NZDUSD Trading Guide: How to trade the NZD/USD

New Zealand may have a small population, but it is also known for its robust economy that thrives on significant involvement in international trade. Furthermore, its currency's pairing with the US Dollar ranks among the most traded currency pairs globally.

Main Points:

• NZDUSD describes the value of the New Zealand dollar relative to the US dollar.
• As of April 2024, the NZDUSD cross FX pair ranks 7th among the most traded currency pairs in the forex market.
• Factors that can affect the NZDUSD exchange rate include central bank policies, commodity prices, and various economic data releases.
• Contracts for Difference (CFDs) provide an alternative means for traders to get exposure to the NZDUSD price fluctuations without owning either of both currencies.

Understanding the New Zealand Dollar - US Dollar Currency Pair

With their significant roles in international trade, the New Zealand dollar and the US dollar are indispensable currencies on the global economic stage.

The Bank for International Settlements (BIS) published its Triennial Central Bank Survey in October 2022. The survey reaffirmed the dominance of the US dollar as the primary global reserve currency, representing 88.5% of all transactions in the forex market. Moreover, the New Zealand dollar, despite its small economy, ranked 14th among advanced economies in global trade and accounts for 1.7% of total transactions in the forex market.

What Is the US Dollar?

• The United States dollar designated as “$” is the official currency of the United States.
• It is abbreviated as “USD” in the foreign exchange market.
• It is known by the nickname “greenback” or “buck”.
• It is the most reserved currency held by foreign central banks.
• Its role as a benchmark currency for global transactions makes it the most used currency across the globe.

What Is the New Zealand dollar?

• The New Zealand dollar designated as “$NZ” or “NZ$” is New Zealand’s legal tender and official currency.
• It is abbreviated as “NZD” in the foreign exchange market.
• It is used for everyday domestic transactions in New Zealand, Niue, Tokelau, the Pitcairn Islands, the Cook Islands, and the Pitcairn Islands.
• The New Zealand dollar is nicknamed “Kiwi” because of the flightless bird depicted on its one-dollar coin.
• The significance of NZD in global finance is a result of New Zealand's major role in commodity exports.

History of the NZDUSD (New Zealand dollar and US Dollar)

In July 1964, the New Zealand Parliament enacted the Decimal Currency Act, which replaced the New Zealand pound and adopted the New Zealand dollar.

After the collapse of the Bretton Woods system in 1971, the United States left the gold standard. This led the New Zealand central bank to untie the Kiwi from the US dollar and pegged it to a trade-weighted basket of currencies.

Subsequently, in 1985, the New Zealand dollar was allowed to float freely while the Reserve Bank of New Zealand occasionally intervened in the forex market to prevent excessive appreciation of the New Zealand dollar. This was intended to maintain the competitiveness of New Zealand's exports in foreign markets.

The use of the US dollar began when the US Congress approved the Coinage Act of 1792, establishing it as the official currency of the United States. Presently, it retains its status as the most commonly utilised currency globally, playing a vital role in daily transactions and serving as an essential component of foreign reserves held by countries around the world.

What Is NZD/USD Trading?

NZD/USD trading involves capitalising on the currency fluctuations between the New Zealand dollar and the US dollar.

The NZD/USD exchange rate is the most current price at which the US dollar can purchase one New Zealand Dollar. For instance, if the NZD/USD pair is currently at an exchange rate of 1.60, it means 1.60 USD will be required to purchase 1.00 NZD. Therefore, it is important to understand the market factors impacting the fluctuations in its exchange rate.

What Are the Driving Factors Affecting the NZD/USD Exchange Rates?

Various fundamental factors influence the exchange rate of the New Zealand dollar to the US dollar. They include:

Monetary Policies

The Reserve Bank of New Zealand (RBNZ) and the US Federal Reserve are in charge of the monetary and fiscal policies of their respective nations. The interest rate differential between both central banks influences the direction of the NZDUSD currency pair.
For instance, if the Federal Reserve intervenes to strengthen the US dollar through open market interventions, it could result in a decline in the NZD/USD pair, given the US dollar's relative strength against the New Zealand dollar. In contrast, an increase in New Zealand's interest rate may attract investors towards New Zealand's investments. This may drive up demand for New Zealand and appreciate the NZDUSD exchange rate.

