The New Zealand Dollar (NZD) has fallen for the second session in a row, but it might still rise over the week due to better risk sentiment linked to potential US trade deals. The Kiwi’s gains are limited by a stronger US Dollar, buoyed by solid US economic data and expectations that the Federal Reserve will keep interest rates steady. NZD/USD had a strong start to the week, hitting a high of 0.6059, supported by a weaker US Dollar. However, as the Greenback recovered, NZD/USD dropped to around 0.6011 by Friday, indicating a cautious market as the weekend approached.

Improved Trade Sentiment

Better trade sentiment is enhancing global risk appetite. This optimism comes as the US finalizes trade deals with Japan, Indonesia, and the Philippines, and is close to an agreement with the EU, as well as making progress with China. There is a 75% chance that the Reserve Bank of New Zealand will lower its rate by 25 basis points, although it may soon end its rate-cutting cycle. The Fed is likely to keep rates steady, with potential cuts expected by late 2025 due to strong US data and ongoing inflation. In the coming weeks, the New Zealand Dollar may face challenges mainly due to differing central bank policies. The Greenback’s strength is expected to limit any potential rallies in the Kiwi. Therefore, we should be careful about the currency’s upward potential. The expectation for the US central bank to maintain rates is supported by recent data, including April’s Consumer Price Index at 3.4%. While this represents a slight decline, it isn’t enough to trigger immediate cuts, keeping the US Dollar appealing. This monetary policy trend is likely to maintain downward pressure on the NZD/USD pair.

Rate Cut Probability

On the other hand, market pricing indicates a strong likelihood that New Zealand’s central bank will start cutting rates from the current 5.5%. With New Zealand’s recent quarterly inflation still high at 4.0%, a rate cut would indicate some policy divergence, which historically weakens the Kiwi against the Greenback. This makes any rallies toward the recent high of 0.6059 look fragile. Given this situation, buying NZD/USD put options appears to be a smart strategy. This method allows traders to benefit from a potential decline while keeping the maximum risk limited to the premium paid. It’s a strategic way to position for a stronger US Dollar and a weaker Kiwi without incurring unlimited risk. The improved trade sentiment may not provide the anticipated support. Recent developments indicate renewed trade tensions, particularly regarding US tariffs on Chinese goods, which usually dampen global risk appetite. This environment typically works against commodity-sensitive currencies, adding extra risk to holding long positions in the Kiwi. Create your live VT Markets account and start trading now.

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