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The New Zealand dollar (NZD) is facing significant headwinds, with a potential downside of nearly 6% by the end of 2025, according to a new report from Wells Fargo Economics.
The report, titled "Reserve Bank of New Zealand Quickens Pace Of Monetary Easing," suggests that the Reserve Bank of New Zealand (RBNZ) is committed to an aggressive easing cycle, which is likely to weigh on the currency.
The RBNZ on Wednesday delivered a 50 basis point cut to its Official Cash Rate (OCR), bringing it down to 4.75%.
This move, the report explains, was driven by a confluence of factors pointing to a weakening economic landscape and cooling inflationary pressures.
Several indicators highlight the subdued economic activity in New Zealand. The report cites weak consumer and investment spending, softening employment figures, and a general decline in business activity as evidence that the economy is struggling to gain traction.
This assessment is based on data from the Quarterly Survey of Business Opinion (QSBO) and Statistics New Zealand's Activity Index, both of which point towards a likely contraction in GDP in the third quarter of 2024
While the RBNZ's mandate includes both price stability and supporting maximum sustainable employment, the recent persistence of inflation had prompted a more cautious approach to monetary policy
However, Wells Fargo economists believe that inflationary pressures have finally begun to subside. Evidence for this can be found in the slowing wage growth, particularly within the private sector, as well as a notable easing of pricing pressures reported in the latest QSBO.
Looking ahead, the Wells Fargo report expects the RBNZ to maintain its aggressive easing strategy.
The economists predict another 50 basis point cut at the next policy meeting in November, followed by a series of 25 basis point cuts throughout 2025, ultimately bringing the OCR down to 3.25% by mid-year
This outlook is predicated on further confirmation of weak economic growth and declining inflation, with the Q3 Consumer Price Index and labor market data holding particular significance
This projected path of monetary policy is significantly more dovish than the current market expectations for the US Federal Reserve.
Wells Fargo economists believe that this divergence in monetary policy between the two countries will likely exert downward pressure on the NZD/USD exchange rate.
While their formal forecast sets a target of 0.5700 for NZD/USD by the end of 2025, the report underscores a significant downside risk to this projection, suggesting that the actual decline could be even more pronounced
Using Wells Fargo's GBP/USD forecast for end-2025, the implied GBP/NZD exchange rate target at the end of 2025 would be 2.2632.
It's important to note that this is a cross-currency calculation based on two separate forecasts and might not represent an official Wells Fargo GBP/NZD forecast.