NZD/USD (New Zealand Dollar/U.S. Dollar)

What Is NZD/USD (New Zealand Dollar/U.S. Dollar)?

NZD/USD is the abbreviation for the New Zealand dollar and U.S. dollar currency pair. A price quote for this currency pair tells the reader how many U.S. dollars are needed to purchase one New Zealand dollar.

Understanding NZD/USD (New Zealand Dollar/U.S. Dollar)

The value of the NZD/USD pair is quoted as 1 New Zealand dollar per variable number of U.S. dollars. For example, if the pair is trading at 1.50, it means that it takes 1.5 U.S. dollars to buy one New Zealand dollar.

Agriculture is a major factor in the New Zealand economy; more than two-thirds of the exports are agricultural. One particular factor affecting the NZD is the price of dairy. New Zealand is the world's biggest exporter of whole milk powder. So if milk prices are on the rise, the New Zealand economy is likely to improve and traders may price up the currency in anticipation. Tourism is another staple of the New Zealand economy, so as visits to New Zealand become less expensive, the economy will be expected to improve and the currency may appreciate.

Although New Zealand is one of the few countries where its agricultural sector is fully exposed to the international economy (no subsidies or tariffs), the NZD/USD pair may be traded for various financial reasons that have nothing to do with the local economy or what it produces. New Zealand markets are the first to open a new trading day, and banks and traders may at times use this fact to position trades in anticipation of the coming day's events.

The NZD/USD is also affected by factors that influence the value of the New Zealand dollar and/or the U.S. dollar in relation to each other and other currencies. The interest rate differential between the Reserve Bank of New Zealand and the U.S. Federal Reserve (Fed) will affect the value of these currencies when compared to each other. When the Fed intervenes in open market activities to make the U.S. dollar stronger, for example, the value of the NZD/USD cross could decline, due to a strengthening of the U.S. dollar when compared to the New Zealand dollar.

The New Zealand dollar is considered a carry trade currency in that it is a relatively high yielding currency. Because of this, investors will often buy the NZD and fund it with a lower yielding currency such as the Japanese yen or the Swiss franc.

Such trades are for risk-seeking investors and tend to be closed out when investors become risk averse. Evidence of this was prevalent during the 2008 financial crisis when the NZD fell close to 50% against the Japanese yen. As volatility rose, investors unwound these carry trades, and the NZD was one of many high-yielding currencies that fell during 2008 and 2009.

The NZD/USD tends to have a positive correlation to its neighbor, the Australian dollar (AUD/USD).

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