A Trader's Introduction to the New Zealand Dollar
In our last lesson we continued our discussion of the world's main commodity currencies with a look at the major fundamental factors which affect the Australian Dollar. In today's lesson we are going to wrap up our discussion on commodity currencies as well as our modules on profiles of the worlds main currencies, with a look at the New Zealand Dollar.
According to Wikipedia.org, New Zealand has a 2008 estimated population of around 4.2 million people, which is the first important fact for us to understand for two reasons. Firstly, as New Zealand's domestic market is so small, it must rely heavily on exports to drive economic growth, making the country especially susceptible to growth or decline in the global economy. This is particularly true when looking at the health of its main trading partners, the largest of which is Australia, followed by the United States, and Japan. Secondly, unlike other countries with a larger population, as the population of New Zealand is small, migration of people into and out of the country can have a significant effect on its economy, and therefore the currency. As Kathy Lien points out in her book Day Trading the Currency Market, strong population migration into New Zealand has contributed significantly to the performance of its economy, because as the population increases, so does domestic consumption.
Like Canada and Australia, New Zealand is a country with vast natural resources, making the economy and therefore currency heavily reliant on exports of commodities such as Wool, food and dairy products, wood and paper products. As Australia is the country's main export market and as the Australian Dollar is also heavily influenced by commodity prices, changes in commodity prices can have a particularly potent affect on the New Zealand Dollar. Although this correlation has broken down somewhat in recent months, as you can see from this chart, the NZD/USD and AUD/USD currency pairs are highly correlated as a result of these factors:
Chart Showing NZD/USD and AUD/USD Correlations:
The last major fundamental factor that it is important to keep in mind when trading the New Zealand Dollar is, like the Australian Dollar here again, New Zealand, as of this lesson, has one of the highest interest rates in the industrialized world currently at 8.25%. This has driven the NZD/USD pair to 25 year highs recently, before selling off a bit as a result of slower growth in the New Zealand. This is important to keep in mind, as the currency has been one of the primary beneficiaries of the carry trade flows we learned about in module 3 of this course, so interest rate expectations going forward will weigh heavily on the future direction of the currency.
As with the other currencies we have studied, in the interest of maximizing our learning I am going to defer to FXWords.com, which has a great free education section giving overviews of the major economic indicators and their relative importance to the market. You can find a link to the New Zealand Economic Indicator page below this video. For updates on when each indicator is released, as well as analysts forecasts, I recommend visiting the global calendar at Dailyfx.com, which you can find at the top of the homepage.
Thats our lesson for today, and that wraps up our lessons on the commodity currencies, and other main currencies of the world. In our next lesson we are going to begin the last module of this course, which will cover resources which can be used in strategy development which are specific to the FX Market.
As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!
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