NZD: Weakness amid deteriorating asset holdings – BNY

BNY highlights the ongoing challenges facing the New Zealand Dollar (NZD) as it transitions into a funding currency due to low yields. The report notes significant outflows and a bleak outlook for asset inflows, particularly in light of the Reserve Bank of New Zealand's (RBNZ) anticipated rate cuts. The analysis underscores the broader implications for financial conditions in New Zealand's economy. Head of Markets Macro Strategy at BNY Bob Savage provides insights into the market dynamics affecting the NZD.

NZD faces significant outflows and challenges

"The RBNZ is expected to cut rates by an additional 25bp overnight, and there is no clear end to the cycle in sight."

"We observe that NZD has been net-sold on a daily basis since the last week of October. There were some initial signs of improvement in interest over the past two weeks, but Friday generated another strong outflow session. Although there is a case for fixed income hedging driving NZD selling, the overall asset flow and holdings outlook is very poor."

"Although not directly linked to the AI shifts globally, equity flows for New Zealand are a general sign that asset classes with a high beta to global risk aversion will struggle amid a general selloff. The lack of asset inflows for a current account deficit economy will represent a tightening in financial conditions, which require additional forms of offsets."