NZD/USD traded near 0.5980 on Wednesday, up 0.27% on the day, extending its rebound for a second session. The move followed US Dollar weakness after President Donald Trump’s State of the Union address to Congress.
Trump said the US economy had seen a “turnaround for the ages”, citing easing inflation and solid growth. He said tariffs had helped, and warned of higher duties on countries that “play games” with recent trade agreements after the Supreme Court blocked several global tariff measures.
Trade Uncertainty Weighs On Dollar
These comments added to trade uncertainty and weighed on the US Dollar. US Dollar losses were limited as markets expect the Federal Reserve to keep interest rates unchanged for an extended period, supporting US yields.
In New Zealand, the Reserve Bank of New Zealand kept the Official Cash Rate at 2.25% and said policy remains accommodative as inflation moves towards the midpoint of its target range. Governor Anna Breman said improving conditions should lift growth this year without a sharp rise in inflation pressures.
Money markets do not expect a rate rise before late in the year. This could limit further New Zealand Dollar gains against the US Dollar.
Looking back to early 2025, we saw the NZD/USD get a temporary lift from political noise in the US. The State of the Union address created just enough trade uncertainty to weaken the dollar for a moment. This created a brief window of opportunity around the 0.5980 level.
Positioning For Headline Driven Volatility
This pattern of political headlines causing short-term volatility is something we should continue to exploit. We saw similar spikes in currency volatility during the 2018-2019 trade disputes, where the Cboe Volatility Index (VIX) often jumped over 20 on tariff news. Buying options to position for these temporary moves remains a viable strategy.
However, the expected divergence in monetary policy that was supposed to cap the Kiwi dollar’s strength never truly took hold. While last year we were focused on a hawkish Fed, the Reserve Bank of New Zealand has been forced to remain aggressive. As of this month, the RBNZ’s official cash rate sits at 5.50%, holding above the Fed’s current rate of 5.33%.
The key driver for us now is the inflation difference between the two nations. New Zealand’s inflation is stubbornly high, last reported at 4.7%, while the latest US CPI figure came in closer to 3.1%. This data suggests the RBNZ has less room to cut rates than the Fed, providing underlying support for the NZD.
Given this, we should consider buying NZD/USD call options with expirations in the next three to six weeks. This allows us to capitalize on the fundamental strength of the Kiwi due to higher interest rates and inflation. It also lets us use any politically driven dips in the pair as cheaper entry points for our bullish positions.
