Inflation data for New Zealand in Q2 2025 came in a bit lower than expected. The quarter-on-quarter increase is 0.5%, while analysts had predicted 0.6%, following a previous rate of 0.9%. On a year-over-year basis, inflation hit 2.7%, slightly below the forecasted 2.8%, but up from the previous 2.5%. For tradeable Consumer Price Index (CPI) items, the rise was 0.3% quarter-on-quarter, short of the expected 0.5% and down from 0.8%.

CPI Non-Tradeables Overview

CPI non-tradeables saw a 0.7% increase quarter-on-quarter, aligning with predictions, though it was previously at 1.1%. This data has led to a decline in both the kiwi dollar and New Zealand yields. A lower CPI could negatively impact the NZD but may benefit New Zealand stocks. We think this weaker inflation number could challenge the Reserve Bank of New Zealand’s tough stance. The central bank has kept its Official Cash Rate at a high 5.5% since May 2023 due to inflation fears. This new data weakens their argument and may lead to a shift in policy sooner than expected.

Interest Rate Influence On Market

Traders in derivatives should prepare for a weaker New Zealand dollar, as interest rate differences are likely to lessen compared to other currencies. The market is already adjusting, with overnight index swaps indicating a higher chance of a rate cut by early 2025, ahead of the central bank’s own timeline. This supports shorting the kiwi, especially against the Australian dollar, which is seeing a higher inflation rate of 3.6% in the first quarter of 2024. This situation is favorable for New Zealand shares and interest rate-sensitive assets. Historically, the expectation of lower rates has boosted the NZX 50 index, similar to the 2019 easing cycle that led to a major market upturn. We recommend considering purchases of NZX 50 futures or call options to take advantage of this potential growth. For those focused on rates, the drop in government bond yields can be traded directly. Traders might explore receiving fixed payments in interest rate swap agreements, betting that benchmark rates will fall further in the next few months. This strategy can yield profits as the market adjusts to a more lenient central bank policy outlook. Create your live VT Markets account and start trading now.

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A recent report claims that Bessent reassured Trump about possibly firing Fed Chair Powell, but Trump called this ‘untruthful.’ He insisted that he doesn’t depend on others for market decisions, saying he knows what’s best for the market. The report suggested Bessent advised Trump to keep Powell for stability, but Trump denies this advice.

Trump’s Reaction

Trump had a strong response to these claims, emphasizing his ability to make decisions independently. He rejected any idea that outside influences shape his views on the market. This situation makes us think that the market is underestimating the risk of political instability. Trump’s comment that he explains things to people indicates he’s unlikely to take moderating advice. This raises the possibility of unexpected policy announcements if he gets back into office. We should be ready for sudden increases in market volatility, especially concerning Fed policy. During his previous term, the CBOE Volatility Index (VIX) had an average over 15 and spiked during his trade disputes—much higher than before. His dismissal of potential advisors hints that this unpredictability may return.

Uncertain Futures

The main takeaway for traders is the newfound doubt about the Fed’s independence. No president has ever fired a Fed chair over policy differences, and even suggesting it introduces major uncertainty. We believe this indicates it’s time to buy protection, such as out-of-the-money put options on major indices like the S&P 500. Trump’s response to the report about Mr. Bessent is especially revealing. It shows he is sensitive to any portrayal of him as being influenced by others. This strengthens our belief that policy decisions might come suddenly and be based more on his personal beliefs than institutional advice. As a result, we are considering strategies that can profit from significant price swings, no matter which way they go. A long straddle on the SPY ETF—buying both a call and a put option—looks like a strong choice as we approach the election. With the VIX trading low, often below 14, options pricing may not yet reflect the possibility of future turmoil. Looking back at the surprise tariff announcements against China from 2018 to 2019 shows a clear historical lesson. Those led to immediate market drops of 2-3% on several occasions, benefitting traders who were prepared for sudden negative shifts. We expect a similar situation where announcements could cause sharp, single-day market reactions. Create your live VT Markets account and start trading now.

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US equity index futures have opened the week on Globex with little change in the ES and NQ futures. Nikkei futures have increased slightly after the Japanese election over the weekend. The Japanese Yen has started the week strong. The USD/JPY is about 147.85, while the EUR/JPY is around 172.10. However, Japanese markets are closed today for a holiday.

