Insights 
VT 
NZD/USD strengthens to near 0.5750, driven by fears of a prolonged US government shutdown. The pair recovers lost ground around 0.5740, ending a seven-day losing streak during Thursday’s Asian session.
The US government shutdown has reached its third week, as the Senate failed to pass legislation restoring funding. A Treasury official stated the shutdown could cost the US economy $15 billion weekly, potentially weakening the Greenback and aiding NZD/USD.
Chance Of Fed Rate Cuts
Traders anticipate a 98% chance of a 25bps Fed rate cut in October, with another expected in December, according to Reuters. Trade tensions between the US and China weigh on market sentiment, as President Trump noted high tensions despite a possible tariff pause extension suggested by Treasury Secretary Scott Bessent.
Any escalation in US-China tensions could affect the Kiwi, with China being New Zealand’s major trading partner. Factors influencing the NZD include the New Zealand economy, central bank policy, and China’s economic performance.
The Reserve Bank of New Zealand’s inflation targets impact interest rates, influencing NZD attractiveness. Macroeconomic data and broader risk sentiment also play roles, with strong data and optimistic growth supporting NZD, while uncertainty favors safer assets.
Trading Strategies Amid Volatility
We are seeing the NZD/USD test the 0.5750 level as the US government shutdown enters its third week. This prolonged closure is weakening the US dollar, creating an opportunity for the Kiwi to gain ground. However, the ongoing trade tensions between the US and China are putting a cap on the Kiwi’s potential.
A shutdown of this length directly impacts US economic output, which we have seen before. Looking back, the Congressional Budget Office estimated the 35-day shutdown in late 2018 and early 2019 permanently cost the US economy about $3 billion. This historical precedent supports the current downward pressure on the greenback and explains why the market is nervous.
The market is now almost certain the Federal Reserve will have to act, with traders pricing in a 98% probability of a rate cut this month. This expectation of looser monetary policy is a significant headwind for the US dollar. A follow-up rate reduction is also fully priced in for December, suggesting a sustained period of dollar weakness.
Given the risk of a sudden reversal from new US tariffs on China, holding a straightforward long NZD/USD position is risky. We should consider using options to manage this uncertainty. For instance, buying call options on the NZD/USD allows us to profit from further upside while limiting our potential loss if trade news turns negative.
Traders who anticipate a sharp move but are unsure of the direction could look at volatility strategies. A long straddle, involving buying both a call and a put option at the same strike price, would profit from a significant breakout in NZD/USD. This move could be triggered either by the shutdown ending or by an escalation in the trade dispute.
