Federal Reserve’s Rate Cut
The US Federal Reserve’s December meeting resulted in a 25 bps rate cut, bringing the range to 3.50%-3.75%. With divided opinions, most Fed officials support more rate reductions as inflation decreases.
Factors impacting the NZD include New Zealand’s economy health, central bank policy, and its largest trade partner, China’s performance. Dairy prices also play a role because they influence export income. RBNZ decisions on interest rates aim to control inflation between 1% and 3%.
Economic data releases affect the NZD by indicating the economy’s strength, potentially prompting interest rate changes. Broader market risk sentiment influences the NZD’s valuation, as it tends to fare better during stable market periods.
We are seeing the Kiwi struggle around 0.5785, even with China’s manufacturing PMI for December unexpectedly expanding to 50.1. This disconnect is happening during the New Year holiday week, a time known for thin trading volumes. Such low liquidity means we should be cautious about reading too much into these small moves.
US Federal Reserve’s Minutes
The US Federal Reserve’s recent minutes show a clear split on the path forward, even after cutting rates to 3.75% in December 2025. With core US inflation proving sticky around 2.8% over the last quarter, the market is only pricing in a 15% chance of another cut in January 2026. This hesitation from the Fed is a major factor keeping the US Dollar strong.
While the improvement in Chinese data is a long-term positive for New Zealand’s exports, it isn’t providing any immediate lift. A more pressing concern for us is that dairy prices have fallen in the last three consecutive Global Dairy Trade auctions, with the latest on December 16th showing another 1.5% drop. This directly undercuts a key source of strength for the Kiwi.
Given this conflicting picture, going into January 2026 with large, unhedged positions is risky. We believe using options to define risk makes sense, perhaps by buying puts to protect against a further slide below key support levels like 0.5750. This allows for participation on the downside while capping potential losses if the market suddenly reverses.
Liquidity will return in the second week of January, which is when we expect to see the market’s true direction emerge. We remember how thin markets in early January 2019 led to a flash crash, so it is wise to remain hedged until a clearer trend forms. Upcoming US employment data and New Zealand’s next inflation report will be the first major catalysts of the new year.
