NZD - Small but Significant

New Zealand, a small country and economy in comparison to most others in the world, is still a force in the foreign currency trading market. The New Zealand dollar (NZD) is a significant player in forex markets due to its highly developed manufacturing and service sectors that have been created within the past two decades.

Being one of the most regulated countries under the Organization for Economic Co-operation and Development (OECD) has made it easier for New Zealand to open its economy to many forms of international trade. Its agricultural markets make up the majority of its trading power with other countries, which include its key trading partners, Australia and Japan.

NZD and

Besides these two countries, the Asian economies as a whole, greatly impact the movements in the New Zealand markets. As seen during the Asian financial crisis in the late 1990’s, New Zealand’s trading activity and economy (in terms of GDP) are highly sensitive to the fluctuations of Asian markets. The reduction in the demand for exports from New Zealand brought their GDP down by 1.3% following the crisis. With its small economy, around $50 billion, it is clear that New Zealand’s financial status has a harder time withstanding damage to its economy.

NZ Central Bank Plays Important Role

Under its central bank, the Reserve Bank of New Zealand (RBNZ), the decision to change the rates that its currency trades on is made by the Governor of the bank. The RBNZ is unlike most other central banks, which do not leave the decision up to a single person, yet with this system, if inflation reaches high levels (over 1.5%) or stability is not maintained, the government still has the ability to change the Governor. The RBNZ is also responsible for setting such rates as the Official Cash Rate that deal with lending cash overnight to banks, which affects the liquidity of the NZD with commercial banks. This, in turn, has an affect on all interest rates for individual consumers and corporations.

NZD and AUD

The other major factor to determine the way in which the NZD in traded is by looking at the movement of the Australian dollar (AUD). The correlation between these two countries, financially, and even culturally, makes the historical pricing graphs between the AUD and NZD, against the US dollar, extremely similar. The positive correlations between the two countries can also be seen in the effects of commodity prices, that, in either country when increasing, also leads to their currency values increasing as well.

Along with the usual factors of interest rate movement, trade with its key partners, the New Zealand dollar faces an unusual issue of severe weather conditions that greatly affects its value. This is due to the weight that the agricultural sector holds in the exports of New Zealand. These adverse aspects still do not stop the NZD from being a highly traded currency supported by its rapid growth and development since the beginning of the 21st century. This, coupled with the US economic contraction, has made the NZD an increasingly more attractive currency to trade.