What is behind the strength of the NZD?

If you look at the NZD daily charts against any of the 7 major forex currencies, you will see that NZD is making a very strong progress against all of them. How is this possible for a commodity currency when most commodity prices have recently been falling?

Here are 4 reasons which help to explain NZD strength:

Guest post by  Tamás Sziládi

1. Increasing Dairy Prices

After many reports of decreasing dairy prices, the prices just turned up December 2014 again. This is very important for the New Zealand economy is milk production is the most important export product of the country. The price index increased further, 3.6% in January.

2. Carry Trade

The NZD has the most positive carry trade from all of the major forex currencies. The interest rate is currently 3.5% in New Zealand.

3. RBNZ (Reserve Bank of New Zealand) outlook

Even if we cannot say that RBNZ is especially bullish, it is definitely more optimistic about the economic development of the country than most of the other developed economies. Some articles and rumors appeared that the RBNZ will tighten sooner than other developed economies, which would mean that carry trade differential would even increase for the advantage of the NZD.

4. The weakness of the other developed economies

This last reason is not confirming the NZD strength, but as currencies are traded in pairs, we cannot forget the weakness of the other economies. As deflation is getting an increasing problem and possibility in some economies (like Japan or Eurozone), the NZD does not even have to be strong to beat the other currencies, at this time it is enough to produce medium strength reports as they are still a lot better than what economic reports other countries have.

If you want to trade the NZD movement, maybe it is better to jump in at a retracement after the current very strong rally.