Trade-weighted index

IBISWorld forecasts the trade-weighted index to edge up 0.1% in 2024-25, to 71.1 index points. The slight appreciation is a product of both domestic and global factors. The RBNZ is forecast to start lowering the OCR, which will ease demand for the New Zealand dollar. Yet, fluctuations in the trade-weighted index is highly dependent on global forces and the actions of other central banks can sometimes outweigh the effects the RBNZ's decisions have on the value of the New Zealand dollar. The slashing of the official cash rate (OCR) in New Zealand is likely to coincide with a global reduction in interest rates, which will limit the impact of movements in the OCR on the trade-weighted index. An upward trend in the value of New Zealand exports, particularly for dairy exports, will also limit the impact of a fall in the OCR on the movement of the trade-weighted index.

In the period before to the global pandemic, New Zealand's trade-weighted index was at a relative high point, on the back of strong economic growth and strong demand for New Zealand exports over the preceding decade. However, the New Zealand dollar tumbled in 2018-19 and 2019-20. The US Federal Reserve's Federal Funds Rate increased, while the RBNZ kept the OCR very low, which weakened demand for New Zealand currency. These trends reversed as the COVID-19 pandemic dragged on and the New Zealand economy performed well compared to the rest of the world, which was more beset by disruptions to economic activity caused by the spread of the virus and public health restrictions. In 2021-22, the RBNZ went earlier than many other central banks in responding to a global rise in inflation, which attracted investors to the New Zealand dollar seeking to capitalise on interest rate differentials and temporarily inflated the trade-weighted index.

In 2022-23, concerns about global inflation heavily weakened the New Zealand dollar. As central banks around the world hiked interest rates, investors flocked to invest in US Dollars at the expense of riskier currencies, like the New Zealand dollar. This development contributed to a sharp drop in demand for the New Zealand dollar in 2022-23. Yet, these declines were moderated by the reopening of the Chinese economy, which is a key trade partner for New Zealand. Prior to the pandemic, China accounted for as much as 40% of New Zealand's dairy exports. These upward trends were boosted by a slowing in the rate of inflation, which peaked in 2023-24, enabling the New Zealand dollar to regain strength at the expense of safer currencies. These divergent trends limited movement in the trade-weighted index, and the value of the New Zealand dollar is expected to remain relatively weak in 2024-25. Overall, IBISWorld forecasts the trade-weighted index to decline at a compound annual rate of 0.2% over the five years through 2024-25.