The New Zealand Dollar (NZD) weakened at the start of the week as risk appetite declined. Although strong trade data from China suggested increased demand for cyclical currencies, it wasn’t enough to lift the NZD. The Reserve Bank of New Zealand (RBNZ) provided some support against this drop. On Monday, the NZD/USD pair decreased by 0.10%, trading around 0.5770. Even with China’s trade surplus hitting $111.68 billion—a 5.9% year-over-year increase in exports—the NZD struggled to hold its ground due to market caution. The US Dollar showed uncertainty as the Federal Reserve prepared for its meeting. There was a 90% chance projected for a 25-basis-point rate cut, amid mixed signals from the economy. This uncertainty limited movement in risk-linked currency pairs. The RBNZ has concluded its easing cycle after a rate cut in November. RBNZ Governor Anna Breman highlighted the bank’s focus on inflation, suggesting it may maintain a steadier monetary policy compared to the Fed. This outlook helped limit the downside for the NZD/USD pair. The future of the NZD/USD depends on comments from Fed Chair Jerome Powell and the latest economic forecasts from the Fed. Today, the New Zealand Dollar was strongest against the Swiss Franc but weakest against the US Dollar. The NZD’s dip to the 0.5770 level appears to be a short-term reaction to cautious market sentiment. The main factor is the growing policy gap between a solid RBNZ and a more dovish Federal Reserve, which may support the currency pair in the coming weeks. The RBNZ’s position is supported by persistent domestic inflation, recorded at 3.5% year-over-year in the third quarter of 2025. This rate is significantly above their target, prompting them to maintain steady rates after their November reduction. In comparison, recent US core PCE data around 2.5% gives the Fed a clear path to start easing soon. Due to uncertainties regarding Jerome Powell’s comments on Wednesday, using options might be a smart strategy. Buying NZD/USD call options with expirations in late January 2026 could capitalize on potential gains if the Fed implies a quicker pace of cuts than expected. This approach helps define our risk while allowing participation in a possible rally spurred by widening interest rate differences. We should remain mindful of the NZD’s sensitivity to global risks, similar to what we observed in 2022 during the global tightening cycle. While recent Chinese export data is strong, ongoing weaknesses in its property sector could still negatively impact market sentiment. Therefore, any long positions should be handled carefully, considering broader market stability.

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