Mitsubishi UFG Says Global Backdrop, Central Bank Policy Shifts Provide More Support for Australian, New Zealand Dollars

12:15 PM EST, 12/31/2025 (MT Newswires) -- The Australian (AUD) and New Zealand (NZD) dollars have underperformed compared with G10 currencies in 2025, MUFG has noted.

The NZD's weakness has been more pronounced, as it has only strengthened by 2%-3% against the US dollar (USD) while the dollar index has fallen by around 9%, wrote the bank in its 'G10 FX 2026 Outlook' note published this week. This divergence pushed AUD/NZD to a high of 1.1636 in November -- the highest level since 2013, it noted.

MUFG said the NZD has been hit hard by the Reserve Bank of New Zealand's aggressive policy easing. The RBNZ has lowered its policy rate by 3.25 percentage points during the current easing cycle that began in August 2024 -- the largest amount of cuts delivered by any G10 central bank.

The pace of easing even accelerated in the fall when a larger 50bps cut was implemented, said MUFG, before adding this reinforced NZD selling. MUFG noted these actions were aimed at supporting growth in New Zealand, which is on course to stagnate for a second consecutive year in 2025. The economy contracted in three of the last seven quarters through Q3 2025, lifting the unemployment rate above its COVID-era peak.

However, there are growing signs that New Zealand's economy will strengthen in 2026, said MUFG, while pointing out that business confidence has just hit a 30-year high, supporting forecasts for growth to rebound above 2.0%.

MUFG said this improvement has given the RBNZ confidence that the policy rate doesn't need to be lowered further and is likely to remain at current levels for some time. Domestic developments, MUFG added, should create a more supportive backdrop for the NZD to recover from weaker levels in the year ahead. The bank expects NZD to rise up to 0.6000 in 2026.

Meanwhile, MUFG noted the Reserve Bank of Australia has also paused its rate-cut cycle after lowering the policy rate to 3.60% in the summer. Since then, the RBA has become more concerned about tighter-than-expected labor market conditions and inflation moving further above its 2.0%-3.0% target range, reaching 3.8% in October.

MUFG noted this has even prompted the RBA to signal it may consider hiking rates if higher inflation persists. Based on recent guidance, a rate hike could be delivered as early as Q2 next year, which would reinforce MUFG's bullish outlook for the AUD. The bank predicts AUD/USD to rise up to 0.7000 in 2026.

Both AUD and NZD should benefit from stronger global growth and higher commodity prices, which are improving Australia and New Zealand's terms of trade, said MUFG. MUFG's outlook assumes the recent one-year extension of the United States-China trade truce remains in place in 2026, and that U.S. tariff rates could be scaled back further.

MUFG noted a U.S. Supreme Court decision deeming EEPA tariffs illegal is one potential catalyst, although the Trump administration would likely act quickly to replicate tariffs. In addition, AUD performance has been strongly correlated with China's renminbi (CNY). MUFG forecasts China to allow the CNY to strengthen more in the year ahead, supported by its record trade surplus, which could encourage a stronger AUD.

If China takes more forceful action to boost domestic demand and address persistent housing market weakness, it would add to upside risks for the AUD, according to the bank.

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.