Market Calm Before Economic Events

ES futures, which track the ES, are showing limited movement as the week begins. For more market insights, you can check online financial platforms. We see this quiet start as a short pause before important economic events. Traders should brace for possible increased volatility, especially with the upcoming U.S. Consumer Price Index (CPI) report. These inflation data releases can cause significant shifts in equity index futures. The biggest news is the yen’s notable rise. This is due to growing belief that the Bank of Japan may soon end its negative interest rate policy. Governor Kazuo Ueda’s recent comments have supported this view, and overnight index swaps are now indicating about a 45% chance of a rate hike by the end of January 2024. This is a significant change from just a few weeks ago.

Strategies For Traders

Given the current situation, we suggest traders consider strategies that take advantage of increased price fluctuations, rather than betting on a specific direction. With the VIX volatility index around 13.5, which is low historically, buying options contracts on major indices is relatively affordable. This presents a chance to prepare for a big move following the U.S. data release. For those interested in currency derivatives, the yen’s movement presents a clear, though risky, trend. The reduced liquidity from the Japanese holiday can amplify price changes, but the underlying speculation about policy is strong. We expect USD/JPY might test the 145 level, which is a key technical support area from late November if hawkish comments from officials continue. Create your live VT Markets account and start trading now.

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The yen initially gained strength, but those gains have diminished as the market experiences increased volatility with low trading volume. Earlier forecasts indicated that the yen’s rise wouldn’t be steady and would likely fluctuate. Several important topics are currently under discussion, including how tariffs might affect inflation and the potential for a trade deal between the U.S. and Japan. Other discussions involve the chances of the Bank of England changing interest rates and new regulations on oil drilling permits in California.

Foreign Exchange Trading Risks

A caution is issued about the risks involved in foreign exchange (forex) trading. It’s crucial to understand these investment risks, particularly when using leverage. New traders should assess their financial situation and consult a professional if needed. InvestingLive is not an investment advisor. The information provided comes from various sources and is meant for informational purposes only. It does not endorse any opinions or recommendations from these sources. The platform may receive compensation from advertisers depending on user interactions. With early indicators showing a yen recovery, traders should brace for major volatility. Japanese authorities have demonstrated their willingness to intervene, having invested over 9.7 trillion yen (about $62 billion) in recent weeks to support their currency. This intervention creates a safety net, but underlying pressures still exist, leading to potential sharp price movements in either direction.

Options Strategy And Interest Rate Gap

In this situation, using options can help manage risk and take advantage of price swings. Purchasing put options on pairs like USD/JPY can shield against sudden gains in the yen resulting from further government actions. While implied volatility on yen options has risen, it highlights the real risk of sudden shifts that could wipe out profits from simple spot trades. The main challenge lies in the significant interest rate gap between Japan and the United States, which exceeds five percentage points. As long as officials like Goolsbee suggest that U.S. inflation might remain high, the Federal Reserve is unlikely to lower rates, keeping the dollar appealing. This makes it tough for the yen to sustain any rally without intervention. We should also keep an eye on the political developments mentioned by Bessent. A successful trade agreement, which the new leadership in Japan is actively seeking, could provide a much-needed boost to the country’s economy and its currency. This presents a positive factor for the yen that isn’t tied to central bank actions. Traditionally, the yen has served as a safe-haven asset, strengthening during global crises, but this trend has been dampened by the interest rate differential. We recommend strategies like buying option straddles, which profit from large price movements in either direction. This approach allows traders to leverage the increased volatility without needing to predict a specific price direction in the short term. Create your live VT Markets account and start trading now.

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Treasury Secretary Scott Bessent has quietly advised President Trump to keep Federal Reserve Chair Jerome Powell in his position. Bessent warned that firing Powell could lead to economic and market turbulence, along with legal and political issues. He emphasized that the Fed’s current plans might include rate cuts later this year, indicating that a conflict with Powell is not necessary. Bessent also pointed out the strong economic performance and favorable market reactions to Trump’s policies as reasons to avoid drastic actions.

