What is NZD/JPY?
The NZD/JPY currency pair represents the exchange rate between the New Zealand dollar and the Japanese yen, or the number of Japanese yen needed to purchase one New Zealand dollar (the base currency). The pair is considered a minor or ‘cross’ currency pair as it includes one major currency (the yen) and not the US dollar.
The New Zealand dollar is legal tender in New Zealand and several of its territories and associated states in the Pacific region, including the Cook Islands, Niue, Tokelau, and Pitcairn Islands. It is one of the most widely traded currencies on the international foreign exchange market. Due to New Zealand's stable economy and relatively high-interest rates compared to other major currencies, it is a favourite among currency traders.
The Japanese Yen is the third most traded currency in the world and is commonly viewed as a safe-haven asset, making it an attractive way to de-risk portfolios during periods of financial or economic instability. The yen has a 150-year history and is notable for its exceptionally low-interest rates, which encourage economic growth.
The JPY has become the world's financing currency because it is possible to borrow yen at low-interest rates to finance higher-yielding projects. Due to Japan's current account surplus and reputation for economic stability, the yen is a desirable currency for international investors.
What affects the price of the NZD/JPY pair?
The trade balance between New Zealand and Japan can affect the exchange rates of their respective currencies. Despite the fact that New Zealand is a relatively minor trading partner for Japan in comparison to other countries, the economic relationship between the two nations remains significant.
New Zealand exports a substantial quantity and variety of agricultural and food products to Japan, including primary commodities such as dairy, meat, wood, and seafood. Japan exports mostly industrial and manufactured products to New Zealand, such as machinery, vehicles, electrical equipment, and other consumer goods.
If New Zealand exports more goods and services to Japan than it imports from Japan (a trade surplus), this increased demand for NZD in trade transactions can lead to an appreciation of NZD relative to JPY.
In addition, Japan is one of the most industrialised nations in the world, a major participant in international commerce and finance, and a significant exporter, especially of automobiles and electronics. Japan is therefore more dependent on crude oil imports than New Zealand. Consequently, the yen and NZD/JPY are highly correlated to the price of crude oil. When the price of crude increases, the yen weakens, and the NZD/JPY exchange rate appreciates.
Differences in interest rates set by the Reserve Bank of New Zealand (RBNZ) and the Bank of Japan (BoJ) also influence the exchange rate between NZD and JPY. Higher interest rates in New Zealand relative to Japan may attract foreign investors desiring higher returns on their investments, resulting in an increase in demand for the NZD and a possible appreciation of the NZD versus the JPY.
Lastly, the exchange rate of the yen is affected by Japan's susceptibility to natural disasters such as earthquakes and tsunamis, which can severely damage the country's economy.
What to watch out for when trading NZD/JPY?
Traders of NZD/JPY should keep an eye out for economic data releases such as GDP growth, job statistics, inflation, and the US and Japan's trade balances. Watch out for announcements from key influential organisations in both countries. These include:
- Reserve Bank of New Zealand (RBNZ) and the Bank of Japan for monetary policy and interest rates
- Statistics New Zealand and Statistics Bureau of Japan (SBJ) for data on Trade Balance, Employment Change, Consumer Price Index (CPI), and Gross Domestic Product (GDP)
- Natural disasters affecting Japan