How to Trade the New Zealand Dollar?

by FX EA Review
New Zealand Dollar

New Zealanders are certainly a unique and quirky bunch. The frequently-cited story of how they were named ‘kiwis’ (in reference to the flightless bird endemic to their region) starts from New Zealand soldiers during World War I. 

However, the kiwi has been a national symbol and a sign of endearment for the citizens since the 1800s. Of course, the kiwi is also the name of the New Zealand dollar (NZD).

Kiwi regularly features in the top 10 most traded currencies globally, producing an enormously high turnover in foreign exchange transactions primarily because of the country’s historically prospering economy. 

NZD is a legal tender used by New Zealanders and people from the smaller Oceania countries, namely Pitcairn Islands, Niue, Tokelau, and the Cook Islands.

The New Zealand dollar is considered a ‘major currency,’ along with AUD, CAD, CHF, EUR, GBP, JPY, and USD.  All USD combinations of these currencies result in the major pairs. As a prevalent currency, there are several methods of trading the New Zealand dollar.

Characteristics of the New Zealand dollar

New Zealand has always been perceived as a historically prosperous economy, resulting in a highly stable, strong currency. These are the characteristics present in the major pairs, currencies producing high turnover in the markets because of their abundant liquidity or demand.

From a trading perspective, this means the spreads or other transaction costs are minimal, and the trade execution is usually fluid and quick. Many analysts consider NZD a ‘commodity currency’ as the country holds some of the largest gold reserves worldwide along with its closest neighbor, Australia.

This means mining is a massive contributor to the nation’s economy and a frequent driver of currency valuations. Other substantial exports include agriculture, power production, food processing, and informational technology. 

While New Zealand has a diversified free-market economy, its two most frequent trade partners are the United States and Australia. 

So, although NZD is paired with currencies from several prominent countries, NZDUSD is one of the most speculated and influences other NZD and AUD-based markets. 

Another unique factor about the kiwi is the Reserve Bank of New Zealand has historically maintained a slightly higher interest rate when compared to many of their established counterparts.

This means investors typically use the NZD to earn high yields by borrowing with low-interest currencies from the likes of Japan and Canada and converting those to New Zealand dollars. 

Such an approach is referred to as a carry trade, a trading style we’ll cover later.

The four main methods of trading the New Zealand dollar

There are several paths to potentially profit from trading the New Zealand dollar, namely short-term speculation, news trading, long-term fundamentally driven speculation, and the carry trade.

Before diving into these approaches, it’s worth mentioning one needs a well-regulated broker providing all the prevalent NZD-based pairs such as the ones below.

  • NZDUSD (the most traded NZD pair)

Of course, there is also an array of exotic currencies paired against the kiwi, though these are usually reserved for experienced long-term traders due to these markets’ high spreads and erratic behavior.

Short-term speculative strategies

Here, traders employ an array of popular 

indicators like Moving Averages, the Relative Strength Index (RSI), Bollinger Bands, Moving Average Convergence Divergence (MACD), stochastics, and more.

Traders experiment with various settings applied on several time frames from 1 minute to the monthly. Many will also incorporate classic price action patterns like head and shoulders, flags, channels, etc., and candlestick formations like pin bars, hammers, and spinning tops alongside one or a few indicators.

Such strategies aim to profit from a range of market conditions, namely when NZD is trending or reversing higher/lower against its base currency and when a particular market is range-bound.

Depending on whether you’re a scalper, day trader, or swing trader determines how long you plan to hold your positions. Regardless, traders here are only concerned with short-term price movements primarily informed by technical patterns.

News trading

This is another technically-driven trading method. However, its aim is to profit from knee-jerk, tremendously volatile price differences caused by high-impact news reports.

A news trader holds their trades for a few minutes or even seconds, trading based on how they perceive the market should react to a particular economic indicator. 

The news events typically causing sudden and significant price differences for NZD mainly include those relating to interest rates, GDP (Gross Domestic Product), CPI (Consumer Price Index), and retail sales. 

So, for instance, if the market anticipates NZD’s interest rate will be lower than the previous figure, and the eventual result confirms this, a news trader would immediately place a sell order.

  • Long-term fundamentally driven speculation: This approach less relies on technical analysis and more on fundamental economic and political indicators driving the kiwi’s price.

It’s somewhat a form of news trading since it requires analysis of economic data. Yet, it’s a more long-term approach as traders seek to hold their positions for several weeks or months.

Like any currency, the kiwi is driven by numerous monetary factors like interest rates and inflation. The GDP and employment figures are also other drivers for the currency. 

To derive an overall bearish or bullish bias, a fundamental analyst incorporates all this information and compares it against other currencies.

  • The carry trade: This is a long-term trading strategy aiming to take advantage of interest rate discrepancies (or rollover swaps) between two currencies in a pair. Here, a trader would sell a currency with a lower-bearing interest rate to buy the NZD, a currency with a higher-bearing interest rate.

This activity creates a favorable interest rate differential, allowing traders to earn interest for every day they hold their positions. Presently, NZD has an interest rate of 0.5%. 

Compared to the countries comprising the major pairs (some of which have negative rates), there are scenarios for producing a positive-yielding carry trade, assuming all other risks have been considered.

Final word

Kiwi is one of the most traded currencies globally for good reasons. The currency is characterized by substantial liquidity, low spreads, and an inherently flourishing economy. 

Unique profiting opportunities will always exist whether you’re trading a major or cross pair with New Zealand. Traders are spoilt for choice on how to trade this currency, whether it’s scalping, trading the news, ‘buy and hold,’ or the carry trade.

As they say, there is more than one way to skin a cat.

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