NZD/USD fell for a second day, trading near 0.5940 in Asian hours on Wednesday. The New Zealand Dollar was steady after RBNZ inflation expectations rose for Q2 2026 on both the 12-month and two-year measures.
Two-year inflation expectations increased to 2.53% for Q2 2026, while one-year expectations rose to 3.41%. High oil prices linked to disruptions in the Strait of Hormuz added to inflation concerns, and markets have fully priced in a July rate rise.
RBNZ Policy Outlook
RBNZ Governor Anna Breman said core inflation stayed within the target range in the first quarter. This led markets to reduce expectations for a May rate rise.
Before the May 28 Budget, Prime Minister Christopher Luxon restated plans to return to surplus by 2028–29. He also confirmed a goal to reduce national debt towards 40% of GDP.
The pair weakened as the US Dollar held firm amid Middle East tensions after comments from US President Donald Trump. Iranian Deputy Foreign Minister Kazem Gharibabadi said any peace deal must include reparations, recognised sovereignty over the Strait of Hormuz, and a full end to US sanctions.
The NZD/USD pair is currently showing weakness around the 0.5940 mark, driven by a combination of a strong US Dollar and concerning inflation signals from New Zealand. We believe the path of least resistance is lower in the near term due to sustained geopolitical risk in the Middle East. Traders should consider buying NZD/USD put options with an expiry after the late-May budget announcement to hedge against or speculate on further declines.
Trading Setup Into The Budget
Rising inflation expectations in New Zealand are complicating the picture, with the market now fully pricing in a rate hike for July. With Brent crude futures trading firmly above $95 a barrel due to the Hormuz disruptions, this energy-driven inflation puts the RBNZ in a difficult position. This scenario could weaken the NZD even if the central bank hikes rates, as a slowing economy struggles with higher borrowing and energy costs.
Volatility is expected to increase as we approach the New Zealand budget on May 28. Given the uncertainty surrounding the government’s fiscal plans and the ongoing tensions involving the US and Iran, option traders might explore strategies like long straddles to profit from a significant price move in either direction. The current implied volatility in NZD/USD options is around 9.8%, which is elevated but could climb higher post-budget.
The US Dollar remains the dominant force, with the US Dollar Index (DXY) continuing to test the 106.50 level amid the flight to safety. Looking back at the risk-off periods in 2025, we saw similar patterns where geopolitical flare-ups led to a stronger dollar, punishing smaller currencies like the Kiwi. New Zealand’s stated goal of reducing debt is fiscally prudent but offers little short-term support against the dollar’s safe-haven appeal.
We are closely watching the 0.5900 psychological support level for the NZD/USD. A decisive break below this mark could trigger stop-loss orders and accelerate the move downwards towards the lows we saw in late 2025. Setting up bearish positions with take-profit targets near 0.5850 seems like a reasonable strategy for the coming weeks.
