The chart above shows, how the relationship between NZD/USD and 2-year yield divergence has unfolded since 2015.
While the spread has narrowed steadily from +300 basis points (bps) in January 2015 to -106 bps as of now, the New Zealand dollar has been pretty volatile around the spread. However, from the chart, it’s quite clear that the direction of the spread is playing a crucial role over the medium to long-term.
We have forecasted a lower NZD against the USD with a target of 0.59 against the USD over the medium to long-term, and with the Reserve Bank of New Zealand (RBNZ) continuing its dovish rhetoric, we expect the spread to decline further in favor of the USD.