Trading New Zealand Dollar

new zealand dollarThe currency of New Zealand is the New Zealand Dollar, which has the Forex symbol NZD. New Zealand is a country made up of several islands: the two main North and South islands together with a number of smaller ones. The country is relatively sparsely populated, with only 4 million residents in the entire nation. Its closest neighbours are Australia, Tonga and Fiji, and these also constitute the country’s major trading partners. The NZD is sometimes referred to as the Kiwi, which is a reference to an indigenous bird that is the national symbol. The central bank of New Zealand is the Reserve Bank of New Zealand (the RBNZ) which is responsible for the fiscal and monetary policies of the country. This body hold eight meetings to discuss monetary policy over the course of the year, and is tasked with maintaining the stability of prices, setting the rate of inflation, and monitoring exchange rates and output.

The History of the New Zealand Dollar

Before the New Zealand Dollar was introduced in 1967, the nation’s currency was the New Zealand Pound, which was distinct since 1933 from the Pound Sterling. Although discussion had taken place about changing to a decimal form of currency in New Zealand in the 1930s, in fact this only came to pass in the 1960s. In 1964 the Decimal Currency Act was brought about, which set the date for decimalisation at 10 July 1967. Initially, the NZD was pegged to the value of the US Dollar, but from 1973 until March 1985 the NZD’s value was determined against a basket of international currencies. In 1985 the NZD was floated freely, and since that time, the value of the currency has been determined by the financial market. The Reserve Bank has intervened on several occasions to drive down the value of the New Zealand Dollar; however, these interventions have been largely unsuccessful.

Factors Influencing the Economy of New Zealand

The economy of New Zealand, and by extension the exchange rate of the NZD, is dependent upon a number of unique factors. These include the following:

  • Commodity dependence – The economy of New Zealand is highly dependent on commodity exports and exports of agricultural products, and therefore the economic performance of the country has a strong link to the prices of commodities. Should the prices of commodities rise, New Zealand’s export prices also rise, thus contributing more to the nation’s GDP and raising the value of the currency. On the other hand, a drop in commodity prices will reduce the value of New Zealand’s exports, thus resulting in a depreciation of the currency.
  • Links to the Australian Dollar – New Zealand and Australia are each other’s most important trading partner, and therefore any change in the economic performance of either country will have a major impact upon that of the other. Should the Australian economy be flourishing, they are likely to import more goods from New Zealand, and thus improve the New Zealand economy exponentially.
  • Carry trading – New Zealand has a higher rate of interest than many other major world economies such as Japan, the UK and the USA. This means that traders with an interest in adopting a carry trade strategy often select the NZD as part of a currency pair in order to increase their profits.
  • Migration – New Zealand has an especially low population for a country of its size. In fact there are fewer people living in the entire nation than in New York in the USA alone. As a result, if there is any increase in migration, the economy is hugely affected, with the demand for consumable goods increasing as the population also increases.
  • Weather – The agricultural industry is vital to New Zealand’s economy, and therefore if there are severe problems with the weather such as a drought, the negative impact is felt across the nation’s economy. Also, thanks to the strong trading links with Australia, if there are weather problems in Australia, these will also affect New Zealand’s economy.

The Economy of New Zealand

As New Zealand has only a small population, the country’s economy is also quite small, with a GDP of only $123 billion. Only ranking 65th in the world in terms of its size, New Zealand still has a strong trading economy, with much of its exports going to its close neighbour Australia, as well as the United States and Japan. New Zealand’s economy is export-driven, with one third of its GDP being made up of its primary exports, including metals, wool, ores, dairy products and cattle. The major industries of New Zealand are tourism and agriculture, with manufacturing and technology making up a much smaller economic share. Primary imports into the country include vehicles, electronic products, heavy machinery and equipment. The New Zealand government have removed most of the barriers to overseas investment, and this has made the nation very business-friendly, and second only to Singapore in this regard.

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