Federal Reserve’s Rate Cut

In December, the US Federal Reserve cut interest rates by 25 basis points, lowering the range to 3.50%-3.75%. While opinions vary, most officials support more rate cuts as inflation goes down. The New Zealand dollar (NZD) is influenced by several factors, including the health of New Zealand’s economy, central bank policies, and the performance of China, its largest trading partner. Dairy prices also impact export income, and the Reserve Bank of New Zealand (RBNZ) aims to maintain inflation between 1% and 3% through its interest rate decisions. Economic data releases can affect the NZD by showing how strong the economy is, potentially leading to changes in interest rates. The NZD usually performs better during stable market conditions, as overall market sentiment also influences its value. Currently, the Kiwi struggles around 0.5785, despite China’s manufacturing PMI for December unexpectedly rising to 50.1. This disconnect occurs during the New Year holiday week, known for low trading volumes. With such little liquidity, we should be careful not to over-interpret small market movements.

US Federal Reserve’s Minutes

The recent minutes from the US Federal Reserve reveal differing opinions on future actions, even after reducing rates to 3.75% in December 2025. With core US inflation remaining steady at about 2.8% over the past quarter, the market sees only a 15% chance of another rate cut in January 2026. This uncertainty helps keep the US Dollar strong. While the improvements in Chinese data bode well for New Zealand’s exports in the long run, they aren’t boosting the current market. Our more immediate concern is the recent drop in dairy prices, which have fallen for three straight Global Dairy Trade auctions. The latest auction on December 16th showed another 1.5% decrease, weakening a vital support for the Kiwi. Given this mixed situation, entering January 2026 with large, unhedged positions carries risks. Using options, such as buying puts, could help manage risk, especially to protect against falling below key support levels like 0.5750. This strategy allows for potential gains while limiting losses if there’s a sudden market shift. We expect liquidity to return in the second week of January, which should help reveal the market’s true direction. Remember how thin markets in early January 2019 led to a flash crash; it’s wise to stay hedged until a clear trend emerges. Look out for upcoming US employment data and New Zealand’s inflation report, as they will likely be the first major market movers of the new year. Create your live VT Markets account and start trading now.

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