Synopsis:

MUFG expects further downside for NZD/USD as trade uncertainty and aggressive RBNZ easing weigh on sentiment. However, demand is likely to pick up below 0.5500, especially if trade risks subside and New Zealand’s economy improves later in 2025.

Key Points:

1. Tariff Risks to Drive Renewed NZD Selling:

   • The 1st February tariff announcement on Canada, Mexico, and China will increase global trade disruption risks, negatively impacting NZD.
   • The initial NZD bounce from January’s optimism over a more pragmatic US trade policy is expected to reverse.

2. NZD/USD Already Down 12% in Q4, But More Weakness Likely:

   • Despite a 12% drop in Q4 2024, NZD’s January rebound has been modest.
   • Further 4-5% downside remains possible, particularly if tariff fears intensify.

3. RBNZ’s Aggressive Easing Cycle to Weigh on NZD:

   • The RBNZ is set to cut by 50bps in February, with another 50bps of easing priced by July.
   • By mid-year, the RBNZ policy rate will be around neutral, allowing economic conditions to stabilize.

4. Economic Recovery Could Provide Support Later in 2025:

   • New Zealand’s economy likely contracted by 0.3% in 2024 but is forecast to grow 1.3% in 2025.
   • With inflation now close to target (2.2% YoY in Q4), less trade uncertainty and better growth could help NZD recover later in the year.

Conclusion:

NZD/USD faces near-term downside risks due to tariff concerns and RBNZ easing, but demand is expected to pick up below 0.5500, especially if trade fears ease and economic growth improves later in 2025.