What is the future trend of the New Zealand dollar? Analyzing the underlying factors behind the depreciation of the New Zealand dollar

New Zealand Dollar (NZD), with the currency code: NZD, ranks ninth in global trading volume among currency pairs. Since reaching a historical high of 0.88 against the USD in 2014, it has been on a downward trend, falling to around 0.5 USD, with a cumulative depreciation of up to 32%. What are the underlying driving factors behind this persistent weakening? Will the NZD continue to decline in the future?

Why has the NZD been in a continuous decline?

To understand the recent performance of the NZD, it is first important to recognize New Zealand’s unique position as an export-oriented economy. Over two-thirds of its exports consist of commodities such as agricultural products, dairy, and wool, making the economy highly dependent on the international performance of these goods.

Commodity price fluctuations are the primary influencing factor. As a typical commodity currency, the NZD shows a positive correlation with the prices of agricultural products, dairy, and wool. When these prices fall, the NZD tends to weaken accordingly.

Tourism industry decline causes secondary impact. After the global pandemic, New Zealand’s tourism sector was severely affected, and tourism income was once a significant pillar of the economy. This further increased downward pressure on the NZD.

US dollar appreciation is the third force. The Federal Reserve’s continued rate hikes have strengthened the USD, widening the interest rate differential with the NZD, which exerts ongoing depreciation pressure on the NZD/USD exchange rate.

Global economic uncertainty shocks. Any large-scale unexpected event could disrupt New Zealand’s export trade chain, accelerating the depreciation of the NZD.

The correlation between AUD and NZD

Both Australia and New Zealand export large quantities of coal, iron ore, copper, aluminum, and wool to the international market, which causes the AUD and NZD to be collectively referred to as commodity currencies. These two currencies often move in tandem, reflecting global economic conditions. Since the pandemic, both have depreciated against the USD by over 10%, illustrating signs of a global economic slowdown.

Commodity currencies differ from traditional currencies like gold and silver in that they are not only backed by government credit but also have intrinsic value supported by physical assets. Today, the AUD, CAD, and NZD all belong to this category.

Future outlook for the NZD

According to forecasts from international investment banks, the NZD/USD exchange rate may show a gradual downward trend in the coming period:

• Six-month target: 0.594
• One-year forecast: 0.5934
• Two-year forecast: 0.5885
• Three-year forecast: 0.5834

In the long term, the probability of the NZD entering a weak phase is relatively high. Due to expectations of a global economic recession and slowing economic growth in New Zealand, there is insufficient momentum to push the NZD higher. However, it is important to note that when risk asset demand recovers, commodity prices tend to rise, prompting investors to reallocate funds into high-yield assets and sell USD, which can lead to a rapid appreciation of the NZD.

In the short term, the USD remains resilient amid global market volatility. Traders should closely monitor the policy directions of the Federal Reserve and the Reserve Bank of New Zealand.

Four investment paths for the NZD

NZD Fixed Deposit

The most traditional approach is to exchange NZD at local banks and place fixed deposits. Convert your local currency into NZD at the current exchange rate, deposit for a fixed term, and upon maturity, receive interest and convert back at the then-current rate. This method has low risk but limited returns, suitable for conservative investors.

NZD Funds

Forex funds investing in NZD are managed by professional fund managers and have higher risk and return volatility. Compared to individual investments, fund products offer more professional management and diversification options.

NZD Futures

Futures are standardized contracts where both parties agree to buy or sell at a predetermined price on a specific future date. NZD futures can be traded on international futures exchanges, offering leverage opportunities. However, futures involve margin calls and settlement risks, requiring investors to understand margin mechanisms and settlement rules thoroughly.

Contracts for Difference (CFD)

Compared to futures, CFDs require lower margin and offer higher capital efficiency. They allow for both long and short positions and have no delivery date restrictions. For investors bullish or bearish on the NZD, CFDs provide more flexible trading mechanisms. Forex margin trading is conducted via CFDs, where investors only track price differences without physical delivery.

Seizing trading opportunities based on NZD trends

As a commodity currency, the NZD’s movement is somewhat predictable, mainly depending on commodity prices and global economic conditions. Traders can monitor commodity markets and central bank policy decisions to identify turning points in the NZD’s trend.

Currently, with the USD strengthening and economic risks remaining low, the NZD is expected to face downward pressure. However, long-term investors should watch for potential reversal signals, such as a rebound in commodity prices or a resurgence in global risk asset demand, which could drive the NZD to appreciate again.

Regardless of the investment method chosen, investors should base their decisions on their risk tolerance, capital scale, and investment horizon, and stay closely updated on global economic data and central bank policies.