What is pulling the NZD up?
Skerdian Meta • 2 min read
Have you guys noticed the uptrend in the Pacific Dollars and particularly the NZD/USD. This bad boy has forced an uptrend in the last year, since it hit the dirt last August when the Chinese stock market nearly crashed. I say "forced" because the NZD has been one of the weakest major currencies since May 2014.
NZD/USD has been stuck in a one-way traffic road
But as you can see from the daily forex chart above, in the last year, this forex pair has marched up and has ignored all the global disturbances such as Brexit, weak Chinese, Japanese and European economies etc. So, what´s the reason behind all this buying pressure in this forex pair? The answer is yield, the NZD has high yield. Why? Because the interest rates set by the RBNZ (Royal Bank of New Zealand) in New Zealand are the highest in the developed world and consequently the government bonds have the highest interest rates.
Someone might ask why the investors would run for high interest when the best they can get is 2-3% annual return on their equity (funds), instead of investing in new businesses and other traditional and non-traditional investment opportunities. because the world is not a safe place right now or better say, everything seems very blurry.
The US economy should have been in a much better shape and the FED should have raised the interest rates several times by now. The inflation in the Eurozone and Japan should have reached the 2% target and their economies should have felt the effects of the stimulus programmes already. Brexit should have never occurred. The Chinese economy should have been growing at the same pace as before the 2008 global crises.
Several years ago, this was the picture in everyone´s mind for 2016, 2017 and the years to come. But, things have gone the opposite way and the investors feel uncertain, to say the least. So, instead of placing their money in risky investments, the investors invest their money in high yield government bonds. After all, better safe than sorry. Not saying that the judgement day is close, but that´s the reason for the demand in NZD and AUD. In forex this is called carry trade.
By the way, stay tuned because the next update will be for this forex pair, but we´ll look at it from another angle.