NZD/USD rose for a second day and traded near 0.5990 in European hours on Wednesday, approaching 0.6000. The move followed a weaker US Dollar after President Donald Trump’s first State of the Union address of his second term.
Trump said his administration had delivered a “turnaround for the ages”, citing lower inflation and economic performance. He also referred to steps on illegal immigration and fentanyl, and said higher tariffs could be imposed on countries that “play games” with trade agreements after the Supreme Court struck down several global levies.
Fed Policy Outlook
Gains in NZD/USD could be capped if the US Dollar finds support from expectations that the Federal Reserve will keep rates unchanged for longer. Boston Fed President Susan Collins said it may be appropriate to hold rates in the current range for some time, while Richmond Fed President Thomas Barkin said policy is “well-positioned” to manage risks.
Last week, the Reserve Bank of New Zealand kept the Official Cash Rate at 2.25% and said policy would stay accommodative as inflation nears the middle of its target band. Traders see little chance of a first rate rise before October or December.
The recent strength in the NZD/USD, pushing it toward the 0.6000 level, should be viewed as a temporary political reaction rather than a fundamental shift. We see this as an opportunity to position for a decline in the pair. The US Dollar’s brief weakness following the State of the Union address masks the underlying supportive factors for the currency.
The core reason for our bearish outlook is the stark difference in monetary policy between the two central banks. The Federal Reserve has held the Fed Funds Rate in the 5.25%-5.50% range since mid-2023 to combat persistent inflation that averaged over 3% through 2025. In contrast, the Reserve Bank of New Zealand is holding its Official Cash Rate at a much lower 2.25%, creating a significant yield advantage for holding US Dollars.
Looking back at the economic data from 2025, the US economy showed resilience while New Zealand’s struggled with a sluggish recovery after its brief recession. New Zealand’s annual inflation has now fallen to 2.8%, well within the RBNZ’s target band, giving the central bank no reason to consider raising rates. This contrasts with the US, where the Fed remains vigilant against a potential resurgence in price pressures.
External Drivers And Trade Headwinds
External factors also weigh heavily on the New Zealand Dollar. We have seen continued slow growth in China, New Zealand’s largest trading partner, which has suppressed demand for key exports. Furthermore, the Global Dairy Trade Price Index, a crucial barometer for New Zealand’s export income, has fallen by 7% over the last six months, adding another headwind for the Kiwi.
Given this backdrop, the rally towards 0.6000 presents a favorable level to initiate bearish positions. Derivative traders could consider buying NZD/USD put options to profit from a potential decline while limiting upside risk. Alternatively, building short positions in NZD futures contracts could be a direct way to act on the view that the pair will likely revisit its lows from last year.
