Leapfrog: The Kiwi Currency Has Recalibrated, Higher, We Now Target 59c (up From 57c)

• The Kiwi economy has (under)performed largely in line with our forecasts. And the RBNZ has kicked off. We expected the Kiwi to be closer to 57c, given the data released. But it’s not even close, at 62c. The USD has weakened, falling about 4.5% in two months. It’s hard for the Kiwi to fall against a falling dollar.
• The RBNZ has been leapfrogged by the Fed. Although the RBNZ started cutting a little earlier, the Fed has cut by a little more. The Fed kicked off their cutting cycle with a bold and beautiful 50bps move. And they’ve outdone the RBNZ.
• We think 50bp moves will be on the table when the RBNZ deliberates in October and November. We’d need to see at least one 50bp move to match market pricing and see a fall in the Kiwi. We still forecast relative underperformance in the Kiwi economy, eventually leading to a lower currency. But we’ve recalibrated our call to 59c from 57c.

We came into 2024 forecasting a weakness in Kiwi, a deterioration, a downward glidepath. Our call was 57c by year end. Because we expected the economy to remain in recession for most of the year. And here we are. The economy remains in recession, the unemployment rate is rising in line with forecast, and the RBNZ has started cutting sooner than initially expected. Looking at the developments in the data, and the RBNZ’s response, we’d expect the Kiwi to be closer to 57c. But it’s not even close.

At 62c, the Kiwi dollar has outperformed. Because the dollar, in Kiwi / Dollar, has fallen. The US dollar has fallen 4.5% in the last two months, helped along by a dovish Fed and their 50bp kickstart to cutting.

It’s worth noting that the US economy has outperformed the Kiwi economy. And with these cuts, the US economy will continue to outperform. So, the question amongst traders and strategists is: if the Fed sees the need to cut 50bps with a stronger economy, will the RBNZ do the same? Yes, they should. Both central banks are aiming to get their cash rates below 4%, quick, and looking towards a neutral rate of 2.5-to-3%. In our opinion, 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. The RBNZ’s first 25bp cut in August marked the start of a move towards 2.5%. That’s 300bps. We argue the RBNZ needs to get the cash rate below 4%, asap. It takes up to 18 months for rate cuts to filter through the economy. We all love fixed rates. And fixed rates need time to roll off. Effectively, the RBNZ are cutting today for an economy at the end of 2025, the start of 2026. Get moving… and get the Kiwi lower.

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