Kiwi

What Is Kiwi?

"Kiwi" is the informal, widely recognized nickname for the New Zealand Dollar (NZD), the official currency of New Zealand. This colloquial term is frequently used within the Foreign Exchange (forex) market. The nickname derives from the kiwi bird, a flightless bird native to New Zealand, which is prominently featured on the country's one-dollar coin. The Kiwi belongs to the broader financial category of global currencies and is actively traded against other major global currencies as a currency pair. Its value is influenced by New Zealand's economic performance, global commodity prices, and the monetary policy decisions made by the Reserve Bank of New Zealand.

History and Origin

The New Zealand Dollar was introduced on July 10, 1967, replacing the New Zealand Pound as part of a decimalization process. Prior to this, the currency operated under the complex pounds, shillings, and pence system. The transition to a decimal system simplified financial transactions and aligned New Zealand with many other nations. The nickname "Kiwi" emerged due to the distinctive image of the kiwi bird on the reverse side of the NZD $1 coin, which replaced the $1 banknote in 1991. Over time, the association between the bird and New Zealanders grew, eventually extending to the currency itself. The bird became a national symbol, and the informal moniker for the currency gained widespread acceptance in financial circles, particularly among foreign exchange traders⁹, ¹⁰.

Key Takeaways

• The "Kiwi" is the informal name for the New Zealand Dollar (NZD).
• The nickname originates from the kiwi bird, depicted on the New Zealand one-dollar coin.
• The Kiwi is considered a commodity currency, meaning its value is significantly influenced by global commodity prices.
• The Reserve Bank of New Zealand is the central authority responsible for the Kiwi's monetary policy and stability.
• It is a widely traded currency in the foreign exchange market.

Interpreting the Kiwi

The value of the Kiwi, like other floating currencies, is primarily determined by supply and demand dynamics in the foreign exchange market. Traders and analysts interpret the Kiwi's movements in relation to various economic indicators and global events. A strengthening Kiwi can indicate robust economic growth in New Zealand, strong export demand for its commodities, or higher relative interest rates compared to other economies. Conversely, a weakening Kiwi might suggest economic headwinds, falling commodity prices, or a loosening of monetary policy by the Reserve Bank of New Zealand. Market participants often assess the Kiwi's performance using its exchange rate against major currencies like the U.S. Dollar (USD), Euro (EUR), or Japanese Yen (JPY).

Hypothetical Example

Consider a hypothetical scenario where an investor in the United States wants to benefit from potential appreciation of the Kiwi. Suppose the current exchange rate for the NZD/USD currency pair is 0.6000. This means 1 New Zealand Dollar is worth 0.6000 U.S. Dollars.

The investor believes that an expected rise in global dairy prices, a major export for New Zealand, will strengthen the Kiwi. They decide to buy NZD 100,000 using their USD.
Initial transaction: ( \text{NZD } 100,000 \times 0.6000 \text{ USD/NZD} = \text{USD } 60,000 )

A few weeks later, global dairy prices increase, and as anticipated, the Kiwi strengthens against the U.S. Dollar. The NZD/USD exchange rate moves to 0.6200. The investor then decides to sell their NZD 100,000 back into USD.
Final transaction: ( \text{NZD } 100,000 \times 0.6200 \text{ USD/NZD} = \text{USD } 62,000 )

In this hypothetical example, the investor would realize a profit of USD 2,000 (USD 62,000 - USD 60,000) from the appreciation of the Kiwi.

