New Zealand may be a tiny country in terms of people at around 4.4 million, but it has a lot going for it. Forex traders are attracted to the NZD because of its high yield and free-floating nature. What drives the NZD?
BIG MOVES
The main NZD currency pair with the least cost to trade is the NZD/USD. It’s appreciated in the 21st century from a low of 0.3900 in 2000 to a high of about 0.8800 in 2011, and is currently sitting around 0.8300. That’s some pretty wicked appreciation that many of us can choose to take part of. Since it’s high in 2011, most of the NZD/USD trading activity has been between 0.7700 and 0.8300.
THE IMPORTANCE OF AGRICULTURE
New Zealand is blessed with relatively great growing conditions for agricultural produce. Having a seasonal nature with mild summers and mild winters mean that optimal growing conditions for livestock and vegetation tend to abound.
Over 50% of all New Zealand exports are agricultural produce so it has a significant impact on the country.
Many parts of Asia are growing in wealth. As that happens citizens start to demand and pay for higher quality food which New Zealand is ready to supply. With globalization trends, high quality meat, fruit and vegetables grown in clean environments are likely to become in short supply driving up prices of quality produce. New Zealand is well poised strategically to capitalize on this sustained trend.
THE CHRISTCHURCH REBUILD
Last weekend I visited Christchurch, New Zealand’s fallen city. I was astonished at how fallen the city actually was.
Now that unsafe buildings in the central city are being demolished it’s become more apparent that there’s actually going to be very little left behind. Most of the multi-story buildings look destined to go and the city horizon was on its way out.
The major earthquake that sadly caused 185 to lose their lives and the majority of the structural devastation occurred on February 22, 2011. Judging by progress so far, where the city is still largely in the demolition phase some two years on, it’s clear to see that the rebuild is likely to take much of this decade.
The total current estimated cost to rebuild Christchurch is approximately NZD 40 billion. That’s not counting the hidden expenditure, like the preventative building strengthening activities elsewhere that the earthquakes have sparked by making us all acutely aware of our vulnerabilities to natural disasters.
Overseas insurers and New Zealand’s Earthquake Commission (EQC) largely fund the Christchurch rebuild. The construction activities, expenditure and jobs are likely to provide New Zealand with some insulated buoyancy and growth for some time that has limited impact from the worlds fluctuating fortunes.
A GIFT FOR HIGH INTEREST RATE SEEKERS
Of the major floating currencies, New Zealand now has the highest government cash interest rate, equal with Australia. This means that by buying and holding NZD you can receive a competitive interest rate.
If you bought the NZD/USD, held it and the currency pair rises in value, then we have what’s known as a “carry trade.” Not only will you profit from the rise in the relative value of the NZD if it appreciates, but you will be paid interest for holding it too. The double gift will help increase the overall return you make.
Internally New Zealand is experiencing rapid rises in residential house prices, particularly in Auckland where approximately 33% of New Zealanders live. This is causing the government concern as housing becomes less affordable and a property bubble is more likely. On October 1, 2013 new legislation came in to restrict bank lending below a 20% deposit to 10% of each bank’s new housing lending flows, to try to slow housing demand.
The pressure is on for government interest rates to rise in an attempt to halt the frenzied house buying. Any rise in interest rates would make the currency more attractive as a high yield investment that in turn would drive up the currency. This would hurt exporters in the process, making them less competitive worldwide.
ON THE CROSSES
When comparing New Zealand with our high interest rate neighbor Australia, you can see that the NZD is climbing relative to the AUD. The AUD/NZD has fallen from about 1.3800 in 2011 to its recent lows of approximately 1.1200.
The New Zealand economy has sustaining factors that are making a positive contribution to the currency, whereas Australia is suffering from lower demand for its commodity mineral products, which are a major driver of its economic fortunes.
Asia has been showing lower demand for Australia’s minerals and this is likely to become a trend as much of Asia is becoming more service based.
New Zealand’s sound economic drivers are likely to apply further pressure on currency appreciation making it the preferred candidate for high yield seekers.
NZD: AN EXCELLENT CANDIDATE FOR A CURRENCY TRADE
Although New Zealand may be a small country, its currency has some long-term positive factors making it a serious choice for trading. Do you see opportunities to add it to your trading portfolio?
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Read Hunter’s September feature story—on the September Top Ten List here.