Inflation

Shifts in prices of goods and services can be gauged by tracking the consumer price index. In New Zealand and the United States, this index acts as a compass for keeping track of purchasing power fluctuations. Should inflation in New Zealand exceed that of the US, it could undermine the NZD value, potentially causing a decline in the NZDUSD exchange rate. Conversely, heightened inflation in the US may undermine the purchasing power of the US Dollar and the NZDUSD exchange rate may appreciate.

Export Demand

The economic activity of New Zealand is largely dependent on trade, mostly with Australia, China, US and Japan. New Zealand's primary exports include metals, wool, cattle, and dairy products, notably milk. Given New Zealand's export-oriented economy, increased demand for these goods can drive GDP growth, strengthening the NZD against the US dollar. Conversely, a decline in export activity will diminish the GDP contribution and may cause the NZD to lose value.

Commodity Prices

Rising commodity prices inflate New Zealand export earnings, increasing the Kiwi's value against the buck. While declining commodity prices decrease the value of the New Zealand dollar. For instance, in 2012, New Zealand's central bank took a significant step to weaken its currency. This decision came after a prolonged period of rising commodity prices that had caused the Kiwi to become too strong.

Economic Data Release

Major economic data from the United States that can influence the trajectory of the NZDUSD include Non-farm payrolls, Purchasing Managers Index, FOMC, ISM Manufacturing data, New Zealand manufacturing data, New Zealand Producer Price Index etc.

Why Trade the NZDUSD Currency Pair?

Having had an understanding of the factors that may appreciate or depreciate the value of the NZDUSD rate, some reasons why you may trade the NZDUSD pair are as follows:

1. As the seventh most traded currency pair in the forex market, the NZDUSD is characterised by substantial liquidity that contributes to narrow spreads.


2. Trading the NZDUSD pair requires the least available margin among major currency pairs. This is due to the Kiwi's lower value against the Buck.


3. Most organisations and financial institutions in New Zealand are under the ownership of international companies. These companies may engage in currency swaps to minimize foreign exchange risk, which can further increase trading activity.


4. Furthermore, these companies rely extensively on the international debt markets. Therefore, they need to convert their foreign currency earnings into NZD to service their debts. This demand for NZD can lead to significant price swings.


5. Due to proximity and strong economic ties with Australia, the NZD/USD cross often shows a positive correlation with the AUD/USD cross. This correlation extends to commodities such as Crude Oil and Gold, further influencing the movements of the NZD/USD pair.

How to Trade the NZDUSD Forex Pair

Two common means by which traders can speculate on the price movement of the NZDUSD exchange rate are as follows:

• Trading Spot NZDUSD.
• Trading NZDUSD CFDs.

1. What is NZD/USD Spot Trading?
   This represents the conventional approach to foreign exchange transactions. In the context of NZDUSD, it involves the instant exchange of NZD for USD and vice versa at the current market rate.


2. What Is Trading NZDUSD CFDs?
   With Contracts for Differences, traders can actively participate in NZD/USD trading. Trading NZD/USD through Contracts for Difference (CFDs) allows traders to speculate on the exchange rate's fluctuations of NZDUSD cross without owning either of both currencies. Through the strategic placement of long or short positions on NZDUSD CFDs, traders can potentially make profit or losses from the price difference between the entry and exit points of the CFD. CFDs are accompanied by risks, and since they are leveraged products, both gains and losses can be magnified.

Key Concepts for Trading NZDUSD CFDs

Effective trading on NZDUSD CFDs hinges on a deep understanding of these fundamental concepts.

1. Contract Size: This is the amount of base currency you control in a NZD/USD trade. For example:
• A standard contract size equals 100,000 units of the base currency i.e. 1 Standard contract size of NZD/USD equals NZ$100,000.
  
  Other contract sizes commonly used are:
• Mini contract size - 10,000 units of the base currency.
• Micro contract size - 1,000 units of the base currency.
• Nano contract size - 100 units of the base currency.


