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

Bank of America strategists are recommending clients buy the New Zealand dollar against the U.S. dollar (NZD/USD), anticipating strength from the Kiwi on the back of a hawkish central bank. The bank has increased its short positions on the U.S. dollar, noting that while market uncertainty remains high, the distribution of risk has shifted.

The Trade Recommendation

In a note to clients, Bank of America outlined a specific long trade for the NZD/USD pair. The bank's positive outlook for the currency is based on a combination of factors, including diverging central bank policies and broader macroeconomic tailwinds.

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

The strategists believe that accommodative financial conditions will support strategies that involve shorting the U.S. dollar while buying high-beta currencies like the NZD, particularly if the Federal Reserve absorbs more short-term Treasury issuance.

Diverging Central Bank Policy

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A key driver of the recommendation is the hawkish stance of the Reserve Bank of New Zealand (RBNZ). Bank of America expressed optimism for the NZD in the fourth quarter, forecasting that the RBNZ will implement two more interest rate hikes.

Conversely, the bank's outlook for the U.S. dollar is contingent on the policy credibility of the U.S. Treasury and the Federal Reserve. The note suggests an expectation that the Treasury will continue its efforts to suppress borrowing costs, potentially through measures like foreign exchange intervention and buybacks of long-dated bonds.

Macroeconomic Support

Beyond central bank policy, Bank of America identified other factors that could provide additional support for the New Zealand dollar. The note pointed to climate-related risks to global food supply chains as a potential tailwind for the currency, given New Zealand's significant role as an agricultural exporter.