Expect More New Zealand Dollar Underperformance: BofA

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Analysts at Bank of America think the NZ Dollar will continue to underperform.

In a new foreign exchange note, Bank of America says it remains "bearish NZD" heading into the second quarter.

However, the research note shows that the Kiwi can hold ground against the Dollar, which is expected to be the biggest underperformer in G10 in the coming months, alongside the yen.

"We expect a recovery to 0.60 by end-2025 but primarily driven by USD depreciation," says BofA.

However, "NZD is likely to underperform on the crosses", which suggests further losses against the Euro and Pound Sterling are in store.

The bearish stance is based on ongoing economic weakness that leaves today's economy the same size as it was in the first quarter of 2023.

This suggests significant economic spare capacity, and Bank of America thinks this will allow the Reserve Bank of New Zealand to cut interest rates further.

The RBNZ has led the charge in the current global rate cutting cycle, which has inevitably weighed on the NZD.

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"The RBNZ will cut by 25bps at the April 9 meeting but suggests upside risks to our below-consensus terminal rate of 2.5%," says Bank of America. "We continue to forecast below-trend growth and a negative output gap in 2025, which will likely see the RBNZ cut below their estimate of the neutral rate."

Economists also think Kiwi inflation will surprise on the downside, and the unemployment rate will peak at 5.5%, which is above the RBNZ's forecast of 5.2%.

Pound Sterling Live has reported that recent NZD weakness has been linked to a deterioration in investor sentiment linked to U.S. equities, suggesting further weakness in the U.S. can also contribute to underperformance.

"Any risk-off is likely to weigh on NZD, which has less terms of trade buffer compared to other commodity currencies," says Bank of America.

The U.S. economy is slowing down due to President Donald Trump's policy mix and ad hoc approach to tariffs, which analysts suggest could lead to stagflation.

This is unsupportive of U.S. equities and the U.S. Dollar. It now looks as though the NZD is an unassuming victim.

There are upside risks to Bank of America's forecasts if data stabilises and the RBNZ only cuts to (or slightly above) the neutral interest rate.