Rising Long-Term Yields

U.S. long-term yields are increasing, which is making it harder for the government to fund itself as borrowing costs rise. Bessent is focused on lowering these yields and believes that firing Powell could worsen the situation. For more insights, visit investingLive.com. Considering the push for stability, we believe the risk of a major political shock at the Federal Reserve has diminished. This means that derivative traders should adjust their strategies, reducing the focus on extreme political crisis risks. We should expect a period of lower-than-expected volatility in the upcoming weeks. This situation strengthens the market’s expectation for monetary policy easing later this year. The CME FedWatch Tool shows over a 60% chance of a rate cut by September, making Bessent’s advice clearer for the President. This signals that traders should consider positions benefiting from falling interest rates, such as long positions in SOFR futures.

Impact On Market Volatility

This sense of stability should help lower equity market volatility. The CBOE Volatility Index (VIX) is currently around 13, and this news takes away a factor that could have pushed it above 20. Selling VIX call options and other short volatility strategies looks more appealing now. Typically, challenges to central bank independence lead to rising bond yields, making Bessent’s intervention noteworthy. The 10-year Treasury yield has recently been concerning, trading above 4.2%. Actions that calm this market are crucial to managing government borrowing costs, so we can be more confident that long-term yields are likely to stabilize soon. The case against conflict is further supported by a robust economy, shown by the addition of 272,000 jobs in May. A thriving economy strengthens the current monetary leadership’s credibility, making any change seem more disruptive. This helps us believe that market directions will be shaped more by economic data than political changes. Create your live VT Markets account and start trading now.

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President Donald Trump has announced a 35% tariff on Canadian imports, set to begin on August 1, 2025. This decision comes in response to concerns about fentanyl trafficking and ongoing trade issues with Canada. After the announcement, the U.S. dollar strengthened slightly, while the Canadian dollar weakened. The currency markets had largely expected this trade move, which limited their reactions. Still, there is ongoing volatility related to tariff news. The USD/CAD exchange rate jumped after the announcement but eventually settled around 1.37, where it is likely to remain unstable as negotiations unfold.

Impact On Interest Rates

Tariffs are likely to raise inflation by approximately 1.8 percentage points in the short term. As a result, the Federal Reserve might choose to keep interest rates steady or even raise them, offering temporary support for the dollar. However, the markets anticipate rate cuts later in 2025, which could weaken the dollar. Futures markets expect about 50 basis points in Fed rate cuts by the end of 2025, starting in September. Trump’s pressure on the Fed raises concerns about fiscal dominance, which could damage trust in the dollar. Rising U.S. deficits have led Moody’s to downgrade the country’s credit rating from Aaa to Aa1, increasing volatility in the bond market and prompting some investors to diversify away from U.S. Treasuries. Analysts expect ongoing downward pressure on the dollar as the year ends, counterbalancing short-term safe-haven demand. Investors should brace for volatility, diversify their assets beyond the dollar, keep an eye on the Fed for policy updates, and consider hedging strategies against the dollar. Markets have largely factored in Trump’s tariff-related policies, leaving limited room for the dollar to gain.

Market Strategies And Hedging

In light of Trump’s announcement, the market has absorbed much of the initial shock, as shown by the stabilization of the USD/CAD pair following its brief spike. Our focus should shift towards navigating expected volatility rather than pursuing a consistent directional move. The tariff’s potential to boost inflation by 1.8 percentage points is critical. With core PCE inflation already at 2.8%, this policy may prompt the Fed to adopt a more aggressive short-term approach, temporarily supporting the dollar. We must be cautious of this misleading trend before the expected easing cycle starts. The markets already expect at least two rate cuts by the end of 2025, as indicated by the CME FedWatch tool, which shows over a 70% chance of cuts beginning in September. This indicates a broader weakness for the dollar later in the year. We can capitalize on this by focusing on longer-term options that bet on a weaker dollar, particularly against the euro. Concerns about fiscal dominance and the credit downgrade from Moody’s are significant and changing foreign investor sentiment. The U.S. national debt has exceeded $34 trillion, leading clients to gradually hedge their exposure to Treasuries. We believe diversifying into assets like gold, which has reached new highs, or the Swiss franc is a wise strategy. For the USD/CAD pair, we are not taking a strong directional stance within the existing ranges. Instead, we are considering buying options straddles ahead of key negotiation dates to benefit from sharp price fluctuations in either direction. One-month implied volatility for the pair has surged nearly 2%, suggesting the market is bracing for instability. Our primary takeaway is to hedge existing dollar exposure and prepare for sudden, headline-driven price changes. The U.S. is Canada’s largest trading partner, with over $70 billion in goods exchanged in the first two months of this year, making the stakes extraordinarily high. We will use forward contracts and increase investments in non-U.S. assets to manage risk. Create your live VT Markets account and start trading now.

