NZD/USD: Trade Wars, Not Rate Cuts, Are Calling the Shots
- RBNZ sees neutral rates between 2.5-3.5%, hinting at more cuts ahead
- NZD/USD traders shrug off rate differentials, fixated on US trade policy
- Market pricing suggests at least four more RBNZ cuts by year-end
- Technical levels hold firm as NZD/USD rides tariff-driven volatility
Summary
The Reserve Bank of New Zealand (RBNZ) says monetary policy remains in restrictive territory despite slashing interest rates by 125bps this cycle, implying there will be a need to continue reducing the overnight cash rate if inflation continues to subside. Its estimate for the range where interest rates keep unemployment and inflation stable are slightly lower than where markets expect the cash rate to bottom this cycle, suggesting the aggressive cuts seen over the past two meetings may extend well into 2025 should there be no evidence of a pickup in the economy.
While large scale rate cuts create downside risks for NZD/USD on a pure interest rate differential basis, right now, that’s a distant secondary consideration for traders. If you want clues on NZD/USD directional risks, evidence suggests you need to pay close attention to trade policy from the United States under the Trump Administration.
A primer on long-term nominal neutral interest rates
It’s a mouthful, but the concept is simple. It’s the level where interest rates keep inflation and unemployment are stable. Think of it as cruise control for an economy, where growth isn’t too fast or too slow.
It’s called “nominal” because it doesn’t account for inflation, and “neutral” because it’s not trying to restrain or stimulate activity. Central banks use it to guide expectations on interest rates. If rates are below the estimated level they’re trying to speed things up, and vice versus when above.
The emphasis needs to be on estimated as neutral is a dynamic level which constantly changes, influenced by things like population growth, productivity, and people’s willingness to save or spend.
RBNZ estimates neutral is below 4.25%
Paul Conway, Chief Economist at the RBNZ, estimates New Zealand’s neutral interest rate currently lies between 2.5% and 3.5%, below the 4.25% level where the overnight cash rate currently resides.
Source: RBNZ
“Easing domestic pricing intentions and the recent drop in inflation expectations help open the way for some further easing, as signalled in the November 2024 Monetary Policy Statement,” Conway said during a webinar hosted on Wednesday.
“Given uncertainty, we will need to ‘feel our way’ as the OCR gets closer to our estimate of neutral.
“We will continually cross-check our estimate of the neutral interest rate by comparing the proximity of the OCR to neutral against what we are seeing in the real economy.”
Markets see neutral around 3%
Source: Bloomberg
Overnight interest rate swaps indicate where markets expect the cash rate to settle in the future. By the next RBNZ meeting on February 19, markets anticipate it will drop to 3.762%, implying a nearly fully priced 50bp cut. By year-end, four 25bp cuts are expected, with a strong chance of a fifth, leaving the cash rate at 3%. This aligns with the midpoint of Conway’s range and the bank’s November guidance.
RBNZ rates a minor consideration for NZD/USD
Although the RBNZ is expected to cut rates faster than the Federal Reserve in 2025, this outlook is already factored in and has had minimal influence on NZD/USD moves recently.
Instead, the pair has shown a stronger inverse relationship with US equity market volatility futures, implied US bond market volatility, and the offshore-traded Chinese yuan (USD/CNH). This highlights the role of US trade policy speculation, which has caused sharp swings in NZD/USD.
Source: TradingView
Despite resembling a washing machine on spin cycle on an intraday basis, NZD/USD continues to respect technical levels. After breaking above downtrend resistance early last week, the pair found support at .5650 on three occasions in the past five sessions.
Momentum indicators like MACD and RSI (14) remain bullish, favouring a cautious near-term upside bias, with dips and topside breaks preferred over selling rallies.
Key resistance levels to watch include Friday’s high near .5725, the 50-day moving average, and horizontal resistance at .5754.
A sustained break below .5650 would invalidate the bullish bias, opening the door for bearish setups targeting a potential retest of early January swing lows.
-- Written by David Scutt
Follow David on Twitter @scutty
How to trade with City Index
You can trade with City Index by following these four easy steps:
-
Open an account, or log in if you’re already a customer
• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
- Search for the market you want to trade in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.
City Index is a trading name of StoneX Financial Pty Ltd.
The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.
While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.
StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.
It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.
StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.
© City Index 2025