Middle East Risk Drives Safe Haven Demand
Iran’s Islamic Revolutionary Guards Corps said shipments through the Strait of Hormuz had stopped. US President Donald Trump said a “big wave” was yet to come, and Secretary of State Marco Rubio said the US was preparing for a major rise in attacks in Iran over the next 24 hours. The US State Department told US citizens to leave countries across the Middle East due to safety risks. A strong US Producer Price Index released last Friday led traders to reduce expectations for aggressive Federal Reserve easing, while the Reserve Bank of New Zealand has an accommodative policy outlook. The recent escalation in the Middle East, with strikes against Iran and the closure of the Strait of Hormuz last week, has injected significant uncertainty into the market. This geopolitical tension is a powerful driver for the safe-haven US Dollar, making sustained rallies in NZD/USD unlikely. Derivative traders should therefore consider buying options to trade the resulting increase in market volatility. The immediate economic impact we are seeing is a surge in energy prices, with Brent crude futures having already pushed past $95 a barrel following the Hormuz closure. Higher energy costs act as a drag on global growth, which disproportionately hurts risk-sensitive currencies like the New Zealand Dollar. This reinforces the view that the upside potential for the Kiwi is severely limited in the current environment.Central Bank Divergence Remains A Key Theme
We see a widening divergence in central bank policy that should continue to pressure the NZD/USD pair downwards. The latest US inflation data for January showed consumer prices remained elevated at 3.4%, forcing markets to price out aggressive Federal Reserve rate cuts. This contrasts sharply with New Zealand, where the economy contracted by 0.1% in the final quarter of 2025, giving the RBNZ every reason to maintain its accommodative, rate-cutting bias. Key fundamentals for the Kiwi are also flashing warning signs. China’s official manufacturing PMI for February recently registered at a contractionary 49.9, signaling weakening demand from New Zealand’s most important trading partner. Adding to this, we saw dairy prices fall by 2.1% in the latest Global Dairy Trade auction, further clouding the outlook for New Zealand’s export earnings. Given this backdrop, selling into strength appears to be the most viable strategy for the coming weeks. The current bounce to the mid-0.5900s could present a favorable entry point for initiating new short positions or purchasing put options. We should anticipate a retest of the five-week lows near the 0.5880 level as long as geopolitical risks and central bank divergence remain the dominant market themes. Create your live VT Markets account and start trading now.
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