Market Musings: AUD/NZD: RBNZ stuck in reverse
In its final meeting of 2024 the RBNZ delivered another outsized rate cut with today’s 50bp reduction lowering the Official Cash Rate to 4.25%. Interest rates had peaked at 5.50% in NZ, but since turning course in August the RBNZ has delivered 125bps worth of easing in quick time as it looks to move settings out of the very ‘restrictive’ territory they were in. As a result, the RBNZ’s OCR is now below the RBA’s cash rate (now 4.35%) for the first time since mid-2013. And the gap should continue to widen, in our view, with the RBNZ set to deliver greater interest rate relief over 2025.
Indeed, according to the RBNZ “if economic conditions continue to evolve as projected, the Committee expects to be able to lower the OCR further early next year”, with its projections showing rates steadily falling towards ~3% over coming quarters. We would argue that the risks reside with NZ interest rates declining faster and more than the RBNZ is anticipating given the challenges the NZ economy is facing.
The lagged effects of the RBNZ’s ‘restrictive’ settings are still working their way through the system. NZ GDP growth has stepped down, and the mix of subpar business and consumer sentiment coupled with global trade uncertainty stemming from US President-elect Trump’s policy agenda suggests momentum could remain sluggish for a while. The RBNZ is forecasting a ‘triple dip’ recession over Q2/Q3 2024 and for growth to remain below potential well into 2025. This is feeding through to the NZ labour market, which is a lagging indicator of the real economy, with the upswing in unemployment set to extend. The build up of excess capacity (NZ’s economy now has a negative output gap) is helping contain underlying price pressures and this is allowing the RBNZ to switch focus to growth and jobs rather than inflation.
In the wake of today’s decision the NZD has risen modestly (now ~$0.5855) and AUD/NZD dipped (now ~1.1050) with some participants thinking the maverick central bank might have delivered even more easing. From our perspective the burst of NZD strength looks to be a short-term positioning adjustment as the RBNZ failed to exceed dovish expectations, and as such we don’t believe it will last or that recent trends will change.
Over the medium-term NZD headwinds should remain in place. The firmer USD due to the Trump policy platform focused on combative trade-tariffs, greater fiscal spending, and steps to curb immigration are likely to compound the reduction in NZ’s interest rate advantage and vulnerabilities associated with funding NZ’s lofty current account deficit (~7% of GDP) during periods of market turbulence. We are forecasting the NZD to linger in the high $0.50s over 2025. That said, we see the NZD underperforming the AUD. In our judgement various macro and policy trends should also remain in favour of Australia. Trade risks are also arguably lower for Australia given it sends a smaller share of its exports directly to the US, and because we would likely see authorities in China attempt to counter any US tariff-induced pain via steps to bolster commodity-intensive infrastructure investment (areas Australia’s key exports are plugged into). All up, we believe interest rate spreads and other drivers 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 towards ~1.13 by mid-2025 (NZD/AUD falling towards 0.8850).
Peter Dragicevich
Currency Strategist - APAC
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