Trading fundamentals of NZD/USD

The New Zealand dollar is nicknamed the Kiwi, as are most things New Zealand, after the indigenous bird of the same name; the term Kiwi refers to both the NZD and the NZD/USD pair. (What is it with local birds and currency nicknames?) Given the relatively small size of the New Zealand economy, Kiwi is probably the most interest rate sensitive of all the currencies and, therefore, heavily influenced by investment and speculation.

The New Zealand economy has undergone a virtual transformation over the past two decades, moving from a mostly agricultural export orientation to a domestically driven service and manufacturing base. The rapid growth has seen disposable incomes soar; with higher disposable incomes have come persistently high levels of inflation. The Reserve Bank of New Zealand (RBNZ), the central bank, has responded by raising official interestrates to over 7 percent, the highest nominal interest rate among the major currencies.

Kiwi trading is heavily influenced by interest-rate levels and expectations, with international investors able to reap several percentage points in higher yields on high credit-quality New Zealand government bonds. The primary fundamental force driving Kiwi, then, is near-term interest-rate outlook and inflation environment. The RBNZ has shown a determined willingness to tighten monetary policy to stamp out inflation, even at the risk of unsettling domestic growth, reinforcing the value of Kiwi along the way.

In addition to all the standard New Zealand economic data and official pronouncements you‘ll need to monitor, Kiwi trading is closely tied to Australian data and prospects, due to a strong trade and regional relationship.

No set formula exists to describe the currencies’ relationship, but a general rule is that when it’s a USD-based move, Aussie and Kiwi will tend to trade in the same direction as each other relative to the USD. But when Kiwi or Aussie news comes in, the AUD/NZD (Aussie/Kiwi) cross will exert a larger influence. For example, disappointing Aussie data may see AUD/USD move lower, which will tend to drag down NZD/USD as well. But Aussie/Kiwi cross selling (selling AUD/USD on the weaker data and buying NZD/USD for the cross trade) will typically reduce the extent of NZD/USD declines relative to AUD/USD losses. A similar effect will play out when New Zealand data or news is the catalyst.

Trading NZD/USD by the numbers

Kiwi is another of the Commonwealth currencies and is quoted in similar fashion to GBP/USD and AUD/USD, or the number of USD per NZD. An NZD/USD rate of 0.6800 means it costs USD 0.68 (or 68¢) to buy NZD 1. Kiwi trades in the opposite direction of the overall value of the USD, so a weaker USD means a higher Kiwi rate, and a lower Kiwi rate represents a stronger USD.

The NZD is the primary currency in the pair, and the USD is the counter currency, which means

• NZD/USD is traded in position sizes denominated in NZD
• The pip value is denominated in USD
• Profit and loss accrues in USD. On a 100,000 NZD/USD position, each pip is worth USD 10; on a 10,000 Kiwi position size, each pip is worth USD 1. At current exchange rates, that makes Kiwi pips the most expensive of the dollar pairs on a percentage-of-margin basis.
• Margin calculations are typically based in USD on margin trading platforms. Because of Kiwi’s lower value relative to the USD, NZD/USD currently requires the least amount of margin dollars on a per-lot basis. Using an NZD/USD rate of 0.6800 and a leverage ratio of 100:1, a 100,000 Kiwi position requires only USD 680 in margin, while a 10,000 NZD/USD position would need only USD 68 in margin. In relation to the other dollar pairs, this makes Kiwi the cheapest to trade on a margin basis and, together with the high pip value, provides the highest pip-per-margin it ratio.

Same as in Aussie, don’t trade Kiwi solely based on the lower margin cost basis –I’m just saying it’s something to be aware of in terms of formulating an overall trading strategy. No relationship exists between the margin cost of a position and the likelihood of a positive outcome.

New Zealand events and data reports to watch

RBHZ commentary and rate decisions are pivotal to the value of Kiwi, given the prominence of the interest-rate differential in favor of NZD. Finance ministry comments are secondary to the rhetoric of the independent RBNZ but can still upset the Kiwi cart from time to time. Additionally, keep an eye on the following:

• Consumer prices, housing prices, and food prices
• Retail sales and credit-card spending
• Trade balance and current account
• Nonresident bond holdings
• Business confidence surveys from National Bank of New Zealand (NBNZ) and Australia and New Zealand Banking Group (ANZ), and the quarterly business sentiment survey issued by the private New Zealand Institute of Economic Research (NZIER)