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The Japanese market is closed today for a holiday after an election that didn’t favor the ruling party. This puts pressure on Prime Minister Ishiba. Economic updates are limited, with the key focus on New Zealand’s Consumer Price Index (CPI). It is expected to drop quarter-on-quarter but rise year-on-year. The lower quarterly CPI might hurt the New Zealand dollar but could boost local stocks.

China’s Monetary Policy Update

The People’s Bank of China will release its monthly Loan Prime Rate (LPR) today. In May, the LPRs fell by 10 basis points for both 1- and 5-year loans, resulting in rates of 3.0% and 3.5%. No changes are expected in today’s announcement. The main policy rate, known as the 7-day reverse repo rate, is at 1.4%. Due to the political uncertainty around Mr. Ishiba, there may be opportunities in Japanese market volatility. Historical data shows that when Japan’s leadership is questioned, like during the 2021 transition, the Nikkei Volatility Index jumped more than 20% in the weeks that followed. Traders might want to consider buying Nikkei put options or selling futures to protect against a possible downturn.

New Zealand’s Economic Outlook

The inflation report from New Zealand gives a clearer view of the kiwi dollar’s future. A decrease in CPI will match the Reserve Bank of New Zealand’s predictions for 2024, which suggest inflation will return to target by late 2025. This could strengthen expectations for interest rate cuts, making it a good time to buy put options on the NZD/USD pair. In China, the central bank’s expected inaction might be seen negatively by the markets. With youth unemployment still high and the property market struggling after a 20% price drop since 2021, keeping rates steady signals a lack of support. This situation presents a strong case for purchasing puts on Chinese equity ETFs, like the FXI, in anticipation of negative market sentiment. Create your live VT Markets account and start trading now.

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Today marks Marine Day in Japan, which means that the stock and bond markets are closed. However, yen trading continues in New Zealand, Australia, Singapore, and Hong Kong, although activity is less than usual. In the early morning, trading is very thin from Sydney to Hong Kong, with most activity concentrated in New Zealand. Recent events, especially Japan’s election results, have influenced trading, resulting in a stronger yen. The USD/JPY exchange rate is about 147.85, and the EUR/JPY rate is near 172.10. The ruling LDP coalition had a disappointing showing, winning only 41 seats. This could pose challenges for Prime Minister Ishiba, who may need support from the DPP to form a coalition.

Short Term Reaction In Thin Market

The yen’s initial strength appears to be a typical short-term response to political events in a thin market. The poor performance of the ruling coalition creates uncertainty about Japan’s political leadership and economic policies, leading to potential volatility rather than a new trend for the currency. To navigate these increased price fluctuations, we should consider buying options volatility. One-month implied volatility for USD/JPY has already surged over 20% in early trading, reminiscent of the political chaos in the late 2000s. We anticipate more volatility as serious political negotiations begin this week. Historically, extended political instability in Tokyo has weakened the yen by hindering decisive economic policies. This was evident between 2006 and 2012 when frequent changes in leadership negatively impacted the currency. Therefore, we should be cautious about buying into this initial yen rally and instead look for opportunities to profit from a potential reversal.

Attractive Strategies For Price Moves

In addition to the prime minister, a key figure to watch is the Governor of the Bank of Japan. The central bank will strive to maintain stability, but any suggestion that a new, unstable government might push for policy changes could trigger significant market moves. A recent survey by the Japan Center for Economic Research revealed that over 60% of institutional investors view political instability as the biggest risk to their Japan-related investments for the rest of the year. Given this climate, strategies like long straddles or strangles on yen pairs could be quite appealing, as they benefit from significant price movements in either direction. Potential triggers for sharp price action could include a leadership challenge to the current prime minister or difficult negotiations to form a government with the DPP. We should brace for a turbulent, headline-driven market in the coming weeks. Create your live VT Markets account and start trading now.

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The Japanese yen started the week strong, with USD/JPY around 147.85 and EUR/JPY at 172.10. This strength follows Japan’s weekend election, where Prime Minister Shigeru Ishiba’s ruling coalition lost its majority in the upper house. The Liberal Democratic Party and its partner Komeito did not reach the 50-seat threshold needed for a majority in the 248-seat chamber. Opposition parties, which promised tax cuts, gained more seats, along with an anti-immigration party.

