40 years of a floating NZD: What it means for investors
The NZD has fluctuated since it was floated in 1985. We look at how currency movements can impact investors, and the role of currency-hedged ETFs.
The New Zealand dollar (NZD) has had a tumultuous journey since it was floated 40 years ago.
On March 4, 1985, the NZD became a free-floating currency, meaning its value would be determined by the foreign exchange market rather than being managed by the New Zealand government1.
Since then, the NZD has experienced significant fluctuations. In fact, we estimate there have been seven instances where the NZD moved by more than 30%—either up or down—against the US dollar. In three of those periods, the movement exceeded 50%. These dramatic swings have often coincided with key economic events, as illustrated in below.
NZD/USD exchange rate: 40 years of fluctuations and key market events
Source: RBNZ data - average monthly NZD/USD exchange rate. Events - analysis by Smart.
What causes the NZD to move up and down?
A variety of factors can cause the NZD (or any currency) to fluctuate against other currencies. These factors include changes in interest rates or inflation, the economic outlook, political events, natural disasters, and even the weather. For instance, a severe drought in New Zealand in 1997-1998 negatively impacted economic activity, which led to a decline in the NZD.2
The New Zealand economy represents only 0.14% of global economic output3 and international trade accounts for approximately 60% of the country’s GDP.4 Despite the relatively small size of the New Zealand economy, the NZD attracts a disproportionate level of trading activity and is the 14th most traded currency in the world.5
Given the relatively small size of New Zealand’s economy and its heavy reliance on trade - particularly primary exports and commodity prices – the NZD is highly susceptible to external shocks. This vulnerability contributes to its volatility.6
Fluctuations in the NZD can directly impact the cost of imports and export prices, which in turn can affect broader economic activity and inflation.7 The value of the NZD has always been a topical issue given the impact it can have on key industries, such as farming and tourism, as well as on households.
How changes in the NZD can impact investors
Many New Zealanders invest in international markets and are affected by exchange rate fluctuations. Changes in the value of the NZD can have a positive or negative impact on the returns they receive from their overseas investments.
For example, a New Zealand investor who holds an investment in US shares will be impacted by changes in the value of the NZD against the US dollar (USD):
If the NZD weakens against the USD, the NZD value of the US investment will rise (assuming no change in the value of the underlying US shares).
If the NZD strengthens against the USD, the NZD value of the US investment will decrease.
It's important to note that while the NZD has historically experienced significant fluctuations, the average exchange rate has remained relatively stable.
Over the past 40 years, the average NZD/USD exchange rate has been 0.64
Over the past five years, it has also been 0.64, and
Over the past 10 years, it has been 0.67.
This underlying stability, combined with the shorter-term fluctuations around this average, suggests that while currency movements can have a noticeable impact on returns over shorter time periods, this effect tends to diminish over the long term.
The role of currency hedging
Currency hedging helps mitigate the impact of exchange rate fluctuations on investments, allowing New Zealand investors to receive returns that aim to reflect the performance of the underlying market in its local currency. While currency hedging can help reduce negative returns when the NZD strengthens, it also means a hedged fund won’t benefit from potential gains if the NZD weakens.
Incorporating currency hedging into a portfolio can be done by combining hedged funds with ‘unhedged’ funds (which do not have currency hedging). Smart offers a range of both unhedged and hedged ETFs that provide exposure to global markets. Smart ETFs which are hedged to the NZD are listed below.
Global shares
Global bonds (all Smart’s ETFs which invest in global bonds are hedged)
Investing in international markets
Investing in Smart ETFs allows you to build a diversified portfolio with global exposure in New Zealand dollars while streamlining the investment process. You won’t need to worry about managing the complexity of individual holdings, foreign currencies, or tax reporting on global shares.
Distributions are paid in New Zealand dollars and automatically reinvested for you, unless you choose to receive them in cash. Smart ETFs simplify investing, making it easier for you to start investing and manage your portfolio throughout your investment journey.
Footnotes:
Before it was floated, the Government used a range of different approaches to managing the exchange rate. Sullivan, R. Exchange rate fluctuations: How has the regime mattered? Reserve Bank of New Zealand: Bulletin, Vol. 76, No. 2, June 2013. Exchange rate fluctuations: How has the regime mattered?
International Monetary Fund. IMF DataMapper
McKenzie, S. (2024, April). How vulnerable is New Zealand to economic shocks in its major trading partners? The Treasury. https://www.treasury.govt.nz/sites/default/files/2024-04/an24-04.pdf
Mabin, G. 2010. New Zealand’s Exchange Rate Cycles: Evidence and Drivers. NZ Treasury Working Paper 10/10. Working Paper 10/10 - New Zealand's Exchange Rate Cycles: Evidence and Drivers
Reserve Bank of Australia. Undated. Exchange Rates and the Australian Economy. Exchange Rates and the Australian Economy | Explainer | Education | RBA
Mabin, G. 2010. New Zealand’s Exchange Rate Cycles: Evidence and Drivers. NZ Treasury Working Paper 10/10. Working Paper 10/10 - New Zealand's Exchange Rate Cycles: Evidence and Drivers
Reserve Bank of Australia. Undated. Exchange Rates and the Australian Economy. Exchange Rates and the Australian Economy | Explainer | Education | RBA
This information is issued by Smartshares Limited (Smart), a wholly owned subsidiary of NZX Limited. Smart is the issuer and manager of the Smart Exchange Traded Funds.
The product disclosure statements are available at smartinvest.co.nz. This information is intended to provide a general guide and is based upon, and derived from sources Smart considers reliable.
Neither Smart nor NZX Limited, or their respective directors and employees accept any liability for any errors, omissions, negligent misstatements, or for the results of any actions taken, or not taken in reliance on this information. This information is not financial advice. Before making any investment decision, Smart recommends seeking professional assistance from a licensed Financial Advice Provider.
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