The EUR/NZD Currency Pair: Influences and Trading Basics

Often referred to as the Euro-kiwi, the EUR/NZD currency pairing offers a unique insight into the interplay between two distinct economies: the Eurozone and New Zealand.

Despite not being among the most popularly traded pairs, EUR/NZD maintains liquidity and responsiveness to a myriad of factors, ranging from monetary policy decisions to commodity prices and geopolitical events.

In the Plus500 guide on how to trade EUR/NZD, we'll explore what makes this currency pair interesting to many traders, including its history, the factors that impact its exchange rate, and common trading strategies. We'll also touch on risk management techniques to help you navigate the potential ups and downs of trading this pair.

Whether you're just starting in forex trading or have some experience, this guide aims to give you valuable insights that can help you trade EUR/NZD with more knowledge and confidence.

Understanding EUR/NZD Currency Pair

The forex ticker symbol for EUR/NZD indicates the exchange rate between the euro and the New Zealand dollar, showing traders how many New Zealand dollars are needed to buy one euro. Despite being outside the top ten most-traded pairs, the EUR/NZD maintains liquidity and is influenced by monetary policy decisions from both the Reserve Bank of New Zealand (RBNZ) and the European Central Bank (ECB).

Traders have historically favoured the New Zealand dollar for carry trades due to the country’s higher interest rates compared to other developed nations, purchasing NZD and selling lower-yielding currencies like the Japanese yen to exploit interest rate differentials and potentially generate profits.

However, the attractiveness of the New Zealand carry trade has waned significantly as the RBNZ cut interest rates to address economic slowdown and subdued inflation, impacting the value of the NZD.

The History of the EUR/NZD

The euro, symbolised by €, emerged as the official currency of the European Union in 1999, replacing the European Currency Unit (ECU) at a 1:1 value. Initially, it existed solely in electronic form until the introduction of physical notes and coins in 2002. Following February 28, 2002, the euro became the sole legal tender in 12 European Union (EU) member states, with others later adopting it.

As of 2024, the euro stands as the official currency in 20 of the 27 EU member countries, constituting the Eurozone, where a unified monetary policy governed by the ECB is shared. These nations not only adopt a common currency but also follow the same monetary policy the ECB sets to ensure stability. The ECB, mandated by the EU, maintains price stability by safeguarding the euro’s value. The euro is well-known as the world's second-most-used reserve currency and the second-most traded.

The New Zealand dollar, NZD, has been the official legal tender of New Zealand since 1967, replacing the New Zealand pound. Represented by the symbol $ or NZ$ to distinguish it from other dollar-based currencies, it was initially pegged to the US dollar at a rate of 1 NZD = 1.43 USD, later untethered from this peg after the US abandoned the gold standard in 1971. Following this, from 1985 onward, the New Zealand dollar began freely floating in the foreign exchange market, its value determined by market forces rather than a fixed peg.

The New Zealand dollar, often informally called the "Kiwi," is known as a commodity currency because of the country's reliance on commodity exports such as dairy, meat, and timber. This dependence on raw materials makes the NZD susceptible to fluctuations in global commodity prices and production levels. The RBNZ plays a pivotal role in shaping the currency's trajectory through its monetary and fiscal policies.

What Moves the EUR/NZD?

The exchange rate of EUR/NZD is subject to diverse influences beyond conventional factors like politics and economics. Monetary policy decisions made by the RBNZ, alongside macroeconomic indicators and political occurrences, contribute significantly to its fluctuations. Moreover, elements such as dairy prices and tourism statistics play substantial roles in shaping its movements.

Monetary Policy, Interest Rates, and Inflation

The EUR/NZD currency pair is notably influenced by the monetary policies of the ECB, which directly impact the euro. Similarly, the RBNZ plays a crucial role in controlling the monetary policy affecting the New Zealand dollar. Changes in interest rates implemented by these central banks can significantly affect currency values and exchange rates.

Central banks, such as the ECB and the RBNZ, adjust interest rates to influence inflation and affect currency values. A higher interest rate in a country typically leads to increased demand for its currency as traders seek better returns. This demand, in turn, impacts the exchange rate of pairs like EUR/NZD.

Commodity Prices

The agriculture sector plays a pivotal role in shaping New Zealand's economy, with fluctuating weather conditions impacting both the nation's economic landscape and the value of the New Zealand dollar.

Being a significant food exporter, New Zealand's economy heavily relies on the performance of its agriculture industry, which in turn influences the movement of the EUR/NZD currency pair. As one of the largest exporters of whole milk powder globally, New Zealand's economic health often correlates with milk prices, thereby impacting the strength of the NZD and, subsequently, the EUR/NZD exchange rate.

Trade Dynamics and Economic Relationships

An influential factor for the EUR/NZD currency pair is the trade trends observed in Australia and China. With Australia standing as New Zealand's second-largest trading partner after China, accounting for 6.2% of New Zealand imports in 2023, these relationships significantly affect currency movements. Consequently, shifts in Australia's economic performance exert notable pressure on the New Zealand dollar.

Economic Performance

The EUR/NZD currency pair is subject to the gravitational pull of stable economies, often enticing traders away from regions perceived as riskier. Traders often prioritise safety and reliability, making healthy economies appealing destinations for their assets. Key economic metrics like gross domestic product (GDP), unemployment, and debt levels provide insight into a country's economic strength and attractiveness for trading.

The euro's value is tied to the economic and political climates of its member states, with sudden shifts in economic indicators affecting its exchange rate. Germany and France, as leading economies within the Eurozone, wield significant influence over the euro's performance.

