What are the three most impactful economic indicators for the New Zealand dollar? This article will cover each of these, which will benefit any fundamental analyst studying this currency.
Most traders may be wondering what happened to Old Zealand. Jokes aside, the New Zealand dollar (NZD) or the kiwi is one of the most traded currencies in the world as it forms part of the major pairs, along with AUDUSD, EURUSD, GBPUSD, USDCHF, USDJPY, and USDCAD.
As expected, the kiwi is paired against a myriad of established currencies as a testament to its substantial trading interest among traders. The island country is an exceptionally developed country revered for its superb quality of life, low crime rate, and economic prosperity.
Along with Australia, New Zealand ranks highly in statistics like GDP and per capita income. Hence, given the nation’s influence in the markets, forex fundamentalists are always curious to understand the driving forces behind its currency.
Therefore, this article will cover the three most impactful economic indicators for the kiwi, what they entail, their effects, and when they are released to the public.
Basic fundamentals of the New Zealand dollar
The Oceania-based country’s largest exports are food/beverage production, metals fabrication, mining, power production, and information technology. New Zealand has a thriving, diverse free-market economy with several frequent trade partners, most notably the United States.
Hence, factors affecting the kiwi tend to correspond with the greenback (USD). Furthermore, as the next-door neighbor and regular trade partner to the marginally richer Australia, the kiwi strongly correlates to the Australian dollar or the AUDUSD market.
Like Australia, commodity prices also significantly influence the kiwi because of mining monetary exports to other countries. Another unique trait with the kiwi is the prevalence of carry trades, like the Australian dollar.
To earn interest on their money, investors favor currencies like NZD since their interest rate yield is slightly higher when paired with lower-yielding currencies like the Swiss franc and Japanese yen, a particularly favored strategy in times of global financial crisis.
Overall, this section is an overview of some of the fundamentals for New Zealand, which have a massive influence on its valuation. The following section will expand on these concepts more through the key impactful economic indicators.
The three impactful NZD economic indicators
Let’s now dive deeper into the significant economic indicators for the kiwi.
The prevalence and significance of interest rates remain top-of-mind for any currency and are considered the leading driver by experts. This indicator typically fosters a knee-jerk reaction in the short term but plays out more crucially in the long run.
The simplest way to describe the importance of interest rates is thinking of them as the price of money. All developed economies either falter or thrive on how much they lend and borrow to their countries and trade partners.
Interest rates also affect the magnitude at which people save their money and foreign investment. Generally, a currency perceived as more valuable has a higher interest rate and vice versa.
Central banks oversee and change these rates based on inflation targets and economic stabilization. In New Zealand, this institution is the Reserve Bank of New Zealand (RBNZ).
Like most central banks, the RBNZ has maintained the same interest rate of 0.25% since March 2020, which is considered a dovish or contractionary stance.
In simple terms, analysts regard a lower interest rate as the sign the central banks want to vitalize the economy and increase inflation. The rule of thumb tends to be that a lower rate equals a less valuable currency and vice versa.
What’s also vital in the analysis is looking at the differences between the forecasted and actual figures.
Like many central banks of its caliber, New Zealand’s reserve bank releases interest rates numbers about seven to eight times yearly. Data is made publicly available from the bank, usually on a predetermined Wednesday (third or fourth day typically) of a particular month around 02h00 GMT.
Gross Domestic Product (GDP)
Ultimately, the interest rate deals primarily with monetary policies but not so much on economic prosperity; this is where the GDP comes into play. The Gross Domestic Product attempts to assign some value to an economy by accounting for all the finished goods and services in a nation.
Other factors accounted for in the GDP include national income, spending done by consumers, investors, and governments, and net exports value. As expected, a higher GDP than the previous reading signals a more valuable currency; the opposite is true.
Like most countries, the GDP (mainly calculated by Statistics New Zealand) is released quarterly. The current GDP reading accounts for the previous three months. Data is usually published on the third or fourth Wednesday/Thursday of March, June, September, and December at 22h45 GMT.
Consumer Price Index (CPI)
The Consumer Price Index refers to the weighted average prices of a number of consumer goods and services. Put simply. The CPI measures the changes in prices paid by consumers expressed as a percentage. Analysts use the CPI to gauge changes to a country’s inflation/deflation and cost of living.
We know inflation deals with purchasing power. If prices are rising, a unit of money will purchase less in value than previously. If the CPI increases, it suggests people have more funds to spend, resulting in a more valuable currency.
Conversely, citizens cannot afford as much when the CPI decreases, resulting in a less valuable currency. CPI results come quarterly in January, April, July, and October for Australia. The readings account for the previous three months and are also calculated by Statistics of New Zealand.
This institution releases the CPI results around 22h45 GMT, usually on a third or fourth Monday/Tuesday/Thursday of the predetermined month.
It goes without saying fundamental analysis in forex is not for the faint-hearted and takes years of skill and experience in macroeconomics. Traders can easily bombard themselves with lots of analytical data, which is why we’ve covered only the most impactful.
Ultimately, there are several methods of traveling down this path, the first of which starts with the interest rates since they are arguably the most crucial.
Fundamental analysts often first compare the interest rates of two currencies and see which country has a higher one. The interest rate generally tends to have a ripple effect on the other two economic indicators, which may be positive or inverse.
To illustrate a positive relationship, if the rates gradually increase, economic growth is higher, resulting in a greater GDP. For an inverse example, if interest rates are minimized, the CPI increases (due to inflation) as borrowing becomes cheaper, increasing the money supply.
These are just a few of the scenarios analysts play out against other markets. Overall, it takes a discerning mind to navigate this information to decide the directional bias of one currency against another, whether positive, negative, or neutral.