The currency pairing between the New Zealand dollar (NZD) and the United States dollar (USD) provides several distinct trading and investment opportunities. From a trading perspective, the consistent market liquidity and volatility of the NZD/USD is ideal for short term strategies rooted in technical analysis. To investors, the pair provides an opportunity to take long-term positions for or against the US dollar or New Zealand dollar.
The "Kiwi" As A Commodity Pairing
The NZD/USD, known among currency traders as the "Kiwi," is considered a commodity pairing. A commodity pair's exchange rate tends to exhibit a correlation to the current market value of an underlying commodity. Typically, the commodity is local to one or both nation's economies. There are three major commodity pairings on the forex: USD/CAD, AUD/USD and NZD/USD. The commodities in question are crude oil, gold and various agricultural products (whole milk powder).
The prominent commodities related to NZD/USD are agricultural in nature, specifically dairy products. New Zealand is a top-five global exporter of dairy, and the transportation of milk powder, butter and cheese represent 21.2% of New Zealand's total exports. New Zealand is the fourteenth-largest supplier of agricultural goods to the United States, totaling US$2.2 billion. Generally, commodity dollars or "comdolls" exhibit a strong correlation to the prices of specific raw materials. For the NZD/USD, a correlation with the pricing of whole milk powder can impact exchange rate valuations in a bullish or bearish fashion. In the event that the market for whole milk powder rallies or crashes, volatility in the NZD/USD is very likely to become heightened.
Intraday volatilities facing NZD/USD can become magnified around the release of data relevant to New Zealand's dairy industry. It is important for traders of NZD/USD to be aware of release times concerning various WASDE agricultural reports, such as the New Zealand Dairy Auction. In addition, normal economic reports are capable of spiking participation in the Kiwi. Monetary policy decisions from the U.S. Federal Reserve (Fed), inflationary measures (CPI, PPI) or output metrics such as GDP may all enhance periodic exchange rate volatilities.
NZDUSD Carry Trades
As previously mentioned, the NZD/USD is commonly used by traders and investors as a vehicle by which to execute a carry trade. A carry trade is one in which an investor sells a currency and invests the proceeds into another currency that has a higher yield. In a carry trade, profit is realized from the difference in interest rates and through exchange rate fluctuations. Historically, hawkish monetary policy from the Reserve Bank of New Zealand (RBNZ) has been the driving force behind the NZD/USD carry trade.
In normal economic conditions, the RBNZ has a track record of taking an aggressive stance towards managing inflation. Subsequently, the NZD typically operates with a higher prime rate than the currencies of other developed countries. When compared to other global majors such as the US dollar or euro, lending rates are high. For the year 2016, the RBNZ set interest rates at 2%, while the United States Federal Reserve (FED) established a rate of .5% for the USD. The discrepancy between the interest rates of each country makes the NZD/USD attractive to traders and investors looking to incorporate the carry trade into their trading plan. Although a multitude of factors determine the success of a Kiwi carry trade, many investors prefer it to the buy-and-hold strategies of the S&P 500 or NASDAQ Composite.
The coronavirus (COVID-19) pandemic of 2020 brought forth a major challenge to the global economy. Widespread lockdowns, quarantines and travel bans impacted everything from cryptocurrencies to each USD pair traded on the forex. Upon the COVID-19 contagion reaching critical mass in late-February 2020, the NZD/USD exhibited extreme volatility. Initial losses for March measured 4.54% as the USD became a premier safe haven. However, the Kiwi rebounded quickly, posting a robust 17.6% rally in the subsequent eight months.
Past Performance: Past Performance is not an indicator of future results.
Key Facts: NZDUSD
New Zealand dollar
- Currency overview: The New Zealand dollar is one of the most frequently traded global currencies. Because the Reserve Bank of New Zealand chooses to aggressively address inflationary concerns through the establishment of higher interest rates, the NZD is often viewed as a "safe haven" for international capital investment. The prime interest rate in New Zealand, known as the Official Cash Rate (OCR), has been set as high as 8% in 2008 and as low as 2% in 2016. Although most of the currency turnover involving the NZD occurs outside of New Zealand, domestic banks are active traders of NZD currency pairings. Over half of the domestic currency turnover of the NZD can be attributed to hedging and liquidity management strategies executed by the domestic banking industry.
- Central bank: The Reserve Bank of New Zealand (RBNZ)
- Currency code: NZD
- History: Over the course of its history, currency in New Zealand has taken several forms. Physical goods, specie, British pounds and Australian pounds have all functioned as legal tender in New Zealand. The passage of the New Zealand Constitution Act of 1852 initiated New Zealand's existence as an independent nation, and it included provisions for coinage and official weights and measures. The Australian pound and British pound served as currency until 1897, when the British pound was made the official legal tender. In 1967, the New Zealand dollar was created and made the official currency of New Zealand. The NZD was a product of decimalisation and effectively replaced the pound system. Originally, the NZD was pegged to the British pound, but within the first year of its existence was pegged to the Australian dollar. Today the NZD is a free floating currency, with its value determined on the open market.
- Economy: New Zealand has the 69th largest global economy in terms of GDP. The economy is service-based, with 69.4% of GDP originating from within the service sector. New Zealand ranks 60th in both imports and exports, with its primary trading partners being China, Australia, the United States and Japan. As with many island nations, New Zealand depends on the export sector for economic growth. Exports account for 30% of GDP, and New Zealand ranks as a top-five global exporter of dairy products.
- Currency subunits: Cent (¢) = 1/100 of one dollar
- Denominations: Bills: $5, $10, $20, $50, $100; Coins: ¢10, ¢20, ¢50, $1, $2
- Countries and territories using the NZD: The New Zealand dollar is the official currency of mainland New Zealand, Pitcairn Islands, Tokelau, Niue and the Cook Islands.
- Currencies pegged the NZD: Cook Islands dollar, Niue dollar and Pitcairn Islands dollar.
- Currency overview: The USD is the official currency of the United States and its inhabited territories. It is a decimalised currency, as one dollar consists of 100 sub units called "cents." The USD acts as the world's reserve currency, with 62% of global foreign exchange reserves held by central banks being denominated in dollars.
- Currency code: USD
- Central bank: United States Federal Reserve
- History: The Coinage Act of 1792 put into place the United States' first organised monetary system. Paper banknotes (dollars) were introduced into circulation in the mid-1800s, via creation of the US Treasury by Congress. The Federal Reserve act of 1913 created the central bank of the US, the Federal Reserve. Through the introduction of the Bretton Woods monetary system in 1944, the USD became the world's reserve currency.
- Economy: The United States economy is considered to be a "mixed" economy, with both private industry and governmental intervention contributing to the overall economic output. The US accounts for nearly 25% of global GDP annually.
- Currency subunits: $1 consists of 100 cents
- Denominations: Bills: $1, $5, $20, $50, $100; Coins: 1c, 5c, 10c, 25c, 50c, $1
- Sixty-six countries peg the value of their currency to the USD, or directly use the USD as their national currency.
- Four currency pairings including the USD are referred to as "majors": USD/JPY, GBP/USD, USD/CHF and EUR/USD.
This article was last updated on 11th January 2021.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…