Government Challenges and Yen Volatility

While the election outcome does not immediately threaten the government, it puts pressure on Ishiba ahead of an August 1 deadline for U.S.-imposed tariffs. Calls for leadership change within the LDP are expected to grow. Even though the yen is strengthening, we anticipate volatility. The loss of control may lead to uncertainty in policy. Typically, this uncertainty supports the yen as a safe haven, but possible pressure for tax cuts and increased spending may weaken the yen in the medium term. We think the initial strength of the yen is a short-term reaction to political uncertainty. The loss of majority in the upper house creates gridlock, which traders see as a safe-haven signal. However, we expect volatility to create opportunities as the underlying conditions become clear again. The main issue is the large interest rate gap between Japan and other major economies. The Bank of Japan’s policy rate is close to 0.1%, while the U.S. Federal Reserve’s rate is between 5.25% and 5.50%. This gap has been the main cause of yen weakness for over two years and is unlikely to change because of this election outcome.

Implications for Fiscal Policy and the Yen

The setback for Ishiba’s coalition makes it harder for the central bank to adjust its policy. Political pressure will increase for populist measures like tax cuts or more spending, which need low borrowing costs to work. This reinforces the idea that the currency will weaken in the medium term. In the past, times of political weakness in Japan often led to more fiscal stimulus instead of austerity. We saw this during Japan’s ‘Lost Decades,’ where extra budgets were used to support a struggling economy. This suggests that the government’s response to its weakened position will likely hurt the yen. Given this outlook, we see opportunities in derivative contracts that position for a reversal in the yen’s recent strength. For example, buying call options on USD/JPY allows traders to profit if the currency moves back toward 150 or higher, while limiting downside risk. This strategy benefits from both expected yen weakness and high volatility. The upcoming August 1st deadline for potential U.S. tariffs introduces more event risk. A weakened government may find it difficult in trade negotiations, adding uncertainty that could impact the currency. Therefore, we should consider options strategies that can handle sharp price fluctuations around that date. Create your live VT Markets account and start trading now.

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Monday mornings usually have low market activity until more Asian markets open, which can lead to price swings. Right now, the USD has gained slightly after the U.S. strikes on Iran. The EUR/USD is at 1.1632, and USD/JPY is at 148.03, showing some strength in the yen. Following the weekend election, Japan’s ruling coalition has lost its majority in the Upper House. The GBP/USD is at 1.3406. Other currency pairs include USD/CHF at 0.8018, USD/CAD at 1.3715, AUD/USD at 0.6510, and NZD/USD at 0.5963. ForexLive traders are ready for the new FX week.

Market Reactions and Implications

The market is reacting to the U.S. strikes on Iran, leading to low liquidity and the risk of sharp price movements. This uncertainty can cause implied volatility to increase, similar to the spike over 30% in the CBOE Volatility Index (VIX) after the Ukraine invasion in February 2022. Derivative traders might consider buying call options on the VIX or straddles on major currency pairs to prepare for a likely rise in market volatility. The yen is strengthening, reflecting a classic move to safety that is overshadowing local political news. Global risk aversion is driving investors toward traditional safe havens like the yen. We suggest traders look into buying JPY call options or taking bearish positions on USD/JPY, as historical trends show the yen tends to gain during geopolitical tensions. The U.S. dollar is also increasing, but not significantly, suggesting its safe-haven status is being offset by other concerns. Fed fund futures indicate there is over a 60% chance that the Federal Reserve will keep interest rates unchanged at its next meeting, which may limit the dollar’s upward movement. This suggests writing out-of-the-money call options on the U.S. Dollar Index (DXY) to take advantage of a potential halt in its rally.

Australian and New Zealand Dollar Outlook

Typically, the Australian and New Zealand dollars weaken during risk-off events, as these currencies reflect global growth sentiment. Their value closely follows commodity prices and China’s economic health, which recently showed a disappointing Caixin Manufacturing PMI that struggled to stay positive. We see an opportunity to buy put options on the AUD/USD, speculating on further declines if global tensions affect economic forecasts. Create your live VT Markets account and start trading now.

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