NZD/USD fell for a second day on Friday after pulling back from 0.5920–0.5925, its highest level since 11 March. The pair stayed below 0.5900 in early European trading, with limited momentum.
Market caution continued despite a 10-day truce between Israel and Lebanon, due to disruption risks in the Strait of Hormuz linked to a US naval blockade of Iranian ports. This supported the US Dollar after it recovered from its lowest level since late February, putting pressure on NZD/USD.
The US Dollar’s advance was limited by reports of renewed diplomatic contact with Iran. US President Donald Trump said on Thursday that Iran was close to making a deal, while the Wall Street Journal reported that Washington and Tehran have agreed in principle to hold fresh talks, with no time or venue set.
Lower expectations for tighter US monetary policy also restrained the US Dollar. Traders are pricing in roughly a 30% chance of a Fed rate cut by year-end, which reduced demand for the Dollar and helped limit NZD/USD losses.
Attention now turns to speeches from influential FOMC members and further updates on US-Iran talks. Despite the latest dip, NZD/USD remains on course for a second weekly gain in a row.
We remember looking back at 2025 when the NZD/USD was caught in a tug-of-war below the 0.5900 level. Geopolitical risks in the Strait of Hormuz provided support for the safe-haven US dollar. However, shifting expectations around Federal Reserve policy and hopes for diplomacy created a ceiling, leading to choppy price action.
Today, we are seeing a similar dynamic with rising tensions in the South China Sea, which is again boosting safe-haven demand for the US dollar. We saw the VIX, a key measure of market fear, spike over 20 during the Hormuz incident in 2025, and it is currently elevated at 18. This suggests traders are pricing in higher risk, which typically benefits the dollar and weighs on risk-sensitive currencies like the Kiwi.
The crucial difference for us now is the clearer policy divergence between the central banks. While New Zealand’s latest quarterly inflation figure was a sticky 3.1%, putting pressure on the RBNZ to remain hawkish, this month’s US Core CPI print of 2.8% keeps the Federal Reserve in a more patient stance. This fundamental conflict between a hawkish RBNZ and a data-dependent Fed is likely to cap any major moves in either direction.
For derivative traders, this suggests that buying volatility could be a prudent strategy in the coming weeks. With geopolitical headlines creating the potential for sharp but short-lived moves, options strategies like long straddles or strangles on the pair could be effective. The market is now pricing in only a 40% chance of a Fed rate cut by July, down from 65% last month, highlighting the policy uncertainty that will continue to fuel volatility.
Given the opposing forces, selling options premium with defined risk may also be an attractive approach. Strategies like iron condors could capitalize on the expectation that the pair will remain range-bound, caught between geopolitical fears and central bank policy differences. In this environment, using options to clearly define risk seems more sensible than holding an outright directional spot position.
