RBNZ Rate Cut Looms: NZD Depreciation Fuels Carry Trade Shifts

The Reserve Bank of New Zealand (RBNZ) is poised to deliver its most anticipated policy decision of the year on May 28, 2025, as markets brace for an official cash rate (OCR) cut widely expected to weaken the New Zealand dollar (NZD) further and reshape global carry trade dynamics. With the OCR set to fall from 3.5% to a projected 3.25%, and analysts like ANZ forecasting even deeper cuts to 2.5% by year-end, investors must act swiftly to capitalize on shifting currency valuations. This article dissects the implications for NZD-driven strategies and identifies actionable opportunities before the RBNZ's decision.

The OCR Cut: A Catalyst for NZD Weakness

The RBNZ's May 28 meeting marks a pivotal moment for the NZD, which has already lost 1.29% against the USD in the past week, trading at 0.5905 as of May 16. Analysts at ANZ and Westpac predict aggressive easing, with ANZ projecting a terminal OCR of 2.5% by year-end—a stark contrast to the RBNZ's “neutral” target of 2.75%. This divergence underscores growing concerns about a domestic recession and global trade slowdown, which are pressuring the central bank to prioritize growth over inflation control.

While annual inflation sits at 2.5%—within the RBNZ's 1%-3% target—the Tara-ā-Umanga Business Expectations Survey reveals a worrying trend: five-year inflation expectations have jumped to 3.06%, signaling potential wage-price spirals. Yet, with GDP growth revised downward to 1% in 2025, the RBNZ has little choice but to proceed with cuts, even as it risks further NZD depreciation.

Carry Trade Opportunities: Navigating the Narrowing Differential

Carry traders, who borrow in low-yielding currencies to invest in higher-yielding ones, face a crossroads. A 25-basis-point OCR cut reduces the NZD's appeal as a funding currency, narrowing its interest rate differential with major peers like the U.S. (5.0% federal funds rate) and Australia (3.6%). For instance, the U.S.-NZ rate spread—currently 1.5%—could widen to 1.75% if the OCR drops to 2.5%, making USD-denominated carry trades more profitable.

However, the NZD's weakening trajectory itself presents opportunities. A depreciating NZD lowers the cost of borrowing in the currency, potentially offsetting reduced yields. Investors could pair NZD shorts with long positions in commodities like dairy or timber—New Zealand's key exports—exploiting the currency's inverse correlation with commodity prices.

Technical Outlook: NZD/USD Targets and Risks

Technicals suggest the NZD/USD could test 0.5820 support if the RBNZ delivers a larger-than-expected cut or global risks escalate. Conversely, a break above 0.6000—a level last seen in late April—would require a surprise hawkish tilt from the RBNZ, which seems unlikely given the data.

Action Plan for Investors

1. Short NZD/USD: Enter ahead of the May 28 meeting, targeting 0.5850-0.5820 with stops above 0.6000.
2. Rotate Carry Trades: Shift from NZD-based funding to higher-yielding currencies like the Brazilian real (BRL) or South African rand (ZAR), which offer steeper rate differentials.
3. Monitor Global Currencies: The GBP/NZD pair, which has surged 3% since April, may continue climbing if the RBNZ's easing outpaces the Bank of England's pauses.

Final Call

The RBNZ's May 28 decision is a binary event for NZD valuation and carry trade strategies. With the OCR on track to hit multiyear lows and inflation pressures easing, the currency's decline is far from over. Investors who act now—positioning for further depreciation and pivoting carry trades—can secure asymmetric returns before the market fully prices in the RBNZ's dovish pivot. The countdown begins.