The interest rates in Australia and New Zealand offer the highest yields among the world’s most liquid currencies. For this reason they have long been popular with the carry trade, where they are usually paired with low yield currencies such as the Japanese Yen.
Paired together, the past decade has seen a degree of volatility between the respective dollars. The booming Australian economy has been pegged back in recent years, as New Zealand has transformed itself from a largely agricultural economy to a globally competitive one.
The basics of trading AUDNZD
There are 3 ways you can trade the Australian Dollar against the New Zealand Dollar.
Literally exchange one currency for the other. You can do this through a trading account with a financial services company or through your bank.
Futures and options. These derivatives allow you to bet on exchange-rate movements without taking delivery of the currency itself. Derivatives, however, can be risky if the rate moves significantly in the ‘wrong’ direction.
CFDs. A Contract for Difference is an agreement between yourself and a broker to pay each other the difference between the price of an asset (in this case AUD/NZD) at the moment the contract is made and its later price when you decide to terminate the contract by closing the trade. They are leveraged products, meaning you can gain exposure by investing only a percentage of the full value of the trade you want. Whilst this gives opportunity for greater profit, you risk losing more than your deposit if the market moves against you. A second risk is that rapid price changes can cause your account balance to change quickly. If you do not have enough funds in your account to cover these situations, there is a risk your position may be closed automatically when your balance falls below a certain level, known as the close-out level. Stop-orders can limit risk but, in fast moving markets, prices might rise above or fall below the desired level before a sale can be executed. This may increase losses.
Economic influences on the AUD NZD currency pair
These export-driven economies have similar priorities regarding keeping inflation low and maintaining price stability, along with high-interest rates. This means the relationship between their respective currencies is largely governed by changes in the local economies rather than larger global trends.
Australia’s heavy reliance on commodities in the form of metals and grains brings factors such as weather cycles, harvests, mining output and the volatility of global metal prices into play.
New Zealand’s move to a more industrialised, free market economy has delivered faster growth than in most other developed countries in recent years. Yet the economy remains reliant on the strength of exports including dairy products, machinery, meat, wool and wood products.
Given their popularity in the carry trade, where investors borrow money at a low interest rate to invest in an asset that’s likely to provide a higher return, speculation about interest rate moves in either country can have a disproportionate impact on their currency.
How has the exchange rate behaved recently and what impacts it?
The last 10 years have been a story of strong growth in the value of the Australian Dollar – hitting a peak value of 1.36 New Zealand dollars in March 2011 – followed by a swift readjustment.
A tailing off in the Australian mining boom economy across the middle part of the decade saw the currencies reach near parity in 2015 at 1.01 New Zealand dollars to the Australian Dollar.
This was helped by an upturn in the New Zealand construction industry as well as a rise in dairy production. Arguably, New Zealand also derives greater value from its free-trade agreement with its close neighbour. A significant number of Australian exporters make their first move to New Zealand as a testing ground for export markets.
The rise and fall in demand for metals in Asia – particularly in China and India – is also a key contributory factor regarding the ongoing interplay between the currencies. It’s a situation that has led Australia, in particular, to look to diversify its export markets.
What should you know before trading AUD/NZD?
This is an increasingly liquid market featuring two major currencies that are issued by politically stable democracies. Buyers and sellers are unlikely to ever be in short supply.
It’s worth remembering that all currency relationships are susceptible to interference by politicians and central bankers. The Reserve Bank of New Zealand, in particular, has staged a number of interventions to drive down the value of the NZD due to fears that an overvalued currency is hurting domestic businesses that compete with foreign imports.
This has stripped out some of the volatility of the NZD in the foreign exchange market, including the swings in its value against the AUD.
Is trading AUD/NZD right for you?
Liquidity – the degree to which assets can be quickly bought or sold in the market without affecting their price – has improved across both currencies in recent years, thanks to a broadening pool of global investors active in both the AUD and NZD.
However, the AUD/NZD market lacks the volatility of the major currency pairings and so is less suited to day trading, where the magnitude of market movements is all important.
For that reason AUD/NZD trading is better suited to those looking to adopt a longer term strategy. To trade effectively you should consider economic events in both countries, carry out thorough analysis on their economies and evaluate the potential for unforeseen events that could impact the exchange rate between them.
*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. All trading carries risk. Only risk capital you're prepared to lose.