Bank of America Flags Potential Decline in NZD/USD Amid USD Strength and RBNZ Rate Cut Expectations

Bank of America has advised investors to sell the NZD/USD exchange rate, pointing to near-term factors that could bolster the U.S. dollar even as the bank maintains a largely negative outlook on the currency for the entire year ahead. The financial institution identifies that recent U.S. economic data have demonstrated stability, and the emphasis on first-quarter fiscal stimulus initiatives is contributing to positive sentiment toward the U.S. dollar. Moreover, the greenback has shown resilience against uncertainties surrounding Federal Reserve leadership, with market expectations for short-term interest rates possibly increasing in advance of the Fed's leadership transition anticipated in June. Though Bank of America holds a core view that the U.S. dollar will face downward pressure during 2024, largely due to cooling inflation, concerns about the labor market, and potential more dovish Federal Reserve policies, it recognizes that certain currencies, particularly the New Zealand dollar, may experience short-term headwinds against the dollar. With regard to New Zealand, Bank of America's analysis notes that despite early signs of improving economic conditions — as reflected in better sentiment and economic activity — persistent spare capacity is expected to continue dampening inflationary pressures. Their economists project that inflation rates in New Zealand will come in below both the Reserve Bank of New Zealand's targets and market expectations through 2026. This scenario sets the stage for the central bank to possibly implement a rate cut in May, even though its hawkish communication in November had previously led to significant shifts in market pricing. This combination of a resilient U.S. dollar and prospects for monetary easing in New Zealand forms the basis for the bank's recommendation to sell the NZD/USD currency pair in the near term.