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The New Zealand Dollar must deflate to mitigate the impact of the evolving global trade war.
According to a new analysis from Westpac, the Australian and New Zealand lender, U.S. tariffs will result in slower trading partner growth, even if they are not directed at NZ exporters specifically.
"Hence this is a negative shock for NZ," says Kelly Eckhold, Chief Economist for NZ at Westpac.
The New Zealand Dollar dropped in late 2024 as markets reacted to Donald Trump's election win and the ratcheting up of fears he would unleash a wave of tariffs that would negatively impact small and open economies like New Zealand's.
However, NZD has stabilised in 2025 as Trump's win is fully priced into the market and as it becomes clear that the worst of Trump's threats won't come to pass.
However, Westpac thinks tariffs are a slow burn process, and it's too soon to write off the tariff threat.
"One thing we should keep in mind is that 'tariff' is no longer a dirty word on the global stage. Countries will likely be more emboldened to deploy protectionist policies in the future now that the U.S., Canada, Mexico, and Europe are using these tools more earnestly," says Eckhold.
In short, the tide of global free trade is going out again.
"None of this is good for NZ's goal of breaking down trade barriers to facilitate a better environment for our exporters," Eckhold adds.
Trump has already levied a 10% import tax on Chinese goods, threatening an economic slowdown in New Zealand's main trading partner.
But New Zealand is also at risk of direct tariffs from the U.S., warns Westpac.
"The bigger impacts will be on those countries with a heavier trading relationship with those countries imposing tariffs. NZ’s exposure is sizeable in that regard as the US is our second largest market for goods exports, and exports account for a large share of our GDP," says Eckhold.
"All of this has clear but complex implications for the NZ outlook. The hit to global demand makes a case for weaker incomes and demand in New Zealand," he adds.
According to the analyst, a weaker New Zealand Dollar would be an important countermeasure to tariffs, helping to soften the blow.
"The key factor is the extent to which the exchange rate buffers this shock. We can clearly see the impact of this buffer in action – the TWI is down 6% since early October when it became clear that Trump had a good shot of implementing his anti-trade agenda," Eckhold explains.
Research generally indicates about half of the impact of tariff introduction is offset by the exchange rate.
"That's why the USD is strong, and the NZD is not," says Eckhold.
Easing Trade War Concerns Offers Near-term Relief
Although the outlook for global free trade is deteriorating, there is a sense that the worst excesses of Trump's tariff agenda won't come to pass, and this is helping vulnerable currencies recover in the short term.
The New Zealand Dollar reached a multi-year low on February 03 at NZDUSD 0.5516 following news that the U.S. would proceed with import tariffs on Canada and Mexico. Those tariffs were soon rescinded as Trump welcomed concessions from Canada and Mexico on controlling their borders.
Tariffs on China (at 10%) are less severe than thought, and a supposed universal tariff on steel and aluminium imports announced on Monday is not as universal as once thought: Australia has escaped the net.
Following a phone call between Trump and his Australian counterpart, Anthony Albanese, Trump noted Australia was one of the few countries with which the United States ran a trade surplus.
"We have a surplus with Australia. One of the few. And the reason is they buy a lot of airplanes. They're rather far away and they need lots of airplanes," Trump said. "I told him that that's something that we'll give great consideration to."
"The market is clearly becoming desensitised to the threat of tariffs as the credibility of the threats is mixed," says Brent Donnelly, "Yes, the tariffs on China are real, but for every utterance, there is only X probability of it being true and it’s close to impossible to assess the value of X for each individual threat."
The New Zealand Dollar is steadily recovering amidst this easing of trade war fears, but there is still a long way to travel as Trump has indicated he wants to achieve a great deal more. This should limit the currency's rebound potential.