The NZD/USD currency pair is one of the 10 most-traded currencies in the world, and gained considerable appeal during the multi-decade commodity boom that took place around the globe. NZD/USD appreciation had gotten so high that the Reserve Bank of New Zealand began intervention efforts in 2012, seeking to devalue New Zealand Dollar Among the most actively traded advanced economy currencies, the New Zealand dollar, alongside its Australian counterpart, continued to expand its presence in global Forex trading. The New Zealand dollar has increased its share in global currency trading from 1.6% in 2010 to 2.1% in 2016, which ranked it 10th. At the same time, NZD/USD accounted for 1.5% of the total turnover, which ranked the pair 9th.
What Is the NZD/USD?
NZD/USD stands for New Zealand Dollar against US Dollar. The NZD/USD currency pair has grown in popularity among traders over the past few years. The current exchange rate of NZD/USD is 0.66, so to buy a New Zealand dollar we need 0.66 US dollars. The economy of New Zealand is based on natural resources and large companies in the agricultural sector, New Zealand is a small island but its natural resources are able to influence the price of commodities. New Zealand is very open to trade, which is why the NZD/USD currency pair is of great commercial importance to traders. Traders use to refer to this currency pair with the term “Kiwi” as the $1 coin of the New Zealand depicts a kiwi bird.
Which Organizations Set the NZD/USD Rate?
Currency interest rates are set independently by the competent bodies that depend directly on the country or group of countries to which they belong. As for the NZD/USD, the dollar interest rate is set by the Fed, the US Federal Reserve. The central bank for NZD is the Reserve Bank of New Zealand (RBNZ), while for USD it is Federal Reserve (Fed). As is well known, the central banks also intervene in the market to adjust their exchange rates with respect to other currencies, so they can intervene directly or simply with their interest rate policies. An increase in the exchange rate is always an attraction for investors, who are forced to buy the currency pair, NZD/USD, with a consequent appreciation of the exchange rate.
Fundamental Analysis of the NZD/USD
The fundamental analysis policies and news, as is the case for any other currency pair, affects both NZD and USD, especially those concerning the commodities that considerably determine the NZD/USD exchange rate. The greatest influence is with the trend of the American economy, which influences the economy of the whole world. As we have seen in this recent crisis, if America is in difficulty, it puts everyone in difficulty, as America consumes more than it produces, so it is a good business partner for everyone.
Economy of New Zealand and Major Economic Indicators
According to the International Monetary Fund, in 2017 New Zealand is ranked 53th in terms of its nominal Gross Domestic Product of $205.9 billion, and 68th in terms of its GDP based on purchasing power parity (PPP). It is a market economy greatly dependent on international trade. Because of its small territory and the huge distances from major world economies, the country is faced with challenges on the international scene. Being New Zealand’s nearest neighbor, Australia plays a key role in trading relations. According to Statistics New Zealand, trade between New Zealand and Australia was estimated to NZ$25.6 billion, with 19% of New Zealand’s exports, including light crude oil, gold, wine, cheese and timber, being oriented towards Australia. China is New Zealand’s second largest trading partner, with trade between the two nations being estimated to NZ$16.8 billion.
This figure is the result of increasing demand for imported dairy products, especially after the Chinese milk scandal in 2008. Chinese demand for milk products has been quite strong in the past years, which also led to a 51% surge in total exports namely to China during the twelve months to March 2014. The agricultural, horticultural, forestry, mining and fishing industries play a crucial role in New Zealand’s economy, particularly in the export sector and in employment. Agriculture accounted for around 5.0% of the GDP in 2012, while the processing of food, beverage and tobacco products contributed to more than 5.0%. Service industries comprise a large proportion of the nation’s economy, accounting for more than two-thirds of its GDP. The sector of services registered consistent growth between 2000 and 2007, with annual growth rate averaging 3.9%.
Tourism is one of the largest single sources of foreign-exchange revenue and also a key growth industry in New Zealand. During the year 2012, international tourist expenditure was at the amount of $9.6 billion, or an increase by 1.6% compared with the prior year. The stock of foreign direct investment in New Zealand amounted to $74.7 billion in 2018, with Australia and the United States being the largest contributors to total foreign direct investment in the country.
Here we provide a list of macroeconomic indicators, which tend to cause the largest influence on New Zealand’s dollar on the global markets.
