NZD: How NZD Trades in Markets

The reason why no two currency pairs are the same is because no two economic systems are the same. NZD and AUD appear to be brothers locked at the hip when in reality both are more like far distant cousins because each nation operates two distinct economic systems for vastly different reasons. NZD bond yields are always higher than most counterpart nations because New Zealand spends more than it saves traditionally.
Bond yields are priced higher purposefully to contain Inflation as New Zealand joined the ranks of Sweden, UK and other nations in 1990 to Target Inflation. NZD 10 year bond yield for example over the past 20 years traded anywhere from 0 – 300 Basis points above USD equivalents. Since 1990, NZD 10 year yield traded 0- 120 basis points above Australia 10 year yields. 10 year yields dropped over the past 20 years because Inflation dropped. To further protect its system, the New Zealand Debt Management Office issues Inflation Indexed bonds to monitor future Inflation. New Zealand Bonds are not only popular with foreign investors because interest is exempt but NZ bonds pay more than other nations to ensure the New Zealand system replicates itself and maintains its economic status. As of February 2014, 64% of NZ bonds are held by foreign investors. Over the past 10 years, bonds held by foreign investors ranged from 50% to 77%. Since 2012, the DMO now offers bonds on an advanced forecast Quarterly schedule rather than its prior method to issue bonds based on maturity and market demands. This changed the dynamics to NZD.

Due to NZD’s equalization in bonds and its known issuance on a quarterly schedule, NZD becomes easier as a management tool. What this means is containment for NZD and NZD currency pairs. AUD is an interest rate currency while NZD shares a hybrid relationship with its interest rates and yields. Its hybrid status allows NZD wider ranges but it also allows NZD not to become a hostage to world vagaries since its currency is purposefully priced at a 0 point.

NZD must be traded based on monthly averages because Bottoms are not seen on a daily view and it includes NZD/USD, NZD/JPY, NZD/CHF and NZD/CAD. But the monthly view allows longer holding periods as opposed to counterpart pairs because bottoms are known. Its the tightness of exchange rates to interest rates that prevents the bottom view from a daily perspective. What is seen from a daily view is longs only. Consider why NZD is never seen from severe overbought / Oversold perspectives long, medium and short term. Yet NZD movements are always reported in percentages and always NZD outperforms other currency pairs movement. Reason for out performance is wider ranges built into the NZD system. It doubles EUR/USD for example. But its the wider ranges built into the system as reason why NZD never reaches extreme prices or extreme overbought /oversold.

Brian Twomey Inside the Currency Market, btwomey.com

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