The NZD/USD exchange rate is currently above 0.5700 but struggling to stay under 0.5750. Worries about a US-China trade war are affecting the New Zealand Dollar because it heavily depends on China’s economy. A lengthy US government shutdown and speculation about Federal Reserve rate cuts are giving the currency pair some support. The Kiwi Dollar has bounced back from a six-month low of 0.5685, but its recovery has stalled. The exchange rate is mostly stuck in the 0.5700s, continuing its overall downward trend. Although the US Dollar is weak, negative market sentiment tied to US-China tensions is keeping the Kiwi Dollar from gaining strength.

US-China Trade Tensions

US-China trade tensions have escalated since President Trump initiated a trade war. The situation worsened when the US Treasury Secretary criticized a Chinese trade negotiator. The US government shutdown is now in its third week, and ongoing speculation about Federal Reserve rate cuts is temporarily halting the NZD’s decline. An unexpected 50 basis point rate cut by New Zealand’s central bank and disappointing business data are also putting pressure on the currency. Trade wars often arise from protectionist measures, like tariffs, which increase costs. The US-China conflict started in 2018, with both countries imposing tariffs. Although the situation eased momentarily, it intensified again after Trump’s re-election, causing renewed economic turmoil. The risk-averse market keeps the NZD/USD pair suppressed, creating tension between a weak Kiwi and a cautious US dollar. Rising US-China trade friction significantly impacts the Kiwi, as it serves as a stand-in for Chinese economic health. Recently, China’s National Bureau of Statistics reported a 45% year-over-year drop in exports to the US for the third quarter.

New Zealand Trade Impact

This pressure is evident in New Zealand’s trade data, as it is a key supplier of raw materials to China. The recent Global Dairy Trade auction showed a 5.2% drop in whole milk powder prices, a vital export. This decline indicates weakening demand and supports the Reserve Bank of New Zealand’s (RBNZ) cautious approach this year, leaving little room for strength in the currency. Meanwhile, the US dollar is also weakened by domestic issues, providing some support for the NZD/USD pair for now. The ongoing US government shutdown, which is now in its fifth week, is creating significant economic uncertainty. Markets are currently pricing in a 95% chance of a 25-basis-point rate cut at the Fed’s November meeting to address this situation. Under these circumstances, we should consider preparing for a potential breakdown below the current trading range. Buying put options with strike prices beneath the important 0.5700 support level offers a defined-risk method to take advantage of possible downsides. This strategy would yield profits if the exchange rate breaks below its recent six-month low of 0.5685. We witnessed a similar trend during the trade tensions of 2018-2019, when the Kiwi depreciated over 10% against the dollar in a few months. Historical patterns suggest that trade disputes can have ongoing impacts on exchange rates. Given that the current tariffs are even more aggressive, there’s a chance for a more significant movement this time. Implied volatility for NZD/USD options has increased, displaying heightened market anxiety. This makes selling volatility risky but reinforces the idea of buying options in anticipation of a sharp move. A break from the current narrow trading range appears more likely than steady sideways movement. Create your live VT Markets account and start trading now.

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