Every three years the Bank for International Settlements carries out a survey of global foreign exchange. Not surprisingly the US$ remains unchallenged – foreign exchange deals with the US$ on one side of the transaction represented 87% of all deals. Remember because there are two sides to each transaction total trades add up to 200%.
The graph below shows the Daily Global FX Volume for 2013. The NZ$ is ranked the 10th most traded currency at 2%.
* two sides to each transaction total trades add up to 200%
Global daily volume = US$5345bn
Global daily volume of NZ$ (expressed at US$) = US$105bn
Relative to its GDP New Zealand has had a high FX turnover especially in recent years. According to Brian Gaynor in the New Zealand Herald there are several reasons for this:
1. A low savings rate in New Zealand means less money in bank and therefore higher interest rates. This attracts “Hot Money” seeking a higher yield which increases the demand for NZ$’s.
2. Most big companies in NZ are overseas owned (especially banks) and use swaps to reduce the foreign exchange risks.
3. NZ organisations are big borrowers on international markets and therefore have to exchange the loans into NZ$’s.
4. As international trade (exporters and importers) is a large part of the NZ economy there is a lot of activity on the FX market
5. Speculators are attracted to the NZ$ as NZ has open financial markets and the Reserve Bank of NZ has limited influence on its value.
From The Economist – Trading in foreign-exchange markets averaged $5.3 trillion a day in April 2013, reports the BIS in its latest “Triennial Central Bank Survey”. This was up from $4 trillion in 2010 and $3.3 trillion in 2007. The US dollar was the dominant currency: 87% of deals contained the dollar on one side. The euro, the second-most-traded currency, was involved in 33% of deals, down from 39% in April 2010. The third-most-traded currency, featuring in 23% of all trades, was the Japanese yen; its market share has risen by four percentage points since the previous survey. Several emerging-market currencies rose sharply in global importance. The Mexican peso and Chinese renminbi made it into the top ten for the first time.
The NZ$ is the 10th most traded currency totalling around US$27 trillion
I was fortunate enough to attend the Institute of Directors breakfast where RBNZ Governor Graeme Wheeler was the guest speaker. He spent a lot of time focussing on the overvalued NZD and that keeping the OCR low is a an effort to weaken its value. He did mention that the RBNZ has intervened in the FX market by buying foreign currency with NZD – supply increases therefore value should drop. In assessing whether to intervene in the exchange market, the RBNZ apply four criteria.
1. Is the exchange rate at an exceptional level,
2. Whether its level is justifiable,
3. Is intervention consistent with monetary policy, and
4. Are market conditions conducive to intervention having an impact.
This last factor is especially important given the volume of trading in the Kiwi. In the most recent survey – April 2010 – by the Bank for International Settlements, the Kiwi was the tenth most traded currency in the world with daily turnover of spot and forward exchange transactions totaling around USD $27 billion.
“We can only hope to smooth the peaks off the exchange rate and diminish investor perceptions that the New Zealand dollar is a one-way bet, rather than attempt to influence the trend level of the Kiwi.” Graeme Wheeler – RBNZ Governor
See the graph below for the value of the NZD after his speech.
Here is a great graphic from the BNZ showing how the NZ dollar performed in September. You could say that it strengthened on the back of notably QE3 from the US Fed and the improving global growth sentiment. Furthermore the NZ economy has performed well under trying circumstances.
June quarter GDP accounts revealed the NZ economy finished Q2 1.6% bigger than where it began the year. That is solid economic growth under ordinary circumstances. But given the ongoing challenging and uncertain global economic environment we should not under sell this achievement. It is the strongest six month expansion we have seen in the past five years. Source: BNZ
Here is an informative graphic with explanations for the decline/rise in the NZ$ – source BNZ.
The key points from the BNZ Financial Market Wrap are:
• Risk aversion relating to the EU debt crisis dominated markets until a late month rally.
• The tone of US data continues to improve. Suggesting the US economy has averted recession.
• In NZ, RBNZ rate cuts were priced. Declining interest rate differentials, commodity prices and risk sentiment undermined the NZD.
• The NZD’s end of month rally was driven by improving global risk appetite.
• We see further upside to NZD on improving interest rate differentials. Next week’s RBNZ meeting is a potential catalyst.
From a recent school trip to Wellington we picked up this great graphic which shows the NZ$ to US$ between the years 1982-2010. If you click on the image you will be able to enlarge it. It is especially interesting to see the volatility over the last two years.