NZD/USD extended its advance for a second session on Tuesday, trading near 0.5650 in European hours after a rebound in domestic sentiment. The ANZ Business Outlook Index climbed to 36.6 in June from 10.0 a month earlier, the strongest reading since February, while softer global oil prices following a US–Iran nuclear agreement tempered near-term inflation concerns. Even so, those gains sit alongside warnings of slower activity after the earlier energy shock, with New Zealand’s four largest banks projecting a second-quarter contraction.
Rate expectations have cooled accordingly. Markets now imply a 66% chance of an RBNZ increase in July, down from above 80% a few weeks ago, and they see two rises this year rather than three. The upside may be checked by firmer USD support as policy pricing points to a more hawkish Federal Reserve track, with CME FedWatch indicating a probability above 60% for a hike by September. Attention turns to Wednesday’s US ADP release and Thursday’s NFP report, which could reinforce a higher-for-longer rates setting and weigh on risk-sensitive currencies.
Short-Term Rally Contrasts With Broader Downtrend
We view the current strength in the NZD/USD around 0.5650 as a short-term rally within a broader downtrend. While the June ANZ Business Outlook was a bright spot, it conflicts with the underlying economic reality. This bounce likely presents a better selling opportunity rather than the start of a sustained move higher.
Central Bank Divergence and External Pressures Signaling Further Downside
The fundamental divergence between central banks remains our core thesis for a weaker Kiwi. The latest quarterly CPI from Stats NZ showed inflation cooling to 3.8%, encouraging the RBNZ to soften its stance on future rate hikes. In contrast, expectations for the US Federal Reserve remain hawkish, especially after last week’s Core PCE inflation data proved sticky at 3.1%.
External factors are also weighing on the New Zealand Dollar, adding to our cautious view. The most recent Global Dairy Trade auction showed a 1.2% fall in whole milk powder prices, signaling weakening demand from key markets. Additionally, recent manufacturing PMI data from China, New Zealand’s largest trading partner, slipped into contractionary territory at 49.8, curbing appetite for commodity-linked currencies.
Therefore, we are looking to position for a decline in the coming weeks, especially with critical US employment data due. A strong Nonfarm Payrolls report on Thursday would reinforce the Fed’s hawkish path, likely strengthening the US dollar and pressuring the NZD/USD pair. Buying put options with a July or August expiry could be an effective way to capitalize on a potential downturn while managing risk through this data release.
