The New Zealand dollar (NZD) is the official currency of New Zealand. Also known as the Kiwi, the NZD is the 10th most traded currency worldwide. Since it was introduced in 1967, the NZD has seen its fair share of highs and lows against other major currencies like the US dollar.
For forex traders, the NZD is an attractive trading option thanks to New Zealand’s stable economy and high interest rates. By understanding what moves the New Zealand dollar, traders can make better educated trading decisions.
This in-depth guide takes a closer look at what impacts the NZD and how to trade it. Keep reading to learn everything you need to know about the New Zealand dollar.
A Brief History of the New Zealand Dollar
New Zealand used the pound sterling as its primary currency until 1934 when it adopted the New Zealand pound. The New Zealand pound was pegged to the pound sterling at parity until 1967.
That year, decimalisation was introduced and the New Zealand dollar replaced the pound at a rate of $1 NZD = $2 pound. Initially, the NZD was pegged to the US dollar at a rate of $1 NZD = $0.6666 USD.
In 1971 when the Bretton Woods system collapsed, the NZD was allowed to float freely. Since then, its value has been determined by the foreign exchange market based on supply and demand.
Some key events in the history of the NZD include:
- 1985 – The NZD is floated and removed from the fixed exchange rate system
- 1999 – The Reserve Bank of New Zealand becomes independent
- 2009 – The NZD rises dramatically during the financial crisis as investors seek safety
- 2014 – The NZD hits a post float high against the USD
Today, the NZD remains one of the 10 most actively traded currencies worldwide. New Zealand ranks as one of the most open economies, making the NZD sensitive to global economic developments.
NZD – USD Exchange Rate
As a commodity currency, the New Zealand dollar is often traded against the United States dollar. Here is a look at the historical exchange rate between the NZD/USD currency pair:
- All time low – 0.3900 in April 2001
- All time high – 0.8842 in July 2014
- Average – 0.6700
In recent years, the NZD has trended lower against the greenback. Reasons include diverging monetary policies between the US Federal Reserve and RBNZ as well as increased risk aversion.
The NZD remains susceptible to movements in the USD as well as shifts in global market sentiment. In times of uncertainty, the NZD tends to weaken as traders flock to safe haven assets like the US dollar.
New Zealand Dollar Banknotes
The New Zealand dollar is issued in 5 different banknote denominations:
- $5 – blue
- $10 – orange
- $20 – green
- $50 – purple
- $100 – red
All banknotes feature Queen Elizabeth II on one side and a notable New Zealand features on the reverse. These include the mountains, flora, fauna and Maori art that symbolize the country.
Paper banknotes make up only a small portion of the money supply. The vast majority of NZD transactions are digital and use credit, debit cards and online payment platforms. Still, banknotes remain in circulation with an estimated $80-$90 million NZD worth of banknotes in use.
NZD Price Drivers
There are several fundamental factors that typically influence the New Zealand dollar exchange rate:
1. Monetary Policy
The Reserve Bank of New Zealand (RBNZ) sets monetary policy aimed at promoting price stability and maximum sustainable employment. Changes to the Official Cash Rate impact interest rates and the attractiveness of the NZD.
If the RBNZ adopts a dovish stance through rate cuts, the NZD tends to weaken. Meanwhile, rate hikes to curb inflation make the Kiwi more attractive to forex traders.
2. Economic Growth
The health of New Zealand’s economy has a major influence over the NZD valuation. Stronger than expected GDP, jobs reports and other data suggest higher consumption and investment which supports the Kiwi.
Weaker growth leading to recession causes the NZD to lose ground against rivals like the USD and EUR. Tourism is also a major contributor to GDP so declines hurt the currency.
3. Commodities
As a commodity producer, New Zealand relies heavily on the dairy, meat, forestry and minerals trade. The NZD tends to rise when global commodity prices are on the ascent.
Dairy makes up 3% of GDP, so milk prices and demand from China are closely watched by Kiwi traders. Broader shifts in risk sentiment that alter commodities like oil also impact the NZD.
4. Rate Differentials
With New Zealand’s benchmark interest rate among the highest of the G10 nations, the interest rate differential makes the NZD attractive. This carry trade advantage has frequently boosted the NZD against rivals.
When other central banks narrow the gap, the NZD becomes less attractive. Traders attempting to profit from differences in rates between economies should track yield spreads.
5. Risk Sentiment
Sentiment in financial markets influences the NZD heavily as it is traded as a “risk-on” currency. When equities and other risky assets sell-off, safe haven currencies are preferred.
Strong bullish sentiment and greater appetite for yield lifts the NZD. In times of fear over growth, traders tend to unwind carry trades and NZD positions. Tracking overall risk appetite is crucial.
Trading the New Zealand Dollar
The NZD’s flexibility and sensitivity to commodities and risk make it a popular trading instrument. Here are some tips for trading the New Zealand dollar:
- Watch for RBNZ rate decisions – The NZD reacts strongly to interest rate adjustments by the central bank. Unexpected cuts or hikes will lead to big moves.
- Follow dairy prices – As the world’s largest dairy exporter, milk and dairy prices significantly impact the NZD. Monitor auction prices and demand from Asia.
- Use risk gauges – Include the VIX or bond yields to monitor risk sentiment day-to-day. Risk-off environments favor safe havens over the NZD.
- Watch yield spreads – Growing rate differentials boost the NZD, while narrowing spreads diminish its appeal. Compare RBNZ rates to those in the U.S., Eurozone and UK.
- Focus on China – As New Zealand’s top export destination, Chinese economic health and demand for commodities impacts the Kiwi. Follow manufacturing and growth data from China.
