Insights 
VT 
The NZD/USD pair recovers half of its losses, reaching near 0.5775, but remains down 0.4%. The fall followed the Reserve Bank of New Zealand’s unexpected reduction of its Official Cash Rate, by 50 basis points, to 2.5%.
RBNZ’s monetary statement mentions potential further easing due to inflation and economic risks. This larger-than-expected cut negatively impacted the New Zealand Dollar.
US Dollar Pressure
In contrast, a robust US Dollar continues to pressure the Kiwi pair. The US Dollar Index revisits highs near 99.00, driven by increased safe-haven demand amid political events in Japan and France.
The ongoing US government shutdown may cap the US Dollar’s gains. President Trump warned of spending cuts as the shutdown enters a second week, with details of federal lay-offs expected soon.
The RBNZ makes interest rate decisions seven times annually, assessing economic conditions. Higher rates usually boost the NZD due to increased capital inflows. RBNZ’s rates announcement, previously at 3%, now stands at 2.5%, below the 2.75% consensus.
The Reserve Bank of New Zealand’s unexpected 50 basis point rate cut today has significantly weakened the outlook for the Kiwi dollar. This aggressive move to 2.5% signals that further easing is likely, especially with New Zealand’s latest quarterly CPI at 1.8%, below the central bank’s target. We saw a similar playbook from the RBNZ back in August 2019, which was followed by months of Kiwi underperformance.
Market Strategy Considerations
Given this dovish stance, traders should consider buying NZD/USD put options to position for further declines. The pair is struggling below the 0.5800 level, a price point we haven’t consistently seen since the global uncertainty of 2020. This suggests there is little technical support to prevent a slide towards the 0.56 handle in the coming weeks.
While the US Dollar is currently strong due to its safe-haven appeal amid political uncertainty in France and Japan, its strength is fragile. The ongoing US government shutdown, now in its second week, poses a significant headwind. Historical data from past shutdowns, like the one in 2018-2019, suggests that each week of closure can trim approximately 0.1% from quarterly GDP growth.
This uncertainty surrounding the US Dollar makes long volatility strategies attractive. The market’s anxiety is reflected in the CBOE Volatility Index (VIX), which has climbed over 15% in the past week to trade above 22. Using options straddles on major pairs like EUR/USD could be an effective way to capture a sharp move once the shutdown’s economic impact becomes clearer.
Tonight’s release of the Federal Reserve meeting minutes will be critical. The market is looking for any discussion on how the shutdown could influence future rate cuts, especially after the Fed already lowered its policy rate to 3.75% last month. Any dovish tilt in the minutes could quickly unwind the US Dollar’s recent gains and complicate the bearish NZD/USD trade.