Practical Applications

The Kiwi plays a significant role in international trade and investment. Its practical applications include:

• International Trade: Businesses involved in importing or exporting goods and services to or from New Zealand conduct transactions in Kiwi, necessitating foreign exchange conversions.
• Forex Trading: The Kiwi is a popular currency among forex traders for speculation on exchange rate movements. Its trading volume, while smaller than major currencies like the USD or EUR, is substantial, often exceeding New Zealand's annual GDP in monthly transactions⁸.
• Investment and Portfolio Diversification: International investors may hold Kiwi-denominated assets, such as New Zealand government bonds or equities, as part of a diversified portfolio. The value of these investments can be affected by the Kiwi's exchange rate.
• Tourism: Travelers to New Zealand require Kiwi for local expenses, and its value impacts the affordability of travel for international visitors.
• Monetary Policy and Economic Management: The Reserve Bank of New Zealand manages the Kiwi through tools like the Official Cash Rate (OCR) to influence inflation and promote financial stability. Fluctuations in commodity prices, particularly dairy, meat, and forestry products, have a notable impact on the Kiwi's value, which in turn affects the broader economy⁷.

Limitations and Criticisms

Despite its importance, the Kiwi's valuation and movements are subject to certain limitations and criticisms:

• Sensitivity to Commodity Prices: As a commodity-linked currency, the Kiwi is highly susceptible to swings in global commodity prices, especially those of agricultural products like dairy. While strong commodity markets can boost the Kiwi, a downturn can lead to significant depreciation, impacting New Zealand's export revenues and overall economic growth⁵, ⁶.
• Market Volatility: The Kiwi can exhibit considerable market volatility, particularly when compared to less commodity-dependent major currencies. This volatility can pose challenges for businesses engaged in international trade and for investors with Kiwi exposure, as unpredictable exchange rate movements can affect profit margins and investment returns³, ⁴.
• Small Economy Influence: New Zealand's relatively small economic size can make the Kiwi more susceptible to external shocks and shifts in global investor sentiment than currencies of larger economies. While the Reserve Bank of New Zealand works to maintain financial system stability, the open nature of the economy means the Kiwi is exposed to global financial cycles².
• Limited Liquidity: While actively traded, the Kiwi has lower liquidity compared to top-tier currencies like the U.S. Dollar or Euro. This can sometimes lead to wider bid-ask spreads and potentially larger price movements during periods of low trading volume or significant news events.

Kiwi vs. Aussie Dollar

The Kiwi (New Zealand Dollar) and the Aussie Dollar (AUD), the informal name for the Australian Dollar, are often compared due to their geographical proximity, similar economic structures focused on commodity exports, and close trading relationship. Both currencies are considered commodity currencies, meaning their values are heavily influenced by global prices for raw materials. However, key differences exist:

While both currencies often move in similar directions due to their shared commodity-exporting nature and ties to Asian demand, differences in their primary commodity exposures and the relative sizes and structures of their economies can lead to divergence in their exchange rate movements. For instance, a surge in iron ore prices might boost the Aussie Dollar more significantly than the Kiwi, while a jump in global dairy prices could have a more pronounced positive effect on the Kiwi.

FAQs

What does "Kiwi" mean in finance?

In finance, "Kiwi" is the common nickname for the New Zealand Dollar (NZD), the national currency of New Zealand.

Why is the New Zealand Dollar called the Kiwi?

The New Zealand Dollar is called the Kiwi because the one-dollar coin features the image of a kiwi, a unique flightless bird native to New Zealand and a national symbol¹.

Is the Kiwi considered a major currency?

While not as widely traded as the U.S. Dollar or Euro, the Kiwi is considered a significant currency in the foreign exchange market, often ranking among the top 10 to 15 most traded currencies globally. Its status as a commodity currency makes it closely watched by traders.

What factors influence the Kiwi's value?

The Kiwi's value is influenced by several factors, including commodity prices (especially dairy), interest rates set by the Reserve Bank of New Zealand, New Zealand's economic growth data, and global investor sentiment.

How does the Reserve Bank of New Zealand influence the Kiwi?

The Reserve Bank of New Zealand (RBNZ) influences the Kiwi primarily through its monetary policy, particularly by setting the Official Cash Rate (OCR). Changes in the OCR can affect interest rates and capital flows, impacting the Kiwi's attractiveness to international investors and thus its exchange rate.