NZD/USD gained 0.59% on Thursday, trading near 0.5705, as the US Dollar weakened after a softer US labour-market release. Nonfarm Payrolls rose 57K in June versus a 110K consensus, while May payrolls were revised to 129K from 172K and April to 148K from 179K, leaving a combined downward revision of 74K jobs. Even so, the Unemployment Rate dipped to 4.2% from 4.3%, labour force participation eased to 61.5% from 61.8%, and Average Hourly Earnings increased 3.5% year on year, in line with expectations.
Attention in markets has centred on the weaker headline employment growth, which has pushed expectations towards a less hawkish Federal Reserve stance and added pressure to the US Dollar. In New Zealand, BNY reported the Reserve Bank of New Zealand will keep a six-member Monetary Policy Committee until the November election after a 3-3 split vote in May. It also said May building consents fell on the month but were up 19% on the year ahead of the 8 July policy decision.
Fed Policy Shift and US Economic Slowdown Support NZD/USD Upside
With US Nonfarm Payrolls coming in at just 57k, we see a clear signal that the Federal Reserve’s rate hike cycle is over. The sharp downward revisions for April and May confirm a rapidly cooling labor market. This fundamentally weakens the case for a strong US Dollar in the near term.
We should consider buying call options on the NZD/USD to capitalize on this expected weakness. Targeting strikes around 0.5800 with expirations in late July or August offers a good way to profit from further upside. This strategy allows us to define our risk to the premium paid while maintaining exposure to a potential rally.
This view is strengthened by other recent data showing a slowdown in the US economy. The ISM Manufacturing PMI for June, for example, registered a contractionary reading of 47.5, its fourth consecutive month below the 50-point threshold. We also note that first-quarter GDP was revised down, supporting the idea that the Fed will have to adopt a more dovish stance.
Policy Divergence and Risk Management for NZD/USD
On the other side of the pair, the Reserve Bank of New Zealand appears set to hold rates steady at its July 8 meeting. Resilient domestic data, like the 19% annual increase in building consents, gives them little reason to ease policy yet. This policy divergence between a dovish Fed and a stable RBNZ is a powerful catalyst for NZD/USD strength.
Historically, periods of policy divergence have strongly favored the Kiwi dollar, particularly when it offers a higher yield. With New Zealand’s Official Cash Rate at 5.50% and the Fed Funds Rate at 5.25%, the positive carry makes holding NZD attractive. We saw a similar dynamic play out between 2011 and 2014, when the rate differential drove a sustained rally in the pair.
To manage risk, we should remain mindful of the upcoming RBNZ meeting, as any surprisingly dovish language could cause a pullback. Traders could use put options with a 0.5650 strike as a hedge against existing long positions. This helps protect profits in case sentiment shifts unexpectedly following the meeting.
