks appear skewed to AUD/NZD increasing to an even higher level (NZD/AUD falling further) (chart 6).

Peter Dragicevich Currency Strategist - APAC peter.dragicevich@corpay.com