NZD/USD rose as the US Dollar softened on Friday, with the pair trading near 0.5880, up about 0.46% on the day. It was set for a third straight weekly gain.
Reports said US officials Steve Witkoff and Jared Kushner would travel to Islamabad for talks linked to Iran. Iran’s Foreign Minister Abbas Araghchi was also reported to be heading to Islamabad.
Dollar Retreat Lifts Kiwi
The US Dollar Index slipped from a one-week high near 98.94 to about 98.56, down roughly 0.27%. The move followed lower demand for safe-haven assets.
There were no confirmed signs of direct talks, with Pakistan acting as a channel between the sides. The ongoing US naval blockade was described as a barrier to negotiations.
Tensions continued around the Strait of Hormuz, which remained under a dual blockade that was disrupting oil supplies. Oil prices kept a risk premium, adding to inflation concerns.
In New Zealand, markets expected the RBNZ to raise rates further at its May meeting due to elevated inflation and oil-related risks. In the US, markets fully priced in a pause at next week’s Fed meeting, with rates expected to stay on hold for longer.
Key Market Risks Ahead
Traders were watching for changes in the US-Iran situation that could shift the US Dollar and NZD/USD.
With diplomatic channels opening between the US and China over the South China Sea, we are seeing a clear shift in risk sentiment. This is softening the US Dollar, which has helped push NZD/USD towards the 0.6150 mark. The current environment mirrors the setup we observed last year during the brief US-Iran de-escalation hopes.
The Reserve Bank of New Zealand is giving us strong reasons to favor the Kiwi dollar. With domestic inflation proving stubborn at 3.5%, well above target, the RBNZ is holding its Official Cash Rate at 5.75% and signaling it will stay there for some time. This contrasts sharply with other central banks that are closer to cutting rates.
In contrast, the US Federal Reserve appears to be on a different path. US inflation has cooled to 2.8%, increasing market confidence that the next move from the Fed will be a rate cut later this year. The CME FedWatch Tool currently shows a greater than 90% probability of a cut by the September meeting, creating a headwind for the US Dollar.
For derivative traders, this policy divergence suggests buying NZD/USD call options could be a prudent strategy. A trader might consider calls with a strike price around 0.6200 expiring in the next six to eight weeks. This position would profit from continued upside momentum while capping potential losses at the premium paid.
Alternatively, we could look at risk reversals, which measure the skew between call and put options. With the market still wary of a potential breakdown in geopolitical talks, implied volatility on NZD/USD puts may be elevated. We could structure a trade that takes advantage of this by selling puts to finance the purchase of calls, positioning for upside at a reduced cost.
