The New Zealand Dollar (NZD) has been under increasing pressure as the Reserve Bank of New Zealand (RBNZ) gears up for another significant interest rate cut. With inflation slightly exceeding expectations in December, the RBNZ remains steadfast in its goal to maintain an inflation rate between 1% and 3% over the medium term, ideally targeting a 2% midpoint. The upcoming February meeting is anticipated to bring a third jumbo rate cut, further impacting the NZD's valuation.
Global economic dynamics play a pivotal role in shaping the NZD's movement. Key trading partners such as China, Canada, and Mexico significantly influence New Zealand's economy, with particular emphasis on China due to its status as New Zealand's largest trading partner. The performance of the Chinese economy is closely linked to the Kiwi, and any adverse developments could lead to a reduction in New Zealand's exports, thus affecting the currency.
The dairy industry, a cornerstone of New Zealand's export market, also plays a crucial role in determining the NZD's strength. Fluctuations in dairy prices directly impact the NZD, further complicated by global trade tensions. The ongoing US-China trade war under President Trump’s administration continues to stir uncertainty, potentially impacting trade relations and influencing the NZD/USD pair.
The RBNZ's dovish stance further weighs on the Kiwi against the US Dollar (USD). Recent macroeconomic data releases have been instrumental in assessing the state of New Zealand's economy. The Consumer Price Index (CPI) inflation came in slightly hotter than expected in December, indicating potential economic overheating and prompting considerations for further monetary policy adjustments.
Swaps markets are currently pricing in a 90% likelihood of another 50 basis points (bps) reduction at the upcoming February 19 meeting. This anticipated rate cut is part of a broader strategy, with expectations of a total of 100 bps of rate cuts throughout 2025. The so-called rate differential between New Zealand and the US Federal Reserve plays a critical role in determining the NZD/USD pair's movements.
The NZD tends to strengthen during risk-on periods when investors are optimistic about growth prospects and perceive broader market risks as low. However, any negative news concerning the Chinese economy could adversely affect New Zealand's export volumes to China, subsequently impacting its currency.