NZD/USD hovered near 0.5740 on Friday, down 0.28% on the session, as the US Dollar stayed firm on expectations that US monetary policy will remain restrictive. The pair was set for a third straight daily fall and held close to its weakest levels since April.
Risk appetite improved briefly after Reuters reported that Israel and Hezbollah had agreed to a ceasefire from Friday afternoon, with US and Qatari negotiators involved and support from Iran. Even so, the currency response was muted as markets kept leaning towards the Greenback, underpinned by the Federal Reserve’s hawkish tilt. This week’s projections pencilled in a 3.8% Federal Funds Rate by year-end versus 3.4% in March, keeping another hike on the table. Separately, CNN said Vice President JD Vance cancelled Switzerland talks with Iran, although Iran said the agreement with the US to end the war was signed digitally. The Kiwi drew only limited help from the RBNZ, which sees the Official Cash Rate at about 2.85% by year-end.
Fed Policy Divergence Keeps Pressure On NZD/USD
Given the Federal Reserve’s aggressive stance, we believe the US Dollar’s strength will remain the dominant theme in the coming weeks. The updated forecast for a 3.8% Federal Funds Rate by year-end creates a significant yield advantage for the dollar over most currencies, including the Kiwi. This policy divergence is the primary factor that should continue to weigh on the NZD/USD pair.
We are looking at derivative strategies that profit from a continued decline or limited upside in NZD/USD. Buying put options with expirations in July and August seems prudent, especially as recent US inflation data for May came in at a stubborn 3.5%, reinforcing the case for another Fed rate hike. We are closely watching the April low around 0.5720 as a key technical level that, if broken, could trigger further selling.
RBNZ Outlook And Geopolitical Developments
The Reserve Bank of New Zealand’s own hawkishness, targeting a 2.85% cash rate, is a supportive factor but will likely only slow the NZD’s descent rather than reverse it. New Zealand’s own inflation, while high, is showing early signs of moderating, suggesting the RBNZ is closer to the end of its hiking cycle than the Fed is. This dynamic ultimately reinforces the bearish case for the pair.
The ceasefire news provides a temporary boost to risk sentiment but does not change the underlying fundamentals driven by monetary policy. We see any subsequent strength in the NZD as a selling opportunity, as the geopolitical risk premium was a minor factor compared to the interest rate outlook. This brief calming of market volatility might even offer a more cost-effective entry point for our bearish positions.
This market environment is reminiscent of the 2022 trading year, when a similarly aggressive Fed tightening cycle led to a sustained fall in the NZD/USD. Recent data from the Commodity Futures Trading Commission (CFTC) shows that large speculators are already holding significant net-short positions against the Kiwi. While this means the trade is becoming crowded, it also confirms that the path of least resistance remains lower.
