NZD/USD traded near 0.5980 on Wednesday. It was up 0.27% on the day, extending its rebound for a second session. The move followed US Dollar weakness after President Donald Trump’s State of the Union address to Congress.
Trump said the US economy had seen a “turnaround for the ages”, pointing to easing inflation and solid growth. He said tariffs had helped. He also warned of higher duties on countries that “play games” with recent trade agreements, after the Supreme Court blocked several global tariff measures.
Trade Uncertainty Weighs On Dollar
These remarks added to trade uncertainty and pressured the US Dollar. Still, the downside in the Dollar was limited. Markets expect the Federal Reserve to keep interest rates unchanged for an extended period, which supports US yields.
In New Zealand, the Reserve Bank of New Zealand kept the Official Cash Rate at 2.25%. It said policy remains accommodative as inflation moves toward the midpoint of its target range. Governor Anna Breman said improving conditions should lift growth this year without a sharp rise in inflation pressures.
Money markets do not expect a rate increase until late in the year. This could limit further New Zealand Dollar gains against the US Dollar.
Looking back to early 2025, NZD/USD got a temporary boost from US political noise. The State of the Union address created enough trade uncertainty to weaken the Dollar briefly. This opened a short window of opportunity near the 0.5980 level.
Positioning For Headline Driven Volatility
We should keep looking for this pattern: political headlines that trigger short-term volatility. We saw similar jumps during the 2018–2019 trade disputes, when the Cboe Volatility Index (VIX) often rose above 20 on tariff news. Buying options to target these temporary moves remains a viable strategy.
However, the expected monetary-policy divergence that was meant to cap the Kiwi’s strength never fully appeared. Last year, we focused on a hawkish Fed, but the Reserve Bank of New Zealand has also had to stay aggressive. As of this month, the RBNZ’s official cash rate is 5.50%, still above the Fed’s current 5.33%.
The main driver now is the inflation gap between the two countries. New Zealand inflation remains stubbornly high, last reported at 4.7%. The latest US CPI is closer to 3.1%. This suggests the RBNZ has less room to cut rates than the Fed, which provides underlying support for the NZD.
Given this, we should consider buying NZD/USD call options with expirations over the next three to six weeks. This can help us capture the Kiwi’s fundamental support from higher rates and higher inflation. It also allows us to treat politically driven dips as cheaper entry points for bullish positions.
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