The New Zealand Dollar (NZD) decreases for the second straight session but may achieve a weekly rise due to improved risk sentiment related to potential US trade deals. The Kiwi’s increase is restricted by the stronger Greenback, influenced by robust US economic data and expectations that the Federal Reserve will maintain current interest rates.
NZD/USD began the week strongly, reaching a high of 0.6059, aided by a weaker US Dollar. However, the Greenback’s recovery resulted in NZD/USD adjusting to around 0.6011 on Friday, reflecting a cautious market tone heading into the weekend.
Improved Trade Sentiment
Improved trade sentiment boosts global risk appetite. This is supported by the US finalising trade agreements with Japan, Indonesia, and the Philippines, with a possibility of a deal with the EU and nearing an agreement with China.
There is a 75% chance the Reserve Bank of New Zealand will cut its rate by 25 basis points, although it might end its easing cycle soon. The Fed is expected to keep rates unchanged, with future cuts likely by the end of 2025, based on strong US data and sustained inflationary pressure.
We see the New Zealand Dollar facing significant headwinds in the coming weeks, primarily driven by diverging central bank policies. The fundamental strength of the Greenback is likely to cap any rallies. We should therefore be cautious about the currency’s upside potential.
The expectation for the American central bank to hold rates is supported by recent data, as April’s Consumer Price Index came in at 3.4%. While this was a slight cooling, it is not enough to prompt imminent cuts, which will keep the US Dollar attractive. This monetary policy stance should maintain downward pressure on the NZD/USD pair.
Rate Cut Probability
Conversely, market pricing indicates a high probability that New Zealand’s monetary authority will begin cutting rates from the current 5.5%. With New Zealand’s latest quarterly inflation still high at 4.0%, a rate cut would signal a clear policy divergence that historically weakens the Kiwi against the Greenback. This makes rallies toward the recent 0.6059 high look fragile.
Given this outlook, we believe buying NZD/USD put options is a sensible strategy. This approach allows traders to profit from a potential decline while strictly defining the maximum risk to the premium paid. It is an effective way to position for a stronger US dollar and a weaker Kiwi without taking on unlimited risk.
The improved trade sentiment mentioned may not provide the expected support. Recent developments show renewed trade friction, specifically regarding US tariffs on Chinese goods, which tends to dampen global risk appetite. This environment typically works against commodity-sensitive currencies, adding another layer of risk to holding long Kiwi positions.
