Bank of America is positioning for a stronger U.S. dollar after the recent uptick in Middle East tensions, and in that context has singled out the New Zealand dollar as the most attractive short among major currencies.
Strategists' view
According to a note from BofA's FX and rates strategists, "High-beta FX is likely to underperform if oil prices spike and equities fall. NZD is our preferred short." The bank says that while other high-beta currencies such as the Australian dollar could also face pressure, the New Zealand dollar appears especially exposed because of several structural and external factors.
Why NZD looks vulnerable
BofA highlights New Zealand's increased dependence on imported energy. The strategists point to a sharp decline in domestic oil production over the past decade and note the 2022 closure of the Marsden Point refinery, which left New Zealand reliant on imported refined fuels. They further note that diesel makes up roughly half of the nation's oil consumption, amplifying the country's sensitivity to higher fuel costs.
On external balances, BofA's strategists emphasize that NZD historically trades with "an especially high beta to risk" and that New Zealand runs a relatively large current-account deficit compared with its G10 peers. Those features, the note argues, create additional downside pressure for NZD in an environment of rising oil prices and falling equities.
Historical patterns and caveats
The bank also observes that historically, scenarios combining higher oil prices and weaker equities have tended to favor the dollar. BofA characterizes such episodes as often driven by oil supply shocks and points out that NZD has been among the weakest performers against the dollar in these situations.
However, the strategists caution that the success of the trade depends heavily on risk sentiment. They note that past geopolitical shocks have sometimes produced equity sell-offs that were short lived, and that in certain episodes rising equities offset oil-driven pressure on NZD. BofA cites past instances when NZD actually appreciated after major oil shocks.
Tactical positioning
For now, the bank treats a short NZD position as tactical. The strategists describe short NZD as "a cheap, tactical hedge" but warn that any benefit could evaporate if risk appetite recovers or equity markets stabilize.
Key takeaways
- BofA expects the U.S. dollar to rally in the event of wider Middle East escalation, with NZD the preferred currency to short.
- New Zealand's reliance on imported refined fuels, closure of the Marsden Point refinery in 2022, and a large current-account deficit are cited as structural vulnerabilities.
- The trade is described as tactical and contingent on continued risk-off sentiment; previous geopolitical shocks have sometimes seen NZD appreciate when equities rose.