The Shifting Dollar Dynamics: How Weaker U.S. Jobs Data Opens Doors for Aussie and Kiwi Currencies

The U.S. dollar, long a pillar of global financial stability, is showing signs of fragility. Recent labor market data has upended assumptions about the resilience of the American economy, creating a ripple effect across forex markets. For investors, this shift presents a compelling opportunity to overweight the Australian and New Zealand dollars (AUD and NZD) as relative value plays in a post-Fed easing environment.

The U.S. Labor Market: A Ticking Time Bomb

The July 2025 nonfarm payrolls report delivered a sobering reality check. Total nonfarm employment rose by just 73,000 jobs, far below the 104,000 expected and a sharp revision downward from previous months. The combined downward revisions for May and June erased 258,000 jobs from the books, signaling a labor market that is cooling faster than anticipated. While the unemployment rate held steady at 4.2%, the labor force participation rate hit a four-year low of 62.2%, and the employment-population ratio declined by 0.4 percentage points year-over-year.

These numbers have turbocharged expectations for Federal Reserve rate cuts. Futures markets now price in a 75.5% probability of a 50-basis-point cut in September 2025, with further easing likely in 2026. The Fed's tightening cycle, which once seemed unshakable, is now under siege from a labor market that is losing steam and a political climate that demands action.

Divergent Policy Paths: The AUD and NZD Advantage

While the Fed grapples with its next move, Australia and New Zealand have already embarked on aggressive rate-cutting trajectories. The Reserve Bank of Australia (RBA) has signaled a 25-basis-point cut in early 2025, with further reductions expected as inflation cools and domestic demand weakens. Similarly, the Reserve Bank of New Zealand (RBNZ) has slashed rates by 225 basis points since August 2024, with another 25-basis-point cut anticipated in August 2025.

This divergence in monetary policy is critical. The U.S. dollar's strength has historically been underpinned by its status as the world's reserve currency and the Fed's hawkish stance. But as the Fed delays cuts and Australia and New Zealand act decisively, the interest rate differential is narrowing. This creates a natural tailwind for the AUD and NZD, which are now trading at levels that reflect their weaker domestic economies but not their potential for relative outperformance.

Commodity Tailwinds and Trade Dynamics

Australia and New Zealand's export sectors are also gaining momentum. Australia's commodity exports, particularly iron ore and LNG, have benefited from a weaker dollar and resilient Asian demand. New Zealand's dairy and horticulture sectors, meanwhile, have seen strong growth, with kiwifruit exports surging 45.9% year-to-March 2025. These sectors are not just resilient—they're strategic. As global growth slows, Australia and New Zealand's export baskets are increasingly aligned with essential goods, giving them a defensiveness that few other economies can match.

However, U.S. tariff policies complicate the picture. While Australia has retained a 10% baseline tariff in the U.S., New Zealand faces a 15% rate, creating a competitive edge for Australian goods. Yet, both countries are navigating a broader shift in global trade dynamics, with China's economic slowdown and U.S. protectionism creating headwinds. For now, though, the AUD and NZD are insulated by their export strengths and policy flexibility.

Technical and Sentiment Indicators: A Case for Overweighting

Forex technical indicators reinforce the case for overweighting the AUD and NZD. The AUD/USD pair has formed a bullish engulfing pattern near 0.6414, with momentum suggesting a potential break above the 0.65 level. Similarly, NZD/USD has shown strength near 0.5910, supported by better-than-expected unemployment data and a dovish RBNZ.

Investor sentiment is also shifting. The U.S. dollar index's 20-day rolling correlation with AUD/USD has hit 0.96, indicating a near-perfect inverse relationship. As the dollar weakens, the AUD and NZD are likely to outperform, especially if the Fed's easing cycle accelerates.

Strategic Recommendations for Investors

For investors seeking to capitalize on dollar fragility, the AUD and NZD offer a dual advantage: policy divergence and commodity-driven resilience. Here's how to position:
1. Overweight AUD/USD and NZD/USD: Allocate to these pairs as the Fed's easing timeline becomes clearer. Use technical levels (e.g., 0.65 for AUD/USD, 0.60 for NZD/USD) as entry points.
2. Hedge U.S. dollar exposure: For those with significant USD holdings, consider rolling short-term USD/AUD and USD/NZD positions to lock in gains as the dollar weakens.
3. Monitor U.S. data and RBA/RBNZ decisions: The September Fed meeting and August RBNZ decision will be pivotal. A dovish Fed or hawkish RBNZ could accelerate the AUD/NZD rally.

The U.S. dollar's dominance is no longer a given. As the labor market cools and the Fed's credibility wanes, the AUD and NZD are emerging as relative value plays with strong fundamentals and technical momentum. For investors with a medium-term horizon, the time to act is now.