Bank of America Recommends Buying NZD/USD on Hawkish RBNZ Outlook

Bank of America strategists are advising clients to buy the New Zealand dollar against the U.S. dollar, citing expectations for a hawkish central bank and a shifting risk environment for the greenback. In a note published Friday, the firm said it has added to its short U.S. dollar positions amid a change in the distribution of risks.

The Trade Recommendation

BofA recommends establishing a long position in the NZD/USD currency pair with specific parameters for its clients. The bank's conviction is that the New Zealand dollar is positioned to appreciate against its U.S. counterpart.

• Entry Level: 0.5957
• Price Target: 0.6200
• Stop-Loss: 0.5800

Hawkish RBNZ Underpins Kiwi Strength

The core of BofA's bullish thesis on the "Kiwi" is the monetary policy stance of the Reserve Bank of New Zealand (RBNZ). The bank's analysts are forecasting two more interest rate hikes from the RBNZ, reinforcing its hawkish credentials.

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Furthermore, BofA noted that potential weather-driven risks to global food supply chains could provide an additional tailwind for the New Zealand dollar. As a major agricultural exporter, New Zealand's currency could benefit from such disruptions.

Shifting Outlook for the U.S. Dollar

On the other side of the trade, BofA's outlook for the U.S. dollar hinges on the policy credibility of the U.S. Treasury and the Federal Reserve. The firm stated it does not expect the Treasury to abandon its multiple efforts to contain borrowing costs, which could include long-end bond buybacks or foreign exchange intervention.

According to the note, accommodative financial conditions suggest that shorting the U.S. dollar against high-beta currencies like the NZD is likely to perform well in the near term. This is particularly true if the Federal Reserve absorbs an increase in Treasury bill issuance, which could weigh on the dollar.