NZD/USD extended its advance for a second session, trading near 0.5830 in early European hours on Tuesday, as the New Zealand Dollar drew support from stronger-than-expected Chinese trade figures. In CNY terms, China’s May trade balance widened to CNY723.98 billion from CNY585.69 billion, while exports rose 13.8% year-on-year versus 9.8% in April and imports increased 21.5% versus 20.6% previously. In USD terms, the trade surplus expanded to $105.43 billion, exceeding the $92.1 billion forecast and $84.82 billion prior reading; exports climbed 19.4% against a 15.0% consensus and imports rose 27.4% versus 25.0% expected.
The pair also benefitted as the US Dollar softened after Iran and Israel agreed to halt mutual attacks, following an appeal from US President Donald Trump, though subsequent statements from Israeli and Iranian officials kept ceasefire durability in question. Separately, strong US jobs data has reinforced inflation concerns and lifted expectations for tighter Federal Reserve policy. CME FedWatch shows the implied probability of a December quarter-point rate rise at 43%, up from 14% a month ago, with attention turning to Wednesday’s US CPI release and Thursday’s PPI data.
Chinese Trade and Geopolitical Developments Support NZD
We are seeing the New Zealand dollar find support from the latest Chinese trade figures. China’s exports grew 7.6% year-over-year in May, which signals healthy demand for New Zealand’s key commodities. This positive data from a major trading partner provides a solid tailwind for the kiwi.
The US dollar has softened recently due to a slight easing of geopolitical tensions in Eastern Europe. A brief flight to safety has reversed as diplomatic channels appear to be making some progress. This reduction in immediate risk has seen traders move out of the dollar and into higher-yielding currencies like the NZD.
However, we believe this geopolitical calm could be short-lived, as the underlying issues remain unresolved. The VIX index, after spiking above 20 last month, has settled near 16 but could easily climb again on any negative headline. This fragility means the dollar’s safe-haven appeal could return without warning.
Fed Policy Expectations and Hedging Strategies
The main driver for the dollar remains the Federal Reserve’s policy outlook, which is leaning more hawkish. Last week’s strong US jobs report, which added 210,000 jobs in May, has reinforced fears that inflation will remain stubborn. The market is now watching this week’s US Consumer Price Index (CPI) report very closely for further clues.
Based on the CME FedWatch tool, the probability of a Fed rate hike by September has now risen to 55%, a significant jump from just 30% a month ago. This shift in expectations is putting a floor under the US dollar, limiting its downside. Therefore, we view any strength in the NZD/USD as a potential opportunity to position for renewed dollar strength.
Given this backdrop, we are considering strategies that hedge against a stronger US dollar, such as buying call options on the US Dollar Index (DXY). For the NZD/USD pair specifically, this could involve buying put options to protect against a potential downturn if the upcoming US inflation data comes in hot. These positions would allow us to capitalize on a rise in US rate expectations while limiting our downside risk.
