THE NZDUSD CURRENCY PAIR
The currency pairing between the New Zealand dollar (NZD) and the United States dollar (USD) presents different unique trading and investment opportunities. A commodity pair’s exchange rate tends to exhibit a correlation to the current market value of an underlying commodity. Generally, the commodity is local to one or both nation’s economy. The three dominant commodity pairings on the forex are USD/CAD, AUD/USD and NZD/USD.The well-known commodities which is similar to NZD/USD are mostly agricultural in nature, mostlydairy products.
Intraday volatilities facing NZD/USD can become magnified around the release of data relevant to New Zealand’s dairy industry.
Traders and investors used the currency pair as a vehicle to execute a carry trade. In carry trade, theinvestor sells a currency and invests the proceeds into another currency that has a higher yield. In a carry trade, profit is realized from the difference in interest rates and through exchange rate fluctuations.
The Reserve Bank of New Zealand (RBNZ) takes an aggressive stance towards managing inflation. Thus, the NZD typically operates with a higher prime rate than the currencies of other developed countries. For the year 2016, the RBNZ set interest rates at 2%, while the United States Federal Reserve (FED) established a rate of .5% for the USD.3) The disparity among the interest rates of each country makes NZD/USD favorable to traders and investors looking to incorporate the carry trade into their trading plan.
KEY FACTS ABOUT THE USD/NZD
NEW ZEALAND DOLLAR
• Currency examination: The New Zealand dollar is one of the most frequently traded global currencies. Because the Reserve Bank of New Zealand chooses to aggressively address inflationary concerns through the establishment of higher interest rates, The prime interest rate in New Zealand, known as the Official Cash Rate (OCR), has been set as high as 8% in 2008 and as low as 2% in 2016.Although most of the currency turnover involving the NZD occurs outside of New Zealand, domestic banks are active traders of NZD currency pairings.
• Central bank: The Reserve Bank of New Zealand (RBNZ)
• Currency code: NZD
• Currency subunits: Cent (¢) = 1/100 of one dollar
• Denominations: Bills: $5, $10, $20, $50, $100; Coins: ¢10, ¢20, ¢50, $1, $2
UNITED STATES DOLLAR
• Currency overview: The USD is the official currency of the United States and its inhabited territories. The currency is decimalized that is, as one dollar consists of 100 sub units called “cents.” The USD acts as the world’s reserve currency, with 62% of global foreign exchange reserves held by central banks being denominated in dollars.9)
• Currency code: USD
• Central bank: United States Federal Reserve
• Currency subunits: $1 consists of 100 cents
• Denominations: Bills: $1, $5, $20, $50, $100; Coins: 1c, 5c, 10c, 25c, 50c, $1
• Four currency pairings including the USD are referred to as “majors”: USD/JPY, GBP/USD, USD/CHF and EUR/USD.