Bank of America (BofA) has issued a "sell" rating for the NZD/USD currency pair, identifying potential near-term strength in the US dollar despite an overall expectation of dollar weakness for 2024. The bank highlights recent stable US economic data and the focus on first-quarter fiscal stimulus as factors that may enhance sentiment towards the US dollar in the near term.
Furthermore, the US dollar has shown considerable resilience in the face of uncertainties surrounding the Federal Reserve's independence. Market participants anticipate that near-term interest rates could be revalued higher before the Federal Reserve undergoes its leadership transition scheduled for June.
Although BofA projects a generally bearish stance on the US dollar for this year, driven by easing inflation, potential challenges in the labor market, and expected dovish Federal Reserve policies, it acknowledges room for short-term dollar support against select currencies, notably the New Zealand dollar.
Regarding New Zealand, BofA's analysts observe emerging signs of economic stabilization, marked by improving sentiment and activity levels. However, the presence of significant spare capacity continues to exert downward pressure on inflation in the country. The bank's economists forecast that inflation rates will fall short of both the Reserve Bank of New Zealand's and market consensus estimates in 2026.
This outlook underpins expectations for a rate reduction from the RBNZ as early as May, despite the central bank's hawkish communication last November which had triggered substantial market repricing. The potential easing contrasts with the earlier tightening rhetoric and suggests a cautious monetary policy pivot.
In summary, the interaction of US dollar resilience driven by domestic fiscal stimulus and stable economic data, alongside New Zealand's inflation dynamics and anticipated monetary easing, forms the basis for BofA's recommendation to sell NZD/USD in the near term.
Bank of America has recommended selling the New Zealand dollar against the US dollar based on expectations of short-term US dollar strength and an impending rate cut from the Reserve Bank of New Zealand (RBNZ). While the bank maintains a bearish outlook on the US dollar for 2024, near-term data and fiscal stimulus measures are supporting the dollar's performance, especially relative to the New Zealand dollar. Persistent economic slack in New Zealand and forecasts of inflation undershooting RBNZ targets suggest easing monetary policy in May, adding downward pressure on the NZD/USD pair.
Key Points
- Bank of America advises selling NZD/USD, citing potential near-term US dollar strength despite a broader weak-dollar outlook for 2024.
- Stable US economic indicators and fiscal stimulus are contributing to improved US dollar sentiment in the short run.
- New Zealand shows signs of economic stabilization but faces inflation pressures due to excess capacity, leading to expected RBNZ interest rate cuts by May.
- The interplay of US dollar resilience and anticipated easing by the RBNZ impacts currency markets and may influence broader trade and investment flows involving these economies.
Risks
- Uncertainty regarding the Federal Reserve leadership transition in June could introduce volatility in US dollar valuations, affecting currency markets.
- The timing and magnitude of RBNZ's rate cut depend on inflation dynamics, which may differ from forecasts, presenting risks to the NZD/USD outlook.
- Potential shifts in fiscal stimulus measures in the US could alter near-term USD strength, influencing the trade balance and capital flows.