The NZD/USD is steady at about 0.6050 after some recent gains. Paul Conway, the RBNZ Chief Economist, remains careful about monetary policy. Conway has expressed worries about global tariffs and economic uncertainty. He believes these issues will lead to lower inflation pressures, as well as less business investment and household spending in New Zealand. He mentioned that the bank is ready to lower the Official Cash Rate (OCR) if medium-term inflation pressures keep falling.

Current Inflation In New Zealand

Inflation in New Zealand is currently within the target range, with the policy rate approaching the neutral range of 2% to 4%. The swaps market indicates an 86% chance of a 25-basis point rate cut by the RBNZ at the upcoming meeting on August 20. Market predictions suggest 40 basis points of easing over the next 12 months, which could bring the policy rate down to between 2.75% and 3.00%. New Zealand’s rate outlook suggests possible changes that may support the NZD. Given Mr. Conway’s cautious stance and the high likelihood of a rate cut, we expect the New Zealand dollar to weaken. The market has priced in an 86% chance of a rate cut in August, which creates a clear direction. We believe traders should prepare for this anticipated monetary easing. To support this view, New Zealand’s economy has recently faced a double-dip recession, with GDP shrinking in both the third and fourth quarters of 2023. Although Q1 2024 saw a slight increase of 0.2%, this weak growth gives the central bank strong reasons to boost the economy. This data indicates that rate cuts are necessary to help improve local economic activity.

Policy Divergence Comparison

The policy differences between New Zealand and the United States are clear. The Federal Reserve is keeping interest rates high to fight inflation. A lower rate in New Zealand could reduce the attractiveness of the Kiwi dollar for international investors, putting downward pressure on the NZD/USD pair. We expect this growing interest rate gap to drive the currency’s value in the coming weeks. As a result, we plan to buy NZD/USD put options that expire in late August or September. This strategy lets us profit if the currency declines after the central bank’s meeting. It offers a risk-defined way to respond to the widely expected rate cut. However, traders should remember that a standard 25-basis point cut is mostly expected and may not lead to a dramatic fall by itself. The most crucial factor will be the central bank’s future guidance; a stronger signal for further cuts could trigger a bigger drop. If the bank surprises the market by holding rates steady, it could lead to a sharp, although unlikely, increase in the currency value. Historically, the NZD has weakened during periods of rate cuts, similar to 2019 when the currency pair fell significantly after the first rate cut. We expect a similar, though possibly more gradual, decline once the first cut is confirmed. A weaker currency trend after the start of a rate-cutting cycle is well established. Given the uncertainties surrounding the bank’s statement, positioning for higher volatility could be wise. Buying options like straddles, which benefit from significant price moves in either direction, might be an effective way to trade this event. This approach safeguards against a muted market reaction if the cut is already fully factored in. Create your live VT Markets account and start trading now.

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