NZD/JPY: What impacts it and what does it tell us about the market environment

If you have traveled recently, you know the hassle of exchanging US dollars for the currency of a country you are going to (or vice-versa). Sometimes when you return after your trip with leftover money, you may notice you get more or less money than it was worth a few weeks ago when you exchanged it. This is because foreign exchange rates fluctuate due to supply and demand for each currency in a pair. Supply and demand for currencies are impacted by the monetary policy, inflation rates, political landscape, and economic environment of each country (Patel 2020). 

New Zealand Dollar/Japanese Yen (NZD/JPY) is a particularly interesting currency pair, and it can tell us about market sentiment more generally. Before the end of the pandemic, Japan had an account surplus and struggled with low inflation (EarnForex 2021). Additionally, the Bank of Japan (BoJ) was maintaining negative interest rates. Now, as of February 2023, Japan inflation is extremely high, but the BoJ is maintaining a dovish stance (loose monetary stance) (Valencia et al. 2023). Japan was always considered a safe-haven currency because of their stability, but with the recent changes in inflation and other factors, yen has lost some of its strength and its status as a safe-haven has come into question. Japan is one of the largest economies in the world, so they are greatly impacted by news in Asia, Europe, and North America. 

New Zealand has a stable economy driven by export of commodities (FXForex 2021). While currency pairs like USD/JPY can give us insight into other parts of the market, strength of the dollar can have a much stronger impact than the other factors which impact USD/JPY, leaving us with less insight into general market sentiment. Meanwhile, NZD is relatively less impacted by US and European economic news, with commodities driving its economy (FXForex 2021).

Based on this background, we know the main factors that impact NZDJPY. As an economy driven by exports, NZD is impacted by the price of those commodities like meat or wool. Japanese inflation, interest rates, and labor data, as well as economic development of China, also impacts the JPY half of the pair (FXForex 2021). Finally, like all currencies, any news out of the Bank of Japan or Reserve Bank of New Zealand will impact NZDJPY.

NZDJPY faces some challenges for those who wish to trade it. Liquidity in foreign exchange is the ability to buy or sell a certain amount of a currency without greatly changing the exchange rate. If barely anyone is buying or selling NZDJPY at a particular time, and a corporation or bank puts in a big order to exchange NZD for JPY, the exchange rate will change (supply is low and they change demand). Pairs like EURUSD or USDJPY are traded very often, so they do not often have big liquidity issues, but NZDJPY is a more minor pair. Therefore, to avoid liquidity issues, NZDJPY should be traded around peak hours when markets in Japan and New Zealand are both open. NZDJPY is a volatile pair, so traders need to be precise and avoid liquidity issues. If someone believes the currency of NZD will strengthen (which could happen due to many economic factors like unexpectedly higher interest rates or stronger GDP) and/or the currency of JPY will weaken (unexpectedly lower interest rates or weaker GDP), they would want to buy the currency pair (buying NZD and selling JPY) (HSBC 2023). If they expect the opposite they would want to sell NZDJPY (sell NZD and buy JPY).

NZD is a high yielding currency (can give insight into high yielding instruments) (Panchal 2023). While Japan has been facing increasing inflation, their interest rates have remained relatively low (dovish stance), and New Zealand has been increasing rates to deal with inflation. Therefore their central bank benchmark interest rate differential is very big. This is why NZDJPY is an attractive carry trade. A carry trade is when a high yielding currency (NZD) funds the trade with a low yielding currency (JPY), which can allow a trader to capture the difference in the rates (Chen 2022). For example, a trader would borrow and sell yen to buy NZD. Then they would invest the NZD into a security paying New Zealand’s elevated interest rate. The security would pay out the principal and interest in NZD. Then, this NZD would be converted back to yen, which the investor would use to pay pack the original borrowed yen. Their profit would be the interest rate differential between the central banks (given the exchange rate doesn’t move against the trade in the meantime).

After understanding what impacts NZDJPY and how to trade it, we finally turn to what the pair can tell us about market sentiment based on how it is trading. The yen can sometimes reflect risk appetite. As mentioned before, more major pairs like USDJPY are largely impacted by the strength of the dollar, so it is hard to get a sense for risk appetite from its movements (Panchal 2023). NZDJPY on the other hand often offers insight: it generally declines when there markets are more risk-off, and rises when markets are more risk-on (Panchal 2023). Many variables give an indication of market sentiment, and NZDJPY is one of them. Investors can use this knowledge to exchange NZDJPY, or use it to help inform risk in other investment decisions. 

Over the past 6 months, as of February 9th, 2023, NZDJPY is down 2.62% (Morozova 2023). It has and will change based on the upcoming news on inflation, interest rates, and risk sentiment in the market. Foreign exchange is important not just for getting the correct currency for your post-grad trip, but also for helping us understand what is going on in the market more generally.

Sources: 

Chen, James. “Currency Carry Trade: Definition as Trading Strategy and Example.” Investopedia. Investopedia, November 5, 2022. https://www.investopedia.com/terms/c/currencycarrytrade.asp. 

Morozova. “NZDJPY Chart, Rate and Analysis.” TradingView. Accessed February 7, 2023. https://www.tradingview.com/symbols/NZDJPY/. 

Panchal, Anil. “Risk Appetite Forex Trading.” FXStreet. Accessed February 7, 2023. https://www.fxstreet.com/technical-analysis/sentiment/risk-appetite. 

Patel, D. “Why Do Currencies Fluctuate?” Foreign Exchange Services, February 17, 2020. https://www.upfx.co.uk/latest-news/post/why-do-currencies-fluctuate. 

“NZD/JPY.” fxforex.com. Accessed February 7, 2023. https://www.fxforex.com/markets/nzd-jpy. 

“Why Are JPY and CHF Considered Safe Haven Currencies?” Forex Trading Information. Accessed February 7, 2023. https://www.earnforex.com/guides/why-are-jpy-and-chf-considered-safe-haven-currencies/. 

“Why Do Exchange Rates Change: Foreign Exchange - HSBC EXPAT.” Why Do Exchange Rates Change | Foreign Exchange - HSBC Expat. Accessed February 7, 2023. https://www.expat.hsbc.com/international-banking/what-makes-exchange-rates-move/#:~:text=Higher%20interest%20rates%20can%20increase,higher%20demand%20for%20the%20currency.