The New Zealand dollar (NZD) is considered a major currency in the forex market. Although it is not as heavily traded as other major currencies, such as the U.S. dollar and euro, the New Zealand dollar is still significantly traded by currency traders. Therefore, it is important for forex traders to understand the economic drivers which affect the currency’s price fluctuations.
Reserve Bank of New Zealand
The market fluctuations of the NZD is largely determined by the market’s expectations of future interest rate decisions of the Reserve Bank of New Zealand (RBNZ), which acts as an independent central bank for New Zealand. RBNZ decisions are made in the context of the bank’s main objective of maintaining price stability. The central bank does this mainly through inflation targets.
Incoming Economic Data
The RBNZ, like other central banks, will look at incoming economic data and releases in order to obtain a glimpse into the current strength and the future trajectory of the New Zealand economy. Data and reports which suggest a strengthening economy will generally increase the chances of the RBNZ of raising rates in the future which is considered bullish for the NZD. Poor economic reports will suggest the opposite in interest rate expectations and therefore provides downward pressure on the NZD.
Carry Trade
Due to the RBNZ’s relatively high interest rates, compared to other currencies, many forex traders will buy the NZD in order to capture the difference between interest rates. However, this strategy, known as a “carry trade” can come with its own risks. Many times the market fluctuations will move against a carry trade position enough to cancel out any financial gain from the interest rate differentials.
On the other hand, these are just some of the main economic factors which could affect the exchange rate for the NZD. Other factors forex traders should closely monitor are technical analysis and technical indicators. Also, market sentiment can have significant effect on price movements despite economic fundamentals.
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Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.
Sources:
http://www.investopedia.com/walkthrough/forex/intermediate/level5/aud-nzd.aspx
https://www.newzealandnow.govt.nz/investing-in-nz/opportunities-outlook/economic-overview
