The New Zealand Dollar (NZD) dipped after reaching highs around 0.5760 but stayed positive by bouncing back from 0.5700. Easing tensions between the US and China are helping the NZD, while talks of potential rate cuts from the Federal Reserve (Fed) are affecting the US Dollar. Markets reacted to President Trump’s optimism about reaching a fair trade deal with China, especially with their upcoming meeting in South Korea. A 25 basis points rate cut from the Fed next week seems likely, with another one expected in December, raising concerns about excessive monetary easing.

Impact Of US Government Shutdown

The US government shutdown has lasted four weeks, with the Senate unable to restore funding after several attempts. Trump’s refusal to engage with Democratic lawmakers is extending what could turn out to be a historic shutdown. This situation has weakened the US Dollar, while the NZD benefits from strong economic data from China and rising inflation in New Zealand. Still, the Reserve Bank of New Zealand (RBNZ) might cut rates by the end of the year to support economic growth. New US-China trade tensions have arisen as Trump returns to office, announcing plans for 60% tariffs, which could reignite trade conflicts and affect the global economy, particularly consumer prices. As we see the NZD/USD pair pull back from recent highs, the outlook for the coming weeks looks challenging. The market is stuck between two strong forces: a weakening US Dollar due to Fed policies and a NZD that’s affected by its connections to China. This tension suggests traders should be ready for sudden price changes.

Focus On The Federal Reserve And Global Implications

Attention is now on the Federal Reserve, with markets predicting an 88% chance of a 25 basis point rate cut at the November 5th meeting, according to CME Group data. This follows last week’s report that showed US Q3 GDP growth slowed to 1.4%, indicating the trade war’s impact is being felt. A softer US economy and expected rate cuts will likely limit the US Dollar’s strength. On the flip side, the 60% tariffs on Chinese goods imposed in January 2025 have heavily impacted Asian markets. Recent data shows Chinese exports to the US have fallen by 48% this year, directly harming the economic outlook for countries like New Zealand that rely on trade with China. This trend is evident in the Global Dairy Trade index, a key indicator for the NZD, which has dropped 18% over the past six months. For traders in derivatives, this uncertainty suggests that volatility is key. Implied volatility in NZD/USD options has reached levels not seen since early 2024, making strategies that benefit from significant price swings, like long straddles or strangles, especially relevant. Hedging existing positions with put options may also be wise against future shocks from trade news. Looking back to the 2018-2019 trade dispute might offer insights on what to expect. During that time, even after a dovish shift from the Fed in 2019, the NZD/USD pair experienced a general downtrend, dropping from above 0.70 to nearly 0.62. This historical trend suggests that the negative effects of US-China conflicts may outweigh the advantages of a weaker US Dollar. Create your live VT Markets account and start trading now.

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