NZD: Another outsized cut, RBNZ turning increasingly negative

The RBNZ has revised its rate cut projections lower multiple times as the economy has cooled faster than expected. This is in stark contrast to the country's nearest neighbour, Australia, which has not yet cut. Across the Tasman Sea, Australia has positive GDP growth and a steady unemployment rate. Sure, they have stickier inflation, but even that is just 0.2% higher than New Zealand.

Markets have put an 85% chance of the RBA cutting at its next meeting (here is our preview) as well as almost fully pricing in a 50bp move by the RBNZ (45bp in the price). We expect the projections to replicate a similar pattern where rates fall to a terminal 3% rate. However, there are risks of another dovish revision, and we think the balance of risks is tilted to the downside for NZD next week.

The Kiwi dollar is not set to receive the same kind of support destined for the euro and Scandinavian currencies if a Russia-Ukraine truce materialises in February. The US's aggressive protectionist stance targeting China means we retain our bearish bias on NZD/USD, at least through the summer. Explorations below 0.55 are a tangible possibility.