New Zealand's currency is known as the New Zealand dollar, which is sometimes referred to as the "kiwi." The currency was decimalized in 1967 and divided into 100 parts or cents. Before that decimalization, the currency was called the New Zealand pound.
- The New Zealand currency is known as the New Zealand dollar.
- The currency circulates in New Zealand, Tokelau, Pitcairn Islands, Niue, and the Cook Islands.
- Bill denominations include: $5, $10, $20, and $50, while coins include 10c , 20c, 50c. $1, and $2.
- Agriculture prices, tourism numbers, and RBNZ decisions influence the New Zealand currency.
- Investors have favored the New Zealand dollar as a carry trade currency over the past decade.
New Zealand Currency Background
The New Zealand dollar trades under the symbol NZD or NZ$. The New Zealand dollar floated on March 4, 1985, at an initial exchange rate against the U.S. dollar of 44 cents. Since then, the financial markets have determined the currency’s value, with the unit typically ranging between 39 and 88 cents against the greenback.
As well as being the official currency of New Zealand, the kiwi also circulates in Tokelau, Pitcairn Islands, Niue, and the Cook Islands. New Zealand bill denominations include: $5, $10, $20, $50, and $100, while coins include 10c , 20c, 50c, $1, and $2.
New Zealand Currency Banknotes
Since 1999, the New Zealand government has produced polymer or plastic versions of the New Zealand dollar, which has made bills more secure against counterfeiting. Also, the new polymer composition has increased the longevity of the banknotes, with polymer bills estimated to last four times longer than regular linen or paper banknotes.
Interestingly, polymer bills can go through a washing machine without suffering any material damage. In 2015, the Reserve Bank of New Zealand (RBNZ) currency updated the currency, with even more bright colors and updated security features.
Reserve Bank of New Zealand's Impact on the NZD
The RBNZ is the country’s central bank, responsible for making monetary and fiscal decisions, which in turn, impacts New Zealand's currency. The RBNZ, currently headed by Adrian Orr, holds monetary policy meetings seven times a year to maintain price stability, set interest rates, and monitor exchange rates.
Factors That Influence the New Zealand Currency
New Zealand is rich in natural resources, with the country's top industries including agriculture, dairy, forestry, fishing, mining, and tourism. In fact, New Zealand is one of the world’s largest exporters of whole milk powder, meaning if milk prices are rising, the NZD will most likely benefit. As tourism accounts for about 6% of the country’s gross domestic product (GDP), the COVID-19 pandemic has the potential to impact its currency as fewer tourists visit New Zealand.
On Aug. 17, 2020, the kiwi took a tumble—falling 1.5% to $0.69 after a case of COVID-19 was discovered, New Zealand's first in six months.
New Zealand Dollar's Relationship with Australia
Australia ranks as New Zealand's second-largest trading partner (behind China), with the neighboring country accounting for 13.6% of New Zealand's total exports. As a result, the performance of Australia’s economy has a significant impact on the New Zealand dollar.
The NZD/USD and AUD/USD currency pairs have a currency correlation coefficient—a statistical measure of the relationship between the two currencies—of 0.90. To provide context, a correlation of 1 shows a perfect positive correlation, while a correlation of -1 shows a perfect negative correlation.
New Zealand Currency and the Carry Trade
Over the past decade, traders and investors favored the New Zealand dollar as a carry trade currency due to the country having had higher interest rates compared to other developed nations.
The carry trade is one of the most popular trading strategies in the currency market. Executing a carry trade involves nothing more than buying a high-yielding currency and funding it with a low-yielding currency.
To execute a carry trade using the kiwi, traders purchase the New Zealand dollar and sell a lower-yielding currency, such as the Japanese yen, with an objective to profit from the interest rate differential.
More recently, the New Zealand carry trade has become much less appealing as the RBNZ has aggressively reduced interest rates to combat slowing economic growth and subdued inflation.