In an effort to support its export industries, New Zealand’s government has begun talks with Chinese officials towards establishing a bilateral trade agreement that will allow their respective currencies to be directly convertible.
For those of you who don’t pay much attention to the New Zealand-China relationship, you should know that latter is now slowly overtaking Australia as the former’s number one trade partner. As of the year ending last April 2013, trade between China and New Zealand totaled 15.3 billion NZD, which is just slightly behind the 16.8 billion NZD pace with Australia. Moreover, experts predict that Chinese-Kiwi trade should increase by roughly 33% over the next two years and hit 20 billion NZD in trade activity by 2015.
With this in mind, it’s no surprise that government officials want to bring down trading costs for exporters. As it is right now, traders must first convert NZD into USD and then into CNY, or vice versa, before completing a trade. Not only does this lead to additional transaction fees but it also exposes both parties to currency risk.
As for China, this just marks another step towards establishing the yuan as a global currency. To its credit, China has actually been allowing the yuan to appreciate slowly over the past few years. In fact, according to the People’s Bank of China, the median price of its daily trading band hit its highest level ever last week!
If this deal pushes through, it would make the New Zealand dollar the fourth currency permitted to be directly convertible to the yuan. In the past, only the dollar and yen could be exchanged directly with the yuan, and it was only last month that Australia and China reached an agreement that would allow the Australian dollar to join the club as well.
As a result, transaction fees in trade between the two countries could be reduced now that Chinese-Kiwi trade is on the rise. On top of that, the projected growth in New Zealand’s trade partnership with China should help compensate for the downturn in demand from the U.S. and Europe. With its free-trade agreement with China in effect, New Zealand’s economy stands to benefit if demand from China remains strong.
At the moment, NZD/USD seems to have a fighting chance at holding on to the .8100 major psychological level or keeping itself above the .8000 mark. Upbeat data from China, particularly in trade and domestic activity, would reflect healthy demand from the Asian giant and help provide support for the Kiwi.