Wobbly Confidence: We Hit 55c On Tariff Turmoil. Now, Where Will The Kiwi Go?

• Widening interest rate differentials and heightened global uncertainty clipped the Kiwi bird’s wings in 2024. From here, we see the Kiwi remaining rangebound at current levels before an eventual climb to 60c by year-end, supported by a recovery of the domestic economy.
• That's the central scenario. But downside risks dominate. Our primary concern is the growing risk of a global slowdown driven by escalating geopolitical tensions and tariff trade wars.
• It’s hard to argue against current market pricing. A 3% terminal cash rate is almost perfectly priced. Short-end rates are well-anchored. Should more stimulatory policy be required, there’s scope for interest rates to move lower, and the Kiwi to test its recent lows.

Short Kiwi dollar (NZD) was a trade we championed all throughout 2024. Back in April, we wrote: “Ultimately our forecasts for the kiwi dollar are unchanged with the Kiwi declining to 57c by year-end”. Even when the bird caught wind and drifted to 63.5USc, we held onto our rather out-of-market call for a Kiwi with a 50-cent handle by year-end. The way we saw it, interest rate differentials were working against the Kiwi. Compared to the US Federal Reserve, the RBNZ was (and remains) on a more rapid cutting cycle. Kiwi cash had fallen below US cash, and the carry on the Kiwi collapsed. Add to that, the ‘Trump trade’ later in the year, which bolstered the Greenback (USD). In our last FX Tactical, we wrote: “As we think about the Kiwi heading into 2025, we see further downside risk. The bird is likely to trade towards 57c, and possibly 55c.” Sure enough, the Kiwi flyer fell to 55c in late December – slightly sooner than anticipated, but the call played out nicely. We pat ourselves on the back. But we won’t get carried away. Because in the world of FX, there’s a little known saying: one day you’re a rooster, the next, a feather duster. But we hope to be crowing for a little while longer. So onto the next one…

In the near-term, we see the Kiwi dollar remaining largely rangebound. Holding here at around 57USc-58USc looks likely, before an eventual climb to 60c by the end of the year. There’s little in the way of domestic catalysts that could push the Kiwi out of current ranges. Our central scenario still sees the Kiwi economy gradually recovering over the second half of this year. More timely data are already showing promising signs of a turnaround in activity. From PMIs popping into positive territory to healthy export earnings for the rural sector, greenshoots are emerging. However, we still see risks as skewed to the downside for the economy, and therefore downside risk to interest rates and currency too. And those risks are predominately from offshore.

We're increasingly concerned about the global backdrop. Between escalating geopolitical tensions and growing risk of geoeconomic fragmentation, the global outlook is shrouded in uncertainty. That’s not great for the Kiwi ‘small, open’ economy. While we’ve managed to stay off the Trump tariff country hit list (for now), the ramifications of an escalated trade war could hurt us significantly. Fears of a global growth slowdown are building given the level and scope of the tariffs proposed. And in that environment, demand for Kiwi exports will come under pressure. It certainly doesn’t help that our two key trading partners are at the forefront of the trade war. Such a scenario could stall the Kiwi economy’s expected recovery, requiring the RBNZ to push the cash rate below 3%. It is a scenario that’s certainly not outside the realms of possibility, yet one the market has not priced. There’s scope for the Kiwi to test its recent lows should we stray from our central scenario.

© Scoop Media