Overview of New Zealand Dollar
New Zealand has been one of the most regulated countries in OCED, but it has been aiming for an open, modern and stable government for the past 30 years. Following the Fiscal Responsibility Act 1994 of the Fiscal Responsibility Act, New Zealand has shifted from agricultural countries to knowledge-based economies with a high level of technology and full-employment.
The law establishes legal standards that support the government’s official responsible for financial management and shows a macroeconomic policy system in New Zealand. New Zealand has been highly developed in the manufacturing and service sectors and agriculture, which leads to most of its national exports. New Zealand is a trade-oriented country, with commodity exports and service trade accounting for about one-third of GDP.
New Zealand is highly sensitive to global economic conditions, especially those of its major trading partners, Australia and Japan, because of its small economy and large trade volume. New Zealand’s GDP shrank 1.3% during the Asian crisis. This is attributed to decreased agricultural and agricultural-related production and decreased exports and demand due to two consecutive years of drought. New Zealand’s most important trading partners are:
The Reserve Bank of New Zealand (RBNZ)
Determine Monetary Policy
The Reserve Bank of New Zealand (RBNZ) is the central bank of New Zealand. The Monetary Policy Committee is an in-bank committee that reviews monetary policy every week. Monetary policy-making meetings are held eight times a year, or almost every six weeks. Unlike other central banks, interest rate adjustments are ultimately decided by the bank president. The minister and the governor determine the current policy objective agreement and focus on maintaining policy stability to avoid the gross product, interest rates, and exchange rates.
Price stability aims to maintain 1.5% of annual CPI. This situation is unlikely to occur if RBNZ fails to achieve this goal, but the government could dismiss the RBNZ president. This strongly encourages RBNZ to achieve its inflation target. The most common tools used by RBNZ to implement monetary policy changes in interest rates.
Key Characteristics of New Zealand Dollars
1. Strong association with AUD
Australia is New Zealand’s largest trading partner. Along with its positional proximity, New Zealand is a trade-oriented country that has created a strong bond between the two countries economies. New Zealand is the first country to suffer flood damage when Australia’s economy is booming, and Australian companies increase their export activities. In fact, since 1999, Australia’s economy has been booming due to a housing market boom that has led to increased demand for building materials. As a result, Australia’s imports to New Zealand increased by 10% between 1999 and 2002.
2. Product-related currency
New Zealand is a commodity-export-oriented country where exports of goods account for more than 40% of its exports. This created a 50% definition correlation between the New Zealand dollar and the commodity price. When commodity prices rise, the New Zealand dollar gains an upward trend.
The New Zealand dollar status as a commodity-related currency links the Australian dollar and the New Zealand dollar. The correlation between commodity prices and the New Zealand dollar is not limited to New Zealand’s trade activities but is also deeply related to the Australian economy’s performance.
Since the Australian economy’s performance is also deeply related to commodity prices, rising commodity prices will benefit the Australian economy and increase economic activity across national operations, including trade with New Zealand.
3. Carry Trade
New Zealand has one of the highest interest rates among developed countries. The New Zealand dollar has traditionally been considered one of the most valuable currencies for the Carrey trade purchase. Carry trading is buying or operating low-interest currency assets by selling or borrowing low-interest currencies. With many global investors looking for investment destinations to earn high profits, Carrie Trading’s popularisation has created a rise in the New Zealand dollar.
However, this also made the New Zealand dollar very sensitive to interest rate fluctuations. If New Zealand maintains or cuts interest rates while the U.S. raises interest rates, the New Zealand dollar’s Carrey’s merit will decrease. In this situation, the New Zealand dollar will be under downward pressure if investors liquidate their Carrie trade positions.
4. Interest rate difference
Professional NZD traders closely watch the difference in interest rates between New Zealand’s interest rates and other advanced countries’ interest rates. The difference in interest rates is a good indicator of potential currency flows because it can determine the extent to which the premium of New Zealand’s short-term bonds is higher than or vice versa.
Because investors are always looking for high-yield assets, this difference indicates potential currency movements for traders. This is especially important for Carrey traders who want to enter or liquidate their positions depending on the interest rate gap between global bonds.
5. Population movement
New Zealand’s population is less than half of New York’s population. As a result, New Zealand’s economy can be significantly affected by the increase in immigrants to New Zealand immigrants. New Zealand population increased by 1,700 between 2001 and 2002, while that of New Zealand increased by 160,000 between 2006 and 2997.
It looks small, but it is significant for New Zealand. Immigration to New Zealand contributes quite a bit to economic performance. This is because as the population increases, demand for daily necessities increases and overall consumption increases.
6. Drought Impact
Since most of New Zealand’s exports are goods, New Zealand’s GDP is very sensitive to extreme weather conditions that damage agricultural activity. In 1998, the national expenditure from the drought exceeded 50 trillion won. Moreover, droughts often occur in Australia, New Zealand’s largest trading partner. The drought will result in losses of more than 1% of Australia’s GDP, which will negatively impact New Zealand’s economy.
Significant economic indicators in New Zealand
New Zealand does not often publish economic indicators, but the following indicators are critical.
1. Gross Domestic Product
GDP is the sum of the market value of all goods and services produced in New Zealand. GDP is calculated, including expenditure by households, businesses, governments, and net foreign purchases. The GDP deflator is used to convert the gross output measured at the current price to fixed dollar GDP for the base year.
This indicator is used to determine the current location of the New Zealand business cycle. High rates of success are often interpreted as inflation, and low growth rates suggest a recession or sluggish economic growth.
2. Consumer Price Index
The Consumer Price Index CPI measures changes in prices of goods and service baskets every quarter, which account for a high percentage of expenditures by the CPI sample group. This basket includes a wide range of goods and services, including food, housing, education, transport, and health. Monetary policy is an important indicator because it is based on this index, a measure of inflation.