Insights 
VT 
The NZD/USD has rebounded to near 0.5750 amid the ongoing US government shutdown, which has been dragging on for ten days due to budget approval stalemates in Congress. This situation undermines the US Dollar, providing support for the New Zealand Dollar, especially as the US government’s data collection agencies are limited, affecting economic assessments.
The Reserve Bank of New Zealand (RBNZ) recently cut the Official Cash Rate by 50 basis points to 2.5%, surprising markets that anticipated a 25 basis point reduction. Future rate cuts remain on the table, as shown by current pricing for further decreases at the RBNZ’s November meeting.
Impact On Currency Demand
These decisions affect the demand for the New Zealand Dollar. The US Dollar has shown some vulnerability in response to the government shutdown, impacting foreign exchange and related markets.
The New Zealand Dollar’s value is also linked to international factors like Chinese economic performance and dairy prices. Greater economic confidence can lead to interest rate adjustments, influencing the New Zealand Dollar’s strength alongside global market sentiments and risk perceptions. The ongoing market dynamics illustrate the complex factors affecting the NZD/USD exchange rate’s trajectory.
Given the current situation, we see the US government shutdown as a short-term distraction creating temporary weakness in the US Dollar. While this has allowed the NZD/USD to recover towards 0.5750, the underlying fundamentals are what matter for the coming weeks. We must look past the political noise in Washington.
The history of these events shows they eventually end; we saw the 2018-2019 shutdown last 35 days before a resolution was found. The current 10-day shutdown is suspending key data releases, but before it began on October 1st, we saw US core inflation holding firm around 3.1% and a strong labor market. This suggests that once the government reopens, the focus will return to a relatively robust US economy.
Opportunities For Traders
On the other hand, the Reserve Bank of New Zealand’s surprise 50 basis point rate cut to 2.5% is a significant bearish signal for the Kiwi. The market is already pricing in another cut for November, meaning the path of least resistance for the NZD is down. This starkly contrasts with the Federal Reserve’s likely position once it can see economic data again.
This divergence presents a clear opportunity for derivative traders. The current strength in the NZD/USD, driven by the shutdown, could be an ideal entry point for bearish positions. We should consider buying put options with expirations in late November or December to capitalize on a potential decline once the shutdown concludes.
Furthermore, we are also watching external factors that weigh on the New Zealand Dollar. China’s latest manufacturing PMI figures have struggled to show decisive expansion, which is a concern for New Zealand’s largest trading partner. This, combined with falling global dairy prices over the last quarter, adds further pressure on the Kiwi.
