The New Zealand dollar had a volatile 2013, reaching recent
highs against both the Japanese Australian and United States
All signs indicate this year will provide more heavy trading
of the kiwi.
The prospect of interest rate hikes from the Reserve Bank
should equate to keeping the dollar higher, rather than
lower, for the remainder of the year.
Milford Asset Management executive director Brian Gaynor said
the latest Bank of International Settlements (BIS) global
foreign exchange turnover survey showed the New Zealand
dollar maintained its place as the world's 10th most-traded
''This is quite extraordinary when it is considered we have a
population of 4.5 million against an average of 260 million
for the nine currencies ranked above us.''
The BIS survey, which is carried out every three years,
revealed the kiwi had moved from 0.2% of global foreign
exchange volume in 1998 to 2% in 2013. That was a rise from
17th to 10th position over a 15-year period.
Since 1998, the New Zealand dollar had passed the Swedish
krona (11th), Russian rouble (12th), Hong Kong dollar (13th),
Norwegian krone (14th), Singapore dollar (15th), South
African rand (18th), Brazilian real (19th), Danish krone
(21st) and the Czech koruna (26th).
The nine currencies the kiwi had overtaken since 1998 had an
average population of 28 million.
The other high-flying currencies since 1998 had been the
euro, which had soared from 32nd to 2nd position, the Chinese
renminbi from 30th to 9th and the Turkish lira from 33rd to
Mr Gaynor said the latest BIS study, which assessed data for
April last year, showed the kiwi had an average turnover of
$US105 billion ($NZ128 billion) a day.
That made it New Zealand's largest financial instrument by a
wide margin, as non-reporting entity New Zealand government
bonds had a daily volume of $950 million during April and the
New Zealand sharemarket turned over $145 million.
The kiwi had 131 times more daily volume than the government
bond market and was 855 times greater than the NZX, he said.
The study said the role of the US dollar as the world's
dominant currency remained unchallenged.
Foreign exchange deals with the US dollar on one side of the
transactions represented 87% of all deals initiated in April,
about 2% higher than three years ago.
Total trades added up to 200% because there were two sides to
In second place was the euro, which had a market share
decline from 39.1% in 2010 to 33.4% last year. The drop was
mainly due to the euro area sovereign debt crisis.
The next most-traded currencies were the yen with 23% market
share, pound sterling (11.8%), Australian dollar (8.6%),
Swiss franc (5.2%), Canadian dollar (4.6%), Mexican peso
(2.5%) Chinese renminbi (2.2%) and the New Zealand dollar
The Australian dollar had gone from sixth to fifth in
turnover since 1998 but was now only 4.3 times larger than
the New Zealand dollar in terms of volume compared with 15
times in 1998.
''No matter which way one looks at it, the growth in
popularity of the kiwi over the past 15 years has been
remarkable, particularly as emerging market currencies have
had nine times volume growth since 2001 while developed world
currencies have expanded only fourfold,'' Mr Gaynor said.
On a global basis, investment banks, hedge funds, pension
funds, mutual funds and insurance companies were playing a
bigger role in foreign exchange markets.
At the same time, trading by official financial institutions,
such as central banks and sovereign wealth funds, accounted
for less than 1% of global foreign exchange market activity
in April last year.
The Reserve Bank noted in December that in the early stages
of a country's development, foreign exchange turnover
increased in line with trade-related activities.
But as the country developed, foreign exchange turnover
increased at a faster rate than GDP growth because of the
greater depth, complexity and openness of a country's
Mr Gaynor said New Zealand had always had a high foreign
exchange turnover relative to GDP, although it had increased
dramatically in recent years.
There were several reasons for that, including:
- New Zealand had a low saving rate and, as a result,
interest rates were relatively high compared to other
countries. The New Zealand dollar attracted international
investors seeking yield.
- Many of the country's largest companies, particularly
banks, were overseas-owned and their owners used foreign
exchange swaps to reduce the risks associated with their New
Zealand dollar assets.
- New Zealand organisations were big borrowers on
international markets and those loans had to be converted
into New Zealand dollars.
- International trade was a large part of the New Zealand
economy and exports and importers were significant foreign
exchange market participants.
- The New Zealand dollar attracted more than its fair share
of speculative currency trading because of open financial
markets and the Reserve Bank did not have the financial
resources to have a material influence on the kiwi's value.
One of the more notable features of the kiwi was it had the
lowest percentage of its currency traded at home, Mr Gaynor
said. In April, about 10% of the total daily transactions of
the $US105 billion were conducted in New Zealand. The rest
was done overseas.
''The future direction of the New Zealand dollar is extremely
difficult to predict and most forecasters get it wrong,
mainly because the kiwi overshoots on the high and low
side,'' Mr Gaynor said.