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Dec 11, 2012 ||
Malcolm Baker ||
We’ve seen increased interest in the commodity currencies lately, namely the Australian dollar (AUD/USD) and the Canadian dollar (CAD/USD), with a more than 200 percent increase in large open interest holders for AUD/USD (most recently 107) and more than 120 percent increase in CAD/USD (most recently 96) since 2008.
Alongside this, our New Zealand dollar (NZD/USD) future has seen a staggering 138 percent increase in total volume year-over-year up to November 2012. Despite Bank for International Settlements numbers pointing to negligible global gains in over-the-counter NZD trading volumes, CME Group has outperformed considerably. NZD/USD FX futures trading has grown from below 1 percent of our monthly volumes a year ago to over 2.2 percent in November. The question is why.
New Zealand’s GDP, with exports making up 30 percent (agricultural mainly), has pulled the NZD into the basket of currencies that track the global commodity markets and daily risk-on/risk-off sentiments. In the past few years, NZD has been highly correlated to this basket, and to the AUD/USD ( Our 2nd largest traded FX future). NZD generally has benefited from investment from its higher interest rates than its global partners, e.g. U.S. dollar, euro and Japanese yen. This “Carry trade”, albeit at much reduced levels, still represents opportunities for investment into the NZD. As a result we have seen a 130 percent increase in NZD/USD large open interest holders from 2008 (most recently 53). Last week’s announcement from New Zealand’s central bank that rates will be held steady may sustain this level of interest.
There’s also a plethora of contributing macro and micro factors have driven NZD for some of the same reasons other currencies have become favored with buy-side participants: the ability of our FX markets to offer a central counterparty to all trades, a regulated trading environment, transparency at all levels of trading, cross margin capabilities and substantially improved liquidity.
Malcolm Baker is Director of FX Products at CME Group.
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