Keep Calm And Carry Kiwi. We Hit 58c, On Track For 57c... Will We Hit 55c?

• The carry on the Kiwi has collapsed, with Kiwi cash cut below US cash, and creeping below Aussie cash, causing a calculated claw back in conspicuous longs. Interest rate differentials are working against the Kiwi, and will continue to do so well into 2025.
• If we put our previous forecasts under the microscope, the RBNZ has cut in line with our thinking … and we’ve been the most vocal in support of aggressive easing to reflate us out of recession. On the other side, the Fed has cut by less than we expected, and the RBA hasn’t even started yet. Both the Fed and RBA have surprised us on the slower to move, die from boredom, side of the ledger.
• The RBNZ will cut another 50bp cut in February, and another 25bp in either April or May. That’s fine. That’s priced. But it’s the inevitable move to 3% that’s not priced. And if we’re right, we’ll see the Kiwi currency crumble towards 55 cents. And it may be a year of two halves, with the Kiwi climbing in the second half. Stronger global growth means a stronger Kiwi.

Interest rate differentials can tell you everything you need to know in life… and even the meaning of it (if you love markets). And it is the differential that can drive investor flow. The famous Yen “carry trade” involved Japanese investors, including the fabled Mrs Watanabe or Kimono trader, taking cheap Japanese cash (with really low interest rates) and hunting yield (higher interest rates) elsewhere, especially in Kiwi and Aussie. Until recently, Kiwi offered higher interest rates than the US and Australia. That rate differential has reversed, reducing the attractiveness of the Kiwi dollar. And we expect that to continue as the RBNZ cuts to 3% next year, more so than the RBA and Fed.

In our last FX tactical, written in September, we said: “the RBNZ are responding – late, but in earnest. A rate cut in October is as close to a done deal as you get. In fact, we’d argue the only discussion should be on delivering 25 or 50. We’d advocate 50. And again, 50 in November... We argue the RBNZ needs to get the cash rate below 4%, asap.” The good news is the RBNZ did deliver, two 50s. And there’s another 50 scheduled for February, and 25 after.

And when thinking about the Kiwi against the Greenback, we noted in our last FX tactical that the “current economic conditions (i.e. the US needing a pacemaker, whilst NZ needing the defibrillator) means ultimately the RBNZ will either have to cut faster or possibly even deeper than the Fed.” And we targeted a move from the 62-63c range to 59c. Kiwi / Aussie was no different. We said “The interest rate differentials should see the cross trade lower. The RBA are comfortable to hold rates at their current restrictive levels for now... Once the cross breaks through the 0.9100 support level it opens up the 0.8900 level, which is where we see the cross belongs in the current rate environment.” The bird song remains the same.

As we think about the Kiwi headed into 2025, we see further downside risk. The bird is likely to trade towards 57c, and possibly 55c. Our traders are ‘odds on’ in favour of such a depreciation. And our economists agree, it would certainly help our exporters and tourism operators.

It’s a bit early to be talking about the next move in the Kiwi… but if we’re right, and the Kiwi economy recovers next year… then yeah, we will see the Kiwi dollar rise. But that’s a story for the second half of 2025.

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