Is the New Zealand dollar depreciating further? A deep dive into New Zealand dollar investment mechanisms and market trends

What is the New Zealand Dollar

The New Zealand Dollar (currency code: NZD), officially known as the New Zealand dollar. Since 1985, New Zealand has adopted a floating exchange rate system, with the Reserve Bank ceasing to publish official buy and sell rates and ending its peg to a trade-weighted currency basket. As one of the most traded currencies globally, NZD/USD ranks ninth in trading volume in the international forex market. Its quote is expressed as a certain amount of USD per one unit of NZD. For example, if the currency pair is quoted at 1.50, it means 1.5 USD is needed to buy 1 New Zealand dollar.

Common Ways to Invest in the New Zealand Dollar

Individuals interested in investing in the NZD can choose from various channels, each with its advantages and disadvantages.

Bank Fixed Deposits in NZD is the most traditional method. As a legitimate international currency, the New Zealand dollar can be exchanged directly at local banks. Investors convert their local currency into NZD at the current exchange rate and deposit it into a fixed-term account. Upon maturity, they convert back to their original currency at the prevailing rate and earn NZD interest. This method carries lower risk but offers relatively limited returns.

Forex Funds are managed by professional fund managers, investing in NZD-related forex products. Due to significant exchange rate volatility, these funds carry higher risks and potential returns.

Futures Trading offers higher leverage options. NZD futures are derivative financial products traded on the Chicago Mercantile Exchange (CME), with the product code NE. Futures have a minimum tick size of 0.0001 points, a tick value of $10, and are settled physically. As margin trading instruments, futures allow for both long and short positions but carry risks such as forced liquidation, margin calls, or even account wipeout.

Contract for Difference (CFD) has gained popularity among retail investors in recent years. It is an agreement between buyer and seller on the price difference, where the seller pays the buyer the difference between the contract price and settlement price in cash. The entire process does not involve physical commodity trading. Compared to futures, CFDs require less margin, have higher capital efficiency, and enable small capital to control larger positions. Since CFDs theoretically have no delivery deadline, investors can hold positions indefinitely and perform flexible two-way trading. For commodities like the NZD, which have relatively predictable trends, CFDs are especially suitable for short-term trading.

Why the NZD Continues to Weaken

The depreciation of the NZD is not accidental; multiple factors have contributed to its exchange rate against the USD falling from a high of 0.88 in 2014 to above 0.5, a decline of about 32%.

Price Fluctuations in Agricultural Products are the primary influence. Over two-thirds of New Zealand’s exports are agricultural products, wool, and dairy, and fluctuations in their international prices directly impact the country’s economic outlook and, consequently, the NZD’s movement.

Decline in Tourism constitutes the second major impact. Tourism is a pillar industry of New Zealand’s economy. Since the outbreak of the COVID-19 pandemic, the industry has suffered heavy losses, significantly dragging down the economy and exchange rate.

Federal Reserve Monetary Policy is the third key variable. The Fed’s rate hikes have driven the USD to strengthen continuously, and the interest rate gap between the Reserve Bank of New Zealand and the Fed has widened. The strengthening USD against the NZD exerts downward pressure on the NZD/USD cross rate.

Global Events also play a crucial role. As an export-oriented economy, New Zealand is highly sensitive to global emergencies. From the COVID-19 pandemic to geopolitical risks, any major event can disrupt its export trade, putting pressure on the NZD.

Characteristics of Commodity Currencies

The AUD and NZD are often seen as barometers of global economic growth. Post-pandemic, the world economy is trending toward recession, with both currencies depreciating against the USD by over 10%.

Australia and New Zealand are both export-driven countries, mainly producing coal, iron ore, copper, aluminum, wool, and other industrial commodities. As a result, the AUD and NZD tend to move in tandem with commodity prices, earning the label “commodity currencies.”

The initial definition of commodity currencies refers to currencies backed by physical assets—beyond government credit, they possess intrinsic value, such as gold or silver in the past. Modern examples include the AUD, CAD, and NZD, which are typical representatives of contemporary commodity currencies.

Future Outlook for the NZD

From a long-term perspective, influenced by global economic recession, the NZD may enter a bear market. The AUD and NZD, both being commodity currencies, usually move together in the same direction. However, recent charts show more bearish sentiment, and the short-term outlook suggests potential downward pressure.

According to forecasts from investment banks, the NZD/USD exchange rate may reach the following levels:

• In six months: 0.594
• Within one year: 0.5934
• Within two years: 0.5885
• Within three years: 0.5834

Conditions for a rebound include strengthening of New Zealand’s economic growth. When risk assets are in high demand, commodity prices tend to rise, prompting investors to shift funds into high-yield assets like gold and commodities, while selling off low-yield USD. Under such circumstances, the NZD, as a commodity-based currency, would appreciate rapidly against the USD.

Currently, the USD demonstrates resilience amid market volatility. Traders should closely monitor key policy decisions from the Federal Reserve and the Reserve Bank of New Zealand, as these will directly influence the future direction of the NZD.

Major NZD Currency Pairs

Common NZD trading pairs in the market include: NZD/USD, GBP/NZD, EUR/NZD, AUD/NZD, NZD/JPY, among others. Investors can choose flexibly based on market conditions and personal strategies.