If you’re an expat working in New Zealand, or you have any ongoing interests in the value of the NZ Dollar against other currencies, this post is here to help you get a better understanding of the forces that determine that value. We’ll look at how interest rates affect exchange rates, New Zealand’s key trading partners (including the United States), and what this all means for OrbitRemit customers sending money out of New Zealand. (for today’s rates – please visit http://www.orbitremit.com)

Interest Rates and the Reserve Bank

One of the key factors in determining the relative value of currencies is the interest rate differential – in other words, the difference in the interest rates set by each country’s reserve bank. For example, in determining the NZD/USD exchange rate, the interest rate set by the NZ Reserve Bank is weighed against that set by the Federal Reserve in the United States.

Right now, the New Zealand Dollar is relatively strong compared to five or ten years ago, and in part this is related to the declining value of the USD over that time period, which in turn is tied in large part to the Federal Reserve’s historically low interest rates and rounds of quantitative easing.

Yesterday the NZ Reserve Bank raised the Official Cash Rate from 3.25% to 3.5%. However, the Reserve Bank is also warning that the current value of the New Zealand Dollar is unsustainably high, and a sudden fall may occur as the currency adjusts to drops in commodity prices. Some traders and investors interpreted this as implying the Reserve Bank may begin actively selling New Zealand Dollars in order to influence the currency’s value.

Another factor that comes into play is the ratings agencies and how they rate each currency – for instance, the NZD strengthened slightly when Fitch upgraded the outlook for the currency.

NZD-AUD Exchange Rate

New Zealand’s trade relationship with its closest economic neighbour, Australia, also has an impact on the value of the New Zealand Dollar. Generally speaking, the NZD/AUD exchange rate is historically highly stable and again, the key factor here is the interest rate differential between the two countries. If you’re sending money between NZ and Australia, keeping an eye on updates from their respective Reserve Banks will help you get a good idea of when shifts in the exchange rate will be happening.

Because both Australia and New Zealand are natural resource rich, the value of both currencies has historically been linked to commodities trading. The price of gold, for example, can have a marked impact on the AUD with Australia being the world’s third-largest gold producer.

Key Trading Partners: USD

We have already mentioned the NZD/USD exchange rate – but this is not only important in terms of trading NZ Dollars for USD, as it impacts the value of the NZD against virtually every other currency.

What This Means for OrbitRemit Customers

If you are trading NZD for Indian rupees or Philippines pesos, this NZD/USD exchange rate is also important to keep an eye on because changes in it will have ripple effects on how much your New Zealand Dollars will be worth once converted to your home country’s currency.