Insights 
VT 
The NZD/USD pair is trading positively around 0.5730 in early Asian sessions. This is due to US government shutdowns and anticipated US interest rate cuts weighing down the US Dollar.
The US federal shutdown will extend into next week as the Senate failed to advance a funding bill for the tenth time. Prolonged shutdown fears may benefit NZD/USD, creating upward momentum for the pair.
Fed Officials and Interest Rates
Dovish remarks from Fed officials are impacting the USD. Fed Governor Christopher Waller supports another interest rate reduction, aligning with market expectations of a 25 basis points cut in October.
However, escalating US-China trade tensions might limit gains for the NZD. Both countries are set to implement additional port fees, raising trade costs and potentially disrupting freight flows.
The New Zealand Dollar is influenced by various factors including the Reserve Bank of New Zealand’s policies. Economic data and broader market sentiment also play roles in its valuation.
NZD tends to strengthen when risk sentiment is positive but weakens during market uncertainty. Its performance is closely tied to both internal economic indicators and international trade dynamics.
Impacts on the US Dollar
We see the US Dollar weakening, and this trend looks set to continue in the coming weeks. The Federal Reserve is signaling rate cuts and the US government shutdown is dragging on, creating clear downward pressure on the currency. This environment makes shorting the dollar against currencies with their own strengths, like the Kiwi, an attractive play.
The Fed’s dovish stance is becoming undeniable, with key officials openly calling for rate reductions this month. Markets have taken note, with the CME FedWatch Tool now showing a 98% probability of a 25 basis point cut at the next meeting. This is a powerful signal that the path of least resistance for the dollar is down.
Adding to the dollar’s woes is the government shutdown, which is now in its third week. The political impasse is hurting economic confidence, and we’ve seen initial jobless claims tick up slightly to 215,000 last week, a sign of uncertainty starting to impact the labor market. Based on the 35-day shutdown we saw back in 2018-2019, prolonged closures can stall economic momentum and further weigh on the currency.
However, we must be cautious about the New Zealand Dollar’s own headwinds, specifically the escalating trade friction between the US and China. Since China accounts for nearly 30% of New Zealand’s total exports according to the latest data from Stats NZ, any disruption from new port fees could cap the Kiwi’s upside potential. This makes a straight long position in NZD/USD risky.
For derivative traders, this situation suggests using options to manage the conflicting signals. Buying NZD/USD call options for late November or December expiry would allow us to profit from further US Dollar weakness. The key benefit is that our maximum loss is limited to the premium paid, protecting us if the US-China trade dispute suddenly hits the Kiwi harder.
Given that implied volatility has risen due to the shutdown, these options might be expensive. A bull call spread could be a more cost-effective alternative, where we buy a call and sell a higher-strike call simultaneously. This strategy would lower our initial cost but also cap our potential profit, a reasonable trade-off in this uncertain environment.
Finally, we are keeping an eye on dairy prices, a key driver for New Zealand’s economy. The most recent Global Dairy Trade auction showed a modest 1.2% price increase. While not a dramatic surge, this provides a stable, underlying support for the Kiwi that reinforces our cautiously bullish outlook on the pair.
