Economics • Foreign Exchange

Foreign Exchange Market

The foreign exchange market for $NZ

The NZ dollar's exchange rate against the US dollar
0.00 0.20 0.40 0.60 0.80 1.00 0 20 40 60 80 100 e0 e1 Quantity of NZ dollars (billions) Exchange rate (US$ per NZ$1) ERe Qe ERfixed D ($NZ) S ($NZ)
Demand for $NZ: foreigners buying NZ exports and assets
Supply of $NZ: New Zealanders buying imports and overseas assets

Scenarios

Shift the curves

Indicators

MeasureStatusValue
Exchange rate Baseline US$0.600
Quantity traded Volume NZ$60.0 bn
The exchange rate is at its baseline equilibrium.

Foreign Exchange Market — Explanation

The exchange rate is the price of one currency in another: here, how many US dollars one New Zealand dollar buys (US$ per NZ$1). Like any price, it's set by supply and demand, in the foreign exchange market for $NZ.

Try it. Choose a scenario to see which curve shifts and why, or drag the sliders yourself. The grey dashed curve and e0 show where the market was; e1 is the new equilibrium. The indicators show what the change means for exporters and consumers.

Floating or fixed. New Zealand's dollar has floated since March 1985: its value is whatever the market sets. Switch to Fixed peg to see what a central bank has to do to hold a currency at a rate the market doesn't choose. Above the equilibrium there is a surplus of $NZ, and it must buy $NZ with its foreign currency reserves; below it there is a shortage, and it must sell $NZ, building up reserves.

Learning objectives

Where this fits

  • AP: AP Macroeconomics
  • AQA: AQA A Level Economics (7136)
  • Cambridge: Cambridge IGCSE Economics (0455); Cambridge A Level Economics (9708); Cambridge AS Level Economics (9708) Goes beyond Cambridge AS Level Economics (9708): The Fixed peg mode (a central bank buying and selling with reserves) is A Level (11.2), not AS.
  • IB: IB Economics HL; IB Economics SL
  • NCEA Level 2 Economics: 91223 Analyse international trade using economic concepts and models
  • NCEA Level 3 Economics: 91403 Demonstrate understanding of macro-economic influences on the New Zealand economy
  • Pearson Edexcel International: Edexcel International GCSE Economics (4EC1); Edexcel International A Level Economics
  • USDP: USDP Economics

Foreign Exchange Market — Key Terms

Key concepts in English, with te reo Māori, Chinese (Simplified) and Korean.

EnglishTe reo Māori中文（简体）한국어What it means on this page
Exchange Ratepāpātanga whakawhiti汇率 (huìlǜ)환율 (hwanyul)The price of one national currency expressed in terms of another currency (e.g. US$ per NZ$1).
Foreign Exchange Market (Forex)no attested term外汇市场 (wàihuì shìchǎng)외환 시장 (oehwan sijang)The global decentralised financial market where currencies are bought, sold, and exchanged.
Appreciationpikinga wāriu升值 (shēngzhí)절상 (jeolsang)An increase in the value of a currency relative to another currency under a floating exchange rate system.
Depreciationhekenga wāriu贬值 (biǎnzhí)절하 (jeolha)A decrease in the value of a currency relative to another currency under a floating exchange rate system.
Floating Exchange Rateno attested term浮动汇率 (fúdòng huìlǜ)변동 환율제 (byeondong hwanyulje)An exchange rate regime where currency value is determined purely by free market forces of supply and demand.
Fixed / Pegged Rateno attested term固定汇率 (gùdìng huìlǜ)고정 환율제 (gojeong hwanyulje)An exchange rate regime where a currency's value is set to a fixed ratio relative to another currency by central bank intervention.
Demand for $NZno attested term货币需求 ($NZ 需求)통화 수요 ($NZ 수요)Purchases of $NZ by overseas buyers to pay for New Zealand exports, tourism, or local investments.
Supply of $NZno attested term货币供给 ($NZ 供给)통화 공급 ($NZ 공급)Sales of $NZ by domestic residents to purchase foreign imports, overseas travel, or offshore investments.
Equilibrium Rateno attested term均衡汇率 (jūnhéng huìlǜ)균형 환율 (gyunhyeong hwanyul)The exchange rate level where the quantity of currency demanded equals the quantity supplied in the market.
Reserve Bank (RBNZ)Te Pūtea Matua中央银行 (zhōngyāng yínháng)중앙은행 (jungang eunhaeng)New Zealand's central bank, responsible for monetary policy, OCR settings, and managing foreign exchange reserves.
Official Cash Rate (OCR)no attested term官方现金利率 (guānfāng xiànjīn lìlǜ)기준금리 (gijun geumni)The interest rate set by the Reserve Bank of New Zealand to influence other interest rates in the economy. A higher OCR makes saving in New Zealand more attractive to overseas investors, raising the demand for $NZ.
Foreign Currency Reservesno attested term外汇储备 (wàihuì chǔbèi)외환보유액 (oehwan boyuaek)External assets held in foreign currencies (like $USD) by a central bank to conduct market interventions.
Surplus (Excess Supply)whakaratonga tuhene供过于求 (gōng guò yú qiú)초과 공급 (chogwa gonggeup)Under a fixed exchange rate set above equilibrium, where quantity supplied exceeds quantity demanded ($NZ overvalued).
Shortage (Excess Demand)popono tuhene供不应求 (gōng bù yìng qiú)초과 수요 (chogwa suyo)Under a fixed exchange rate set below equilibrium, where quantity demanded exceeds quantity supplied ($NZ undervalued).
Exportshoko ki tai出口 (chūkǒu)수출 (suchul)Domestically produced goods and services sold to overseas consumers and businesses.
Importshoko ki uta进口 (jìnkǒu)수입 (suip)Foreign-produced goods and services bought by domestic households and businesses.

On the te reo Māori column. Terms marked as gaps have no attested equivalent in the sources checked — Karaitiana Taiuru's Dictionary of Māori Computer and Social Media Terms, Paekupu, the Reserve Bank's te reo financial glossary, NZQA and Te Aka. No coinage is printed as though it were established; where a class needs one, commission it from Te Taura Whiri i te Reo Māori and credit the translator. Te reo Māori is not italicised and takes no plural "s".