The New Zealand Dollar (NZD), often referred to as the Kiwi by currency traders, has been a popular currency to trade in recent years on account of the strength of the New Zealand economy and the relatively high interest rates that prevailed there during the global recession.
Because there are fewer New Zealand dollars in circulation compared with some of the other major currencies, it can fluctuate purely as a consequence of currency trading activity. In 2007, the Reserve Bank of New Zealand, the country’s central bank, intervened in the market by selling an unknown number of dollars in an effort to drive down its price. This was its first currency intervention since the New Zealand dollar was floated.
The New Zealand dollar was launched in 1967 to replace the New Zealand pound, and at the same time introduce a decimal currency into the islands (New Zealand previously used the old imperial system of pounds, shillings and pence). The NZD was initially pegged to the US dollar, but in 1975 switched to a trade-weighted basket of currencies. It was fully floated in 1985.
New Zealand is a lightly populated country, but is a major exporter of agricultural products. An expensive NZD will hit this key strategic industry hard. The central bank has demonstrated that it is prepared to intervene in currency markets if this happens.
While the New Zealand dollar is one of the top 10 most highly traded currencies in the world, it is considered a riskier asset than those of some larger currencies, prompting a ‘flight to quality’ in times of crisis. Heavy selling of the NZD is magnified by the fact that there is less currency in circulation.