The New Zealand Dollar (NZD) is one of the most traded currencies in Forex markets.
NZD and AUD are also called antipodean currencies simply because the word refers to their issuing countries (New Zealand and Australia, respectively).
Great, so common sense says NZD is the currency of New Zealand…
And common sense it’s right.
The Reserve Bank of New Zealand (RBNZ), the Central Bank of New Zealand issues and manages NZD.
But what drives the price of the New Zealand Dollar?
Glad you asked.
The New Zealand Dollar is very, very affected by the monetary policy of its issuing Central Bank and the state of the economy backing it.
Nothing new here, right?
Well, as you probably guessed from the intro, when it comes to the economy of New Zealand, commodity exports are important.
But what commodities matter most?
Would you guess?
MILK POWDER (butter and cheese are also grouped with milk in the official statistics).
You don’t believe me?
Well, here is the official source.
Just check the table with “Exports – top commodities” about half-way through the page.
According to the same source, exports of goods and services make up about 30% of GDP (holy cow).
Does this remind you of someone? (Canada, ahem!)
The biggest trading partners? Australia and China (surprise! Not really…).
Hence, international trade is very important for the economy of New Zealand, and any strong move in commodity prices (or quantity demanded) will influence NZD.
Imagine aliens come down to earth and kidnap half of New Zealand’s cows…
Farfetched? Perhaps. But bear with me.
Suddenly we will only make half the milk we used to, since it takes a while to raise new cows (to come back to the previous production level).
This constitutes a supply shock.
Since demand remains the same, we’ll have a shortage of milk in the market (in this example, of course).
Since there’s so many people looking for milk, price will go up (some are willing to pay more to get it, under the circumstances).
What happens then?
As many economists like to say, it depends…
Now, now, before you get your forks out and mob me over, let me explain.
If price doubled, then exports of milk in $ terms will remain the same.
Example with numbers:
100 bottles of milk.
Exported at a price of $5 each, gives you:
$500 total exports (in $ terms).
In our example, we now only have 50 bottles of milk to sell.
But price doubled to $10 each. By simple multiplication we get:
$500 total exports (in $ terms).
But we don’t know how price will react (actually, we may have a very good idea based on something called elasticity of demand, but that’s more complex).
If price more than doubles, then New Zealand will get more in $ terms (good).
But if price doesn’t double (say it grows 70%), then New Zealand will get less in $ terms (bad).
How does this Bullsh$t help us FX traders?
We will cover that in the next section, but in a nutshell?
An unexpected sharp decrease (or increase) in exports of milk will impact NZD.
An increase in exports (from price and/or quantity sold) appreciates the New Zealand Dollar.
While the opposite devalues NZD.
Because to buy that milk, the foreign nation has to obtain NZD with which to purchase those goods (increasing demand of NZD, and thus its exchange rate).
Note: how it actually goes is different. Most trade happens in terms of USD. But it doesn’t change the previous result too much since:
1. (Say) China sells Yuan to purchase USD.
2. New Zealand receives those USD in exchange for the milk.
3. New Zealand sells (some of) those USD in exchange for NZD.
The net result?
The cross pair Yuan/NZD (this isn’t a standard way to quote the pair) went down.
But to do so, USD was bought and sold.
Get how dominant USD is?
But I digress.
So we already touched on how trade of commodities affects the New Zealand Dollar.
There’s an event called Milk auctions in New Zealand. This can give you an idea of how things are going.
As well as milk futures.
However, in order to trade with a better probability of banking it, its best if you look only at FX news feeds
They will tell you when NZD is being affected by a move in commodities.
And you’ll have a chance to profit from this information.
It makes no sense to watch commodity markets by yourself to infer moves from it.
Unless you’re pro and you really know what you’re doing (as in, you’ve studied how NZD reacts to certain moves in the index you’re checking out, and you know all the caveats -no rule of thumbs here).
Of course, I can’t close the piece without giving another mention to monetary policy.
Even though I only mentioned it in passing, the single biggest mover of NZD price is interest rate decisions by the Reserve Bank of New Zealand (RBNZ).
Keep that in mind, since NZD won’t react to no freaking milk, if the RBNZ is commanding the attention of the markets.
And with that, I’m off.
See you another day,
The Forex Economist
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