The New Zealand dollar through the global financial crisis
In this article, we examine the impact of the global financial crisis on the New Zealand dollar (NZD). The NZD fell, on a trade-weighted basis, by 35 percent over the period from 2007 to early 2009 during the peak of the crisis, and remains around 10-12 percent below its pre-crisis peak. The impact of the carry trade on the value of the NZD appears to have diminished, as international investors shifted their attention to higher-yielding currencies, such as the Australian dollar and the Brazilian real. There have also been several periods of market turbulence during the crisis, during which movements in the exchange rate have been driven primarily by declines in the risk appetite of international investors. These developments are consistent with the decline in liquidity in the NZD currency market compared to pre-crisis levels. Our regime-switching model of the NZD/US dollar (USD) exchange rate identifies several instances during the past three years when the key exchange rate driver has changed from relative interest rates to investors’ risk appetite.