- Manage volatility – The NZD is susceptible to swift price swings around data events and periods of illiquidity. Use stop losses and maintain prudent position sizing.
By combining technical analysis with a strategy based on these fundamentals, traders can take advantage of opportunities in the exciting New Zealand dollar.
Impact of COVID-19 on the New Zealand Dollar
The ongoing COVID-19 pandemic has heavily influenced financial markets and global trade flows. New Zealand has fared better than many countries, using strict lockdowns to limit cases and economic damage.
Nonetheless, the NZD has seen heightened volatility and weakness amid the crisis. Here are some of the key effects on the Kiwi:
- RBNZ rate cuts to record low 0.25% to support the economy
- Weaker global growth denting demand for exports
- Drop in tourism hammering services trade
- Investors fleeing to safe havens like USD and JPY
- Greater market volatility and risk aversion
- Supply chain disruptions weighing on commodities
With New Zealand poised to recover faster than many competitors, the NZD may regain some lost ground. However, further virus outbreaks and lockdowns could extend the downturn. Traders should closely follow case counts, vaccine news and global growth forecasts when analyzing the New Zealand dollar outlook.
Is the New Zealand Dollar a Commodity Currency?
The New Zealand dollar is commonly categorized as a commodity currency due to the outsized role commodities play in its economy. New Zealand depends on agricultural exports like dairy and meat as well as forestry, minerals, oil and natural gas.
When commodity prices rise, export revenues grow and the value of the Kiwi typically follows. The opposite occurs when global growth and demand for raw materials declines.
Dairy is especially crucial, with global dairy auction prices having a high correlation to NZD swings. As the world’s largest dairy exporter, milk and dairy account for over 25% of New Zealand’s goods exports.
Beyond dairy, soft commodities like lumber, wheat and wool contribute significantly along with meat exports. Forestry products alone made up 12% of exports in 2018.
The reliance on commodities makes the NZD vulnerable to changes in their prices and global demand levels. Traders should track both commodity prices and overall risk appetite when analyzing the NZD outlook.
Advantages of Trading NZD
Here are some of the key benefits traders should know when trading the New Zealand dollar:
Higher Interest Rates
With rates among the highest of all developed markets, the Kiwi offers a yield advantage. The carry trade potential attracts substantial trading volume.
Commodity Correlation
Its close correlations to dairy prices and other soft commodities allows for commodity trading using the currency pair.
Volatility
As a high-beta currency, the NZD sees larger swings around risk events. This creates opportunities for short term trades around data releases.
Global Exposure
The commitment to free trade and exports means the NZD reacts quickly to global data like Chinese GDP as well as overall risk sentiment.
Liquidity
As one of the most actively traded currencies, getting in and out of positions is easy with tight bid/ask spreads.
By understanding and utilizing these advantages, traders can boost their strategies when adding the Kiwi to their portfolio.
How Has the NZD Performed During Crises?
Currencies reflect the relative economic fortunes of their countries. During major global downturns, the New Zealand dollar often weakens against safe haven assets before recovering.
Let’s look at how the NZD performed during some of the most extreme market events in recent decades:
1987 Stock Market Crash
- The NZD plunged over 10% in a month as stocks crashed worldwide. As a risk asset, the Kiwi sold off before bouncing back.
1997 Asian Financial Crisis
- New Zealand’s reliance on Asian export demand caused the NZD to fall over 10% in five months during this emerging markets crisis.
2008 Global Financial Crisis
- Considered a carry trade currency, the NZD sank as investors unwound trades and bought USD. The Kiwi lost more than 25% in five months.
2020 COVID-19 Pandemic
- Another risk-off event, the coronavirus crash saw the NZD decline 8% in just a week as stocks plunged. It hit an 11-year low before recovering.
The NZD consistently declines during acute crises as money leaves risk assets. But New Zealand’s resilient economy allows the currency to rebound after the initial shock passes. Maintaining a long-term perspective is key when trading NZD around crises.
New Zealand Dollar Forecast
Predicting exchange rates is notoriously difficult, but analyzing the fundamental and technical outlook can put probabilities in a trader’s favor.
Based on New Zealand’s strong COVID response, solid growth trajectory, and terms of trade, economists widely expect the NZD to rise over 2021. Westpac analysts forecast the NZD hitting $0.80 vs the USD.
The RBNZ remains committed to its dovish monetary policy and has signaled no rate hikes until 2023. This could limit NZD upside. However, New Zealand’s position as a safe haven relative to Australia and Canada may boost its allure.
Technically, the NZD recently broke out of a descending channel to hit a 3-year high. The break and hold above 0.70 cents may open the door to further gains contingent on the global recovery.
Of course, virus outbreaks, policy shifts or commodities weakness could derail any strengthening. Traders should incorporate these fundamental and technical signals when trading alongside the prevailing trend.
Key Facts About the New Zealand Dollar
- Official currency symbol: NZ$
- Currency code: NZD
- Central bank: Reserve Bank of New Zealand
- Coins: 10c, 20c, 50c, $1, $2
- Banknotes: $5, $10, $20, $50, $100
- Introduced: 1967
- Inflation rate: 1.5%
- Total notes in circulation: $7.94 billion NZD
Conclusion
The New Zealand dollar’s frequent swings, global correlations, liquidity and unique attributes make it a compelling currency to trade. Its role as a commodity and risk proxy gives traders signals to follow.
By tracking factors like dairy prices, yield spreads, Chinese demand and risk sentiment, traders can identify trading opportunities. Though the NZD fluctuates around crises, the underlying strength of the Kiwi ensures it ultimately rebounds.
With its high interest rates, volatility and global importance, the New Zealand dollar offers intriguing potential. By using this guide, forex traders have a detailed roadmap to trading the Kiwi successfully.