Investing in NZD/USD: What to consider
This currency pair measures the value of a single New Zealand Dollar, known as the ‘Kiwi,’ in US Dollars. The USD is the most widely traded currency against the NZD. The economic relationship between the two countries, coupled with the policies of their respective central banks, could generate volatility for this currency pair. Moreover, New Zealand’s dairy and tourism industries make up a major part of its GDP - so both could also impact the base currency. The New Zealand Dollar is perceived as a high yielding currency for traders, which is why it attracts so much attention, despite the relatively small population of the country that uses it.
Who should include NZD/USD in their portfolios?
Currency traders: Since the NZD is perceived as a high-yielding currency, it is often bought by traders using low-yielding currencies such as the Japanese Yen and Swiss Franc. Since these currencies are affected by different factors other than the USD, the NZD/USD pair could be used as a means to diversify such a portfolio.
AUD traders: The physical proximity and close relationship between Australia and New Zealand result in their currencies often moving in tandem. Therefore, traders who specialize in the Australian Currency could also consider investing in the NZD, due to the similarities between the two.
Day traders: Currencies often fluctuate significantly in the course of a single day. Traders who wish to capitalize on these price swings often open and close trading positions during a single day.
Fundamental analysts: Currencies often show volatility following news, events, announcements and financial reports. Fundamental analysts follow these releases and try to use them to determine whether a relevant currency will go up or down.
What drives the NZD/USD price?
Like many currency pairs, the NZD/USD could display great volatility at times. There are various factors that could impact both sides of the pair. Alongside general occurences of global importance which could affect any number of currencies, there are certain factors that uniquely influence the NZD/USD:
Dairy: New Zealand is the world’s largest exporter of powdered milk and its economy is heavily dependent on its dairy exports. Therefore, the New Zealand Dollar often displays volatility when reports relating to its dairy industry surface.
Tourism: While tourism was always a main aspect of New Zealand’s economy, the success of the Lord of The Rings movies (shot in New Zealand and directed by Kiwi Peter Jackson) caused a 50% spike in tourism to the country. Since then, the country has placed great emphasis on using the popular fantasy franchise as a selling point for tourists, so much so that the airport in the capital, Wellington has been redesigned with a Lord of The Rings theme. In contrast, events such as the catastrophic earthquake in Christchurch in 2011 could damage the flow of tourists to the country, subsequently affecting its currency.
Interest rates: Both the Federal Reserve and the Reserve Bank of New Zealand control their respective interest rates and sometimes use it as a tool to strengthen or weaken their national currency, depending on their monetary needs. Therefore, whenever a major event, such as an interest rate decision, takes place, it could have tremendous impact on currencies. Other reports, such as GDP, employment data and consumer price indices, could also impact each side of the currency pair.
Economic research: Due to the relatively small size of its population, New Zealand’s government collects tremendous amounts of data regarding its citizens. Therefore, much of its economic policies are research-driven, and could strengthen or weaken the country’s currency, based on its economic needs.
NZD/USD: A mutually beneficial relationship
The relationship between the US and New Zealand has always been a friendly one. Both countries share a lot of history, such as being part of the same alliances during World Wars and sharing the same language. Both countries have a strong import/export relationship and the US is second only to China when it comes to Kiwi dairy imports. Both countries have attempted to draft free trade agreements, which will remove many of the barriers preventing the expansion of this relationship. However, as of 2018, none of the proposed agreements have been signed. Nevertheless, both countries cooperate in many areas, including commerce, defense and intelligence and continue to deepen their financial relationship.
History of NZD/USD
The New Zealand Dollar was created in 1967, when the government decided to forgo the New Zealand Pound and decimalize its currency. The subsequent result was the New Zealand Dollar, which was introduced at a 2:1 ratio to the former Pound, and pegged to the US Dollar. The currency went through a series of changes over the years, until in 1985 it was allowed to float freely. During the Great Recession of the early 2000s, the currency dropped nearly 50% against the Japanese Yen. However, it has recovered since then and regained its status as an asset that is considered high yielding among currency traders.
Conclusion: NZD/USD could add to any currency trader’s portfolio
The mix between the world’s strongest currency and one that is considered high yielding makes the NZD/USD an interesting combination for foreign currency traders. Furthermore, since both sides of the pair belong to developed countries, which promote stability and growth, it is likely they will remain attractive financial instruments for investors.
In addition, New Zealand’s government is known to be meticulous at collecting data regarding its citizens, holding very accurate details, which enable it to perform comprehensive research. This means that much of the country’s economic decisions, such as the Reserve Bank of New Zealand’s monetary policy, are based on hard data, enabling the government to make calculated decisions. This adds another layer of stability to the base currency of this pair.
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*This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation.
*Past performance is not an indication of future results.