NZD/USD has climbed above 0.5750 as the US Dollar weakens, driven by expectations of Federal Reserve rate cuts in 2026. The pair was trading near 0.5760 during Asian hours on Friday, breaking a five-day losing streak.

Federal Reserve Outlook

Markets expect US President Donald Trump to nominate a new Fed chair in May, likely favoring lower interest rates. The Federal Reserve recently cut its target range to 3.50%–3.75%, following a 75 basis point cut in 2025 due to a slowing labor market. The CME FedWatch Tool shows an 85.1% chance that rates will stay the same at the January meeting. The likelihood of a 25-basis point cut has slightly decreased from 15.5% to 14.9% this week. The Reserve Bank of New Zealand (RBNZ) supports the New Zealand Dollar, anticipating a rate hike due to an economic rebound in the third quarter. RBNZ Governor Anna Breman has stated that rates are expected to remain stable. The value of the New Zealand Dollar depends on its economy and central bank policies. Key factors include economic ties with China, dairy prices, and overall risk sentiment affecting commodity currencies like the Kiwi.

Market Strategy and Volatility

With the US Dollar weakening, we see an opportunity in the NZD/USD pair, currently rising toward 0.5760. This trend is driven by the differing policies of a dovish Federal Reserve and a possibly hawkish Reserve Bank of New Zealand. In the coming weeks, our strategy should focus on capitalizing on this gap. The Fed cut rates by 75 basis points in 2025 and markets expect further cuts this year. This morning’s Non-Farm Payroll report for December showed a modest gain of 150,000 jobs, highlighting the cooling labor market. This makes it difficult for the Fed to maintain rates in the current 3.50%–3.75% range for long. We also need to prepare for increased volatility leading up to May, when a new Fed Chair is expected to be named. Historically, changes in Fed leadership create uncertainty, potentially leading to significant shifts in currency markets. Given this, owning options might be a safer strategy than holding outright positions. On the other hand, the New Zealand Dollar is gaining support. New Zealand’s Q4 2025 inflation data shows persistent price pressures at 4.6%, putting pressure on the RBNZ to consider another rate hike. This perspective was reinforced by a recent Global Dairy Trade auction, where prices unexpectedly jumped by 3.2%, improving the nation’s terms of trade. Broader risk sentiment also supports the Kiwi. Recent manufacturing PMI data from China, New Zealand’s largest trading partner, exceeded expectations, suggesting a stronger regional growth outlook. This positive environment favors commodity-linked currencies like the NZD over safe havens like the USD. Given these circumstances, we should consider positioning for further NZD/USD gains. Buying call options on the pair could allow us to profit from a potential rally toward the 0.5800 mark and higher. This approach lets us capture upside while defining our maximum risk ahead of potentially volatile central bank announcements. Create your live VT Markets account and start trading now.

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