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I'm building a tile shower, have the pan set and most of the cement board up. I've come up to the height where the shower alcove (or niche) will go. General searches have shown most people cutting backer board into the shape of the niche. I have been drawing up different plans for how to do this and I am toying with the idea of using 1/2 inch thick treated exterior plywood to frame the niche, then sealing the corners, then applying aquadefense waterproofing then mortar and tile. To be honest the main reason is that I hate the idea of cutting cement board that many times when something else might suffice. is there any reason to not go through with the plywood?

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    For a shower niche you can use quarter inch hardy backer board which you can score and snap
    – Alaska Man
    May 9, 2019 at 3:46

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is there any reason to not go through with the plywood?

Yes, the reason is that the manufacturer of the waterproof membrane you say you intend to use (Aquadefense) forbids the use of plywood as a substrate for tile on an interior vertical surface. You can only use it on horizontal surfaces like countertops and floors, and only in dry areas, not showers.

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