2. Margin: This represents the amount of position size you can control beyond the limit of your actual balance. For instance, if the current NZDUSD rate is 0.7000 and you have a leverage of 20:1, you'll need 3500 USD in the available margin to open a position worth 100,000 NZD. For a smaller position of 10,000 NZD, you'd only need 350 USD in available margin, given the same leverage ratio of 20:1.
   
   Leverage in trading allows for the magnification of position sizes and potential gains but it poses the risk of losing all your capital.


3. Spread: This is the variance between the current buy rate (bid price) and the current sell rate (ask price) of the NZDUSD pair. It is one of the expenses of initiating a buy or sell trade on NZDUSD CFDs.


4. Pip: A pip represents a unit price move of an exchange rate, which is typically 0.0001 for the NZDUSD pair. In the context of trading NZDUSD, a pip’s value is denominated in the quote currency (US dollars).
   In a NZD/USD position of 100,000 units, the value of each pip equals $10.
   In a NZD/USD position of 10,000 units, the value of each pip equals $1.
   In a NZD/USD position of 1,000 units, the value of each pip equals $0.10.


5. Swap (Overnight Funding Fee): This represents the cost of holding positions overnight. These expenses accrue daily on your active positions until you exit the trades.

What Are the Trading Hours for NZDUSD CFDs?

Understanding the NZDUSD market hours is crucial for traders who want to capitalise on its price fluctuations across various time zones. The NZD/USD CFD market operates continuously, providing round-the-clock availability to buy and sell NZDUSD. Regardless of where you are, you can track NZDUSD price fluctuations in real time and trade it directly from the Plus500 app or WebTrader platform. NZDUSD trading is available continuously, starting Sunday at 10:00 PM CET until Friday at 10:00 PM CET.

*Please note that trading platform hours depend on the individual operator.

Steps to Buy and Sell NZDUSD CFDs With Plus500

To trade NZDUSD CFDs, follow these steps:

• Open a trading account to get started. This may be a real or demo account.
• Log in to the Plus500 app or WebTrader platform.
• Deposit real money to your real account or simulated money to your demo account.
• On the user-friendly trading platform, locate and choose ‘NZDUSD’ among the forex majors.
• Conduct a thorough analysis of the NZDUSD price to determine whether to buy or sell.
• On the position screen, specify your risk management parameters, including Take Profit (Close at profit) and Stop Loss (Close at loss).
• Finally, confirm your trade by clicking the "Buy" or “Sell” button located at the bottom of the position screen.

Trading NZDUSD CFDs with Pending Orders

On the Plus500 trading platform, you can use advanced orders to trade the NZDUSD CFD market. This involves establishing pending orders at a specific level above or below the current price of the NZDUSD market. To do this,

• Click on "advanced" within the position screen.
• Toggle on the button "buy when rate is" to establish your pending buy order, specifying the preferred price above or below the current market rate.
• Toggle on the button "sell when the rate is" to establish your pending sell order, specifying the preferred price above or below the current market rate.
• Finally, click "Place Order" to confirm the pending order.

Conclusion

The NZD/USD currency pair presents an opportunity for traders seeking to capitalise on fluctuations in the foreign exchange market. Its high liquidity, stemming from its position as the seventh most-traded pair globally, translates to narrow bid-ask spreads, minimising transaction costs.
Beyond liquidity, the NZD/USD offers unique advantages due to New Zealand's economic structure. The nation's dependence on international trade, coupled with the substantial international ownership of New Zealand companies and the need for these companies to convert foreign earnings into NZD, creates ground for numerous trading opportunities.
By equipping yourself with a thorough understanding of NZDUSD drivers and employing effective trading strategies, you can potentially generate significant returns.

Frequently Asked Questions

When Does NZDUSD Experience Peak Trading Activity?

NZDUSD sees the most trading activities during the Asian and US market hours, especially during economic data releases that pertain to both currencies.

How Do You Analyze the NZDUSD?

Just as you would with other markets, you can analyze the NZDUSD pair by a combination of trend analysis, technical analysis, fundamental analysis and various trading strategies.

Can the New Zealand Dollar Be Used For Carry Trade?

The New Zealand dollar's attractive interest rates make it a popular choice for carry trades, where investors borrow in a low-yielding currency like the Japanese Yen and invest in the Kiwi for a potential profit from the interest rate differential.