- Reserve Bank of New Zealand decision on policy
- Gross Domestic Product
- Consumer Price Index
- Producer Price Index
- Change in employment
- Balance of trade
Economy of the United States and Major Economic Indicators
The United States is the world’s largest economic power with a nominal Gross Domestic Product (GDP) amounted $19.39 trillion in 2017. It represents almost 25% of the global nominal GDP. It is also the world’s second-largest trading nation, following China.
The US economy is primarily service-oriented, as almost 80% of the GDP is produced by sectors such as real estate, transportation, financial services, other business services and health care. The country is the second largest manufacturer in the world with an industrial production of $2.33 trillion in 2018, or larger than the output of Germany, France, India and Brazil combined. Major industries are petroleum, steel, automobile production, aerospace, construction and agricultural machinery, chemicals, electronics, telecommunications. Moreover, the United States is the third-largest producer of oil (8453000 barrels per day, or 9.97% of the global total oil production) and the largest natural gas producer (66.5 billion cubic feet per day). Taking into account the sheer size of the US economy and its pillars of strength, one can clearly understand the effect of economic data from those sectors on the US dollar, and in turn on the global Forex market. After all, the greenback stands on one side of 87% of all trades, according to the BIS
Here we provide a list of macroeconomic indicators, which tend to cause the largest influence on the United States’ dollar on the global markets.
- Non-farm payrolls
- Consumer Price Index
- Producer Price Index
- Trade Balance
- ISM Non-manufacturing
- ISM Manufacturing
- Federal Reserve Minutes
- Retail Sales
- Industrial Production
Highest trading volumes and volatility can be expected during the Asian and the US trading sessions, and more particularly when key economic indicators are released. It is logical to expect that the most intense trading will occur at the release of economic reports such as the US non-farm payrolls, US consumer sentiment and spending, US or New Zealand’s manufacturing activity growth, US durable goods orders, US or New Zealand’s consumer inflation, US retail sales, US or New Zealand’s balance of trade, US industrial/manufacturing production, New Zealand’s Producer Price Index, New Zealand’s Commodity Price Index, and last but not least, policy decisions by the Federal Reserve or the Reserve Bank of New Zealand. NZD/USD may also be influenced by key macroeconomic reports or political events taking place in Australia and China, New Zealand’s first two largest export markets
Trading the Fundamentals
Trading based on the major economic reports and other events without the help of technical analysis is done using three general strategies – using a proactive, a reactive or a mixed approach. Proactive trading suggests entering a position ahead of the release of the data and basing your decision on analysts’ forecasts, while the reactive approach implies entering the market after the data is published. Logically, a mixed approach combines the previous two.
Carry trades are one of the most popular trading strategies used in the Forex market. When performing a carry trade, a trader typically sells a currency with a relatively low interest rate, while purchasing a higher-interest rate one. The objective is to profit from the difference in interest rates, which can be substantial, especially when taking into account leverage. At present, the NZD/USD pair provides excellent carry trade opportunities. As we already mentioned, the Official Cash Rate in New Zealand is currently maintained at 3.50%. The Reserve Bank of New Zealand has signaled a gradual rate increases in the future, as inflation rate in the country remains below the 2% target mid-point. However, it is expected to accelerate slowly in an intermediate term.
On the other hand, the Federal Reserve Bank has kept its benchmark rate within the range of 0%-0.25% at the past 47 consecutive meetings. The Fed has committed to raise borrowing costs in 2015, having already concluded its Quantitative Easing program. As long as this difference between interest rates in the United States and New Zealand is in place, NZD/USD may be used in carry trades. In the future such opportunities will depend on the policies followed by the two financial institutions – the timing and the pace of possible rate hikes
The term “volatility” in Forex refers to the fluctuations a currency pair exhibits during trading. These fluctuations directly impact the amount of risk a trader is subjected to, but also his return. A higher volatility means that the currency pair could potentially perform a sudden and drastic move in either direction over a short period of time. In contrast, low volatility implies that the exchange rate does not have the potential for wide fluctuations and instead moves at a steady pace over a longer period. Lower volatility carries less risk for market participants, but it is also much harder to profit from, especially by shorter-term traders such as scalpers and day traders.
Correlations to Other Pairs
The term “correlation” refers to the connection between two assets and movements of them in relation to each other. As a key component of advanced portfolio management, correlation is crucial for achieving maximized risk-adjusted return. Ranging between -1 and +1, a correlation close to the upper limit means that the two currencies are moving in almost perfect consonance, allowing for almost no diversification, and vice versa. A correlation of zero, which in the world of finance practically does not exist, means that movement of the two assets is completely random. NZD/USD is positively correlated with AUD/USD, EUR/USD and GBP/USD.
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