Despite its small size both in terms of population and geography, the New Zealand Dollar (NZD) or ‘Kiwi’ is one of the top 8 most traded currencies. The popularity of the NZD derives from its commodity currency appeal, and its use in carry trades--trades that capitalise on the difference between the reserve bank interest rates in two countries.
Due to its major commodity exports, including dairy and forestry products, New Zealand is one of three primary commodity currencies (currencies that depend heavily on the export of certain raw materials for income) along with the Australian dollar (AUD) and the Canadian dollar (CAD).
Please keep in mind that we do not offer personal advice or specific exchange rate forecasts and predictions; however, here are some general considerations you can use when evaluating forecasts and making your own decisions regarding the best time to transfer your money internationally.
Some key considerations in NZD forecasting
When attempting to forecast the movement of the New Zealand dollar exchange rate, investors may take into account these country-specific factors:
- Dairy Farming and Products. According to MIT, dairy products account for almost 30% of New Zealand’s exports. In fact, nearly one-third of the international dairy trade is controlled by New Zealand’s largest company, Fonterra.1 Fonterra runs dairy auctions which can have a dramatic impact on the New Zealand dollar forecast and announcements from the company can hold considerable sway for some forecasters.
- The relative strength of the Australian and Chinese economy. Australia accounts for a little over 20% of New Zealand’s total exports making it a primary trade partner. In recent years, China has overtaken the US as the second largest trade partner for New Zealand (around 16%). When predictions for Australia or China’s growth are slowing, the New Zealand dollar forecast usually responds
- Reserve Bank of New Zealand announcements (RBNZ). When trading currencies, the policies of the local reserve banks are always important. In the case of New Zealand, the RBNZ announcements factor even more than usual because the NZD is a popular option for carry trades that originate in Japanese yen. (Japan usually has low interest rates, and the RBNZ usually supports relatively high interest rates.) Historically, the interest rate spread between the two currencies can be vast (nearly 8% in 2008). When reviewing New Zealand dollar forecasts, how RBNZ announcements affect this interest rate spread is another factor to consider.
Like the other commodity currencies, the New Zealand dollar can be volatile. That’s why it’s popular with traders and why it’s very important to hedge risks when working with the NZD. If you’re ready to make an overseas money transfer, you should know that big banks charge big margins on foreign exchange transactions, often up to 4%. Instead, register with OFX and lock in a great rate.
For a more general discussion about exchange rate forecasting and macroeconomic factors to consider, read our article: Exchange rate forecasting: Strategies for success.