The NZD/USD pair has recovered some of its losses, now around 0.5775, but it’s still down 0.4%. This decline followed the Reserve Bank of New Zealand’s surprise cut of its Official Cash Rate by 50 basis points to 2.5%. According to the RBNZ’s monetary statement, further cuts may be needed due to inflation and economic concerns. This larger-than-expected rate reduction has weakened the New Zealand Dollar.

US Dollar Pressure

Meanwhile, a strong US Dollar is putting pressure on the Kiwi pair. The US Dollar Index is nearing highs of 99.00, boosted by heightened safe-haven demand amid political events in Japan and France. The ongoing US government shutdown could limit the US Dollar’s gains. President Trump has warned of spending cuts as the shutdown enters its second week, and details about federal layoffs are expected soon. The RBNZ meets seven times a year to decide on interest rates while evaluating economic conditions. Generally, higher rates support the NZD by attracting more investment. The current RBNZ rate cut from 3% to 2.5% is below the expected 2.75%. The unexpected 50 basis point cut by the Reserve Bank of New Zealand today has significantly weakened the outlook for the Kiwi Dollar. This bold move signals that more cuts may be on the way, especially with New Zealand’s latest quarterly CPI at 1.8%, below the central bank’s target. We saw a similar approach from the RBNZ in August 2019, which resulted in several months of Kiwi underperformance.

Market Strategy Considerations

Given this cautious outlook, traders might consider buying NZD/USD put options to prepare for further declines. The pair is struggling below the 0.5800 mark, which we haven’t seen consistently since the global uncertainty of 2020. This implies little technical support to stop a potential drop towards the 0.56 level in the coming weeks. Although the US Dollar is currently strong due to its safe-haven status amid political turmoil in France and Japan, this strength is not guaranteed. The ongoing US government shutdown, now in its second week, represents a significant challenge. Historical data shows that past shutdowns, like the one from 2018-2019, can reduce quarterly GDP growth by about 0.1% for each week of closure. This uncertainty around the US Dollar makes long volatility strategies appealing. The market’s anxiety is reflected in the CBOE Volatility Index (VIX), which has risen over 15% in the past week and is now trading above 22. Using options straddles on major pairs like EUR/USD might be an effective way to benefit from a sharp move once the shutdown’s economic impact is better understood. Tonight’s release of the Federal Reserve meeting minutes will be crucial. The market is eager to see if there are any discussions about how the shutdown might affect future rate cuts, especially since the Fed lowered its policy rate to 3.75% last month. A dovish tone in the minutes could quickly reverse the recent gains of the US Dollar and complicate the bearish NZD/USD trade. Create your live VT Markets account and start trading now.

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