NZD/USD shifting from US rates play to trade war proxy?

• NZD/USD price and momentum signals turn bullish
• Kiwi shifting from US rates to global sentiment play
• Trade war risks raise volatility potential near-term

Overview

NZD/USD may be shifting to its traditional role as a high beta play on the global economy, with the strong grip US rates had on its performance weakening since the US election. With trade arguably the largest source of uncertainty as we head towards 2025, you could argue the Kiwi is morphing into a proxy for Trump’s trade war. If that is the case, it casts doubt on whether recent bullish price and momentum signals generated by NZD/USD will be able to extend beyond the short-term, unless a trade war can be avoided.

NZD/USD: shifting drivers

The following correlation analysis provides context to the views discussed in the introductory paragraph, looking at the 20-day correlation between NZD/USD with numerous financial market variables.

Source: TradingView

In yellow, we have the shape of the Fed funds futures curve between November 2024 and December 2025. As the curve shape has become less steep (which implies less rate cuts being priced), it’s weighed on NZD/USD. Similarly, the inverse correlation with two-year yields has also been significant. However, the relationship with both has softened recently, suggesting something other than the US rate outlook is influencing the Kiwi's movements.

Considering the extreme correlation with Hang Seng futures, copper futures, AUD/USD and EUR/USD, and the extremely strong inverse correlation with USD/CAD, it’s obvious NZD/USD is moving to the tune of other cyclical markets. They just happen to be heavily exposed to Donald Trump’s proposed tariff increases, either through direct trade or their economic ties to China. As such, they resemble trade war proxies.

Even writing this note, we’ve seen headlines talking about a constructive conversation between Trump and Mexican president Claudia Sheinbaum regarding the US-Mexico border, helping spark a turnaround in the Kiwi, Aussie and CAD.

While that doesn’t mean NZD/USD traders can completely ignore developments regarding the US interest rate outlook, it suggests headline risk may be the main driver of Kiwi movements near-term. For those around during the first iteration of the trade war, such an environment reinforces the need to focus on position sizing and risk management given how fast things can change.

NZD/USD breaks downtrend, confirming bullish momentum signals

Source: TradingView

Looking at NZD/USD on the daily timeframe, we saw a bullish break through downtrend resistance after the RBNZ interest rate decision, confirming the positive signals from MACD and RSI (14) seen prior. The break eventually stalled at .5912, a horizontal level that has acted as support and resistance on multiple occasions in recent weeks. Given the proximity to this level, it can now be used to build setups around depending on how the near-term price action evolves. Current price and momentum signals favour buying dips and bullish breaks.

If NZD/USD can break and hold above .5912, longs could be established with a tight stop beneath for protection. While some sellers may be encountered around .5950 and .6000, there’s little visible resistance until .6053. Alternatively, if the price cannot break .5912 on the second attempt, the setup could be swung around with shorts established below with a tight stop above for protection. The 2024 nadir of .5800 would be the obvious target.

-- Written by David Scutt

Follow David on Twitter @scutty