New Zealand Tourism

As an integral part of the economy, tourism plays a significant role in driving the value of the New Zealand dollar. Increased visitor numbers may correlate to currency appreciation due to a more robust economy.

Ways To Trade EUR/NZD

Various financial derivatives offer opportunities to trade the EUR/NZD currency pair.

• Spot Forex: FX spot is an agreement to exchange currencies at the current market rate through a broker. Traders can profit or incur losses based on the difference between their purchase and sale prices.
• Forex Futures: Futures are contracts specifying the price at which a currency can be bought or sold on a future date.
• Forex Options: Options provide the right, but not the obligation, to buy or sell a currency at a set exchange rate by a specified date, with a premium paid to the seller.
• Forex ETFs: Exchange-traded funds pool investments to provide exposure to foreign exchange markets, allowing traders to capitalise on changes in exchange rates.

In addition to these financial derivatives, forex CFDs allow traders to speculate on the price fluctuations of the EUR/NZD pair without requiring ownership of the underlying asset.

Trading EUR/NZD Using CFDs

When trading EUR/NZD contracts for difference (CFDs), you're essentially entering a contract with the CFD issuer, speculating on the currency pair's movement. Leveraging CFDs allows you to increase your trade size while committing only a fraction of the total value, known as “margin.” This leverage can enhance potential profits, but it's crucial to recognize that it can also result in substantial losses.

Unlike traditional trading, CFD trading doesn't involve owning the actual asset; instead, it's based on the difference between the opening and closing prices of the CFD contract on the EUR/NZD. Whether you "buy" or "sell" a CFD, your profit or loss is determined by the difference between the closing and opening prices. Pips, which measure movement in the forex pair, dictate the fluctuations in your profit or loss for each movement in the market.

Maintaining a position in CFD trading necessitates meeting initial and maintenance margin requirements specific to each financial instrument, including EUR/NZD. Leverage enables traders to amplify potential gains or losses.

Trading EUR/NZD CFDs allows you to speculate on its price changes without the need to purchase the currency pair outright.

Trading Strategies for EUR/NZD

Navigating the complex world of currency trading requires a solid understanding of both fundamental and technical methodologies, each offering unique insights into market dynamics and potential trading opportunities.

Fundamental Trading Methodology

Fundamental traders examine economic, political, and social factors to gauge a currency pair's potential appreciation or depreciation. By assessing intrinsic value, they can pinpoint trading opportunities and anticipate future price movements. Fundamental analysis aids traders in navigating volatility by understanding an asset's strengths and weaknesses.

Technical Trading Methodology

Technical analysis relies on chart indicators and past price movements to determine market conditions. Traders utilise indicators like simple moving average (SMA), Bollinger Bands, and relative strength index (RSI) to gauge market sentiment and potential price trends. These indicators may help identify overbought or oversold conditions, aiding traders in making informed decisions.

• Simple Moving Average (SMA): An essential technical indicator frequently employed in trading, SMA reflects the average price of an asset over a specified period, providing insight into price trends and potential reversals, particularly useful for identifying long-term market trends.
• Bollinger Bands: Derived from the SMA, Bollinger Bands consist of an upper and lower band, with the SMA line serving as the 'middle' band, providing traders with a visual representation of price volatility; widening bands indicate increased volatility while narrowing bands suggest stability.
• Relative Strength Index (RSI): A widely used oscillator in technical analysis that indicates bullish or bearish momentum, RSI can help traders assess the magnitude of price changes and potential trend reversals.

Trading methodologies are purview to each individual’s trading and risk management plan.

EUR/NZD Trading Hours

Trading hours for the EUR/NZD currency pair span 24 hours a day, five days a week, from 5 pm (EST) on Sunday evening to 4 pm on Friday. Although, trading hours may differ on the Plus500 platform depending on which currency pair you're trading.

Risk Management Tools for EUR/NZD

Understanding the EUR/NZD currency pair involves grasping the inherent volatility of forex trading and the necessity of effective risk management tools. Traders can employ tools like Stop-Loss, Trailing Stop, Guaranteed Stop, and Take-Profit to mitigate potential losses. Additionally, staying informed about market news and events is vital as they can significantly impact trading conditions.

It's essential to recognize that while risk-management tools can help minimise losses, there are no foolproof guarantees in trading.

Conclusion: Understanding EUR/NZD FX Pair Trading

The EUR/NZD currency pair stands as an avenue for traders to explore the intricate dynamics between the Eurozone and New Zealand economies.

As traders navigate the nuances of this pairing, understanding its historical context, influenced by the policies of the European Central Bank and the Reserve Bank of New Zealand, alongside factors like commodity prices and trade dynamics, becomes paramount.

Adopting sound risk management tools and employing both fundamental and technical trading methodologies can empower traders to navigate the volatility of the EUR/NZD currency pair effectively and make informed decisions about trading.

EUR/NZD FAQs

Why is the New Zealand dollar known as a commodity currency?

The NZD, also called the "Kiwi," is a commodity currency due to New Zealand's reliance on exports like dairy, meat, and timber, making it susceptible to fluctuations in global commodity prices.

What influences the movements of EUR/NZD beyond monetary policy?

Factors such as dairy prices, tourism statistics, and trade trends in Australia and China play significant roles in shaping the movements of the EUR/NZD currency pair.

What are some trading strategies for navigating EUR/NZD fluctuations?

Traders can employ both fundamental and technical methodologies, analysing economic, political, and social factors alongside chart indicators like SMA, Bollinger Bands, and RSI to gauge market conditions and make informed trading decisions.