Middle East Conflict Drives Risk Aversion
Over the weekend, the US and Israel carried out airstrikes on Tehran and reported killing Supreme Leader Ayatollah Ali Khamenei. Iran responded with missiles and drones aimed at Israeli territory and several US military bases in the Middle East. Markets are also tracking US data, with February Nonfarm Payrolls due on Friday. On Monday, traders are watching the US ISM Manufacturing PMI for February at 15:00 GMT, expected at 52.3 versus 52.6 in January. In New Zealand, expectations for tighter Reserve Bank of New Zealand policy have eased. Governor Anna Breman said in February that the economy could keep growing without creating inflation pressure. A correction dated March 2 at 12:19 GMT clarified that the war referenced is between the US and Iran, not the US and Israel.From Geopolitical Shock To Fundamentals
Looking back at the events of early 2025, we saw the market driven by a flight to safety due to the US-Iran conflict, which pushed the US Dollar Index (DXY) towards 98.40. Today, the situation is different; the DXY is trading much higher near 104.50, but this strength is rooted in economic fundamentals rather than geopolitical fear. The focus now is on the Federal Reserve’s policy in response to persistent, though moderating, inflation. The NZD/USD, which fell to around 0.5950 during the conflict last year, is currently holding stronger near 0.6180. This resilience comes despite the strong dollar, partly because the Reserve Bank of New Zealand has signaled rate cuts are further off than previously expected due to stubborn domestic inflation. This contrasts with their dovish tone in February 2025, when they were less concerned about price pressures. With the key US Nonfarm Payrolls report due this Friday, implied volatility is increasing. We just saw the US ISM Manufacturing PMI for February come in at 50.1, barely in expansion territory but beating expectations of a contraction. Traders should consider using options to manage risk around Friday’s jobs number, which is forecast to show a solid 190,000 jobs were added last month. A payrolls number significantly above forecast could propel the DXY higher and push NZD/USD down, making long-dated puts on the pair an attractive hedge. Historically, strong US jobs data during periods of global uncertainty, like the post-pandemic recovery in 2022, often led to sharp dollar rallies. Conversely, a weak report could challenge the dollar’s strength, making short-term call options on NZD/USD a viable speculative play. Create your live VT Markets account and start trading now.
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