NZD/USD trades lower near 0.5695 in Asian hours on Monday as the US Dollar strengthens. Traders are weighing developments in the Middle East, ahead of the Reserve Bank of New Zealand (RBNZ) policy meeting on Wednesday.
US President Donald Trump set a Tuesday deadline for Iran to reopen the Strait of Hormuz, and said the US could target Iran’s power plants and bridges if it does not comply. Iran’s foreign ministry said Tehran would respond to attacks on its infrastructure and would target similar infrastructure owned by the US or linked to it.
Rbnz Decision In Focus
The RBNZ will announce its interest rate decision on Wednesday. Markets widely expect the Official Cash Rate to stay at 2.25%.
RBNZ Governor Anna Breman said the bank may look through temporary energy-driven inflation, but could raise rates if longer-term expectations come under pressure. Westpac analysts said the RBNZ may signal future increases if energy-driven inflation persists.
Markets have priced in nearly a 40% probability of a rate rise by September 2026. A full 25 basis point move is fully priced in by December.
We see the NZD/USD pair is under pressure due to the renewed US-Iran tensions over the Strait of Hormuz. With President Trump’s deadline set for tomorrow, we can expect volatility to pick up significantly. This kind of uncertainty historically strengthens the US dollar, much like we observed during similar tensions in early 2020 when the dollar index saw a sharp, temporary spike.
Options Strategy And Volatility
The risk is already being reflected in energy markets, with West Texas Intermediate crude futures surging over 4% to trade above $95 a barrel, the highest level this year. This spike acts as a headwind for the kiwi dollar in the short term. However, it also feeds into the very inflation concerns the RBNZ is watching closely.
All eyes will be on the RBNZ this Wednesday, and while a rate hold is expected, the statement’s tone will be critical. New Zealand’s latest quarterly CPI reading from last year came in at 3.8%, which is well above the central bank’s target, giving credibility to a more hawkish stance. Given the market is already pricing a 40% chance of a rate hike by September, any hawkish surprise could cause a sharp rally in the NZD.
Considering these opposing forces, we believe buying volatility could be a prudent strategy. Purchasing NZD/USD options strangles with expirations in late April or May could be effective. This approach would profit from a significant price move in either direction, whether from a geopolitical shock driving the pair lower or a hawkish RBNZ statement causing a sharp rebound.
