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Decentralized Currency Carry Trading- The trading opportunities for non-USD stablecoins and NZDS grow

source-logo  bravenewcoin.com 03 May 2022 02:58, UTC

Decentralized foreign exchange (Forex) platforms are growing in popularity. The crypto stablecoin market is dominated by US dollar equivalents but lots of users are not from America. They want to not just use their local currency, they also want to hedge exposure and make forex trades. Additionally, given the choppy price performance of the volatile digital asset markets in 2022, there is a hunger for digital safe havens, beyond the US Dollar, that offer security and yields.

The New Zealand Dollar Stablecoin (NZDS) is growing in popularity across digital forex markets. In Tradfi, the NZD is a popular asset because it is somewhere in between an exotic, high growth, high yielding small economy currency, and the stable, steady currency of a developed economy. We’re seeing a similar pattern in DeFi with NZDS high yields and reduced forex risk.

Source: Ethplorer

The New Zealand Dollar- A popular forex currency

The New Zealand Dollar is the official currency and legal tender of New Zealand, the Cook Islands, Niue, the Ross Dependency, Tokelau, and the Pitcairn Islands.

Between 1840 and 1933 British coins and currency were used as legal tender in New Zealand. In 1933, distinctive New Zealand coinage was introduced based on a fractional system. The new coins used the same denomination, weight, and size as British coins. In 1935, New Zealand introduced its own unique coinage and in doing so, became the last and most remote of the British colonies to do so.

In 1967, New Zealand transitioned from the Imperial British standard to the decimal dollar based coinage that is still used today.

In the most recent Bank of International Settlement (BIS) Triennial Central Bank Survey - Foreign Exchange Turnover, conducted in 2019, The New Zealand dollar ranked as the tenth most traded currency globally. The NZD has held the number 10 position since 2010. The survey reports that New Zealand's foreign exchange market handled an average of US$9.5 billion per day in April 2019.

Discussing the ranking, Reserve Bank Assistant Governor and General Manager of Economics, Financial Markets, and Banking, Christian Hawkesby, said New Zealand has been able to maintain a high FX turnover to GDP ratio because non-residents are able to freely trade directly in the currency as well as in New Zealand Dollar-denominated financial instruments.

New Zealand’s popularity as a foreign currency has grown steadily in the last 20 years. When the same survey was conducted in 1998, NZD was the 17th most traded currency in the world.

Source: Bank of International Settlements

Source: Bank of International Settlements

Data indicates that while global forex markets have grown since 1986, the rise in the volume of NZD trading has been exceptional, particularly in the period post-2010.

Beginning around the mid-1980s, New Zealand began a period of extreme deregulation. Import regulations were liberalized, exchange rate and interest rate controls were removed, tariffs were cut sharply, subsidies were stopped, and the marginal rate of taxation was slashed.

The liberal import regimes have helped New Zealand establish strong trade relationships with Asia, the Pacific islands, the Americas and the European Union. New Zealand was the first country to negotiate a free trade agreement with China in 2008, and on the 7th of April 2022, the country upgraded the trade deal.

New Zealand’s open policy surrounding imports, foreign investment, and subsidies has allowed the isolated island nation to punch above its weight in the international finance space.

# New Zealand Dollar- A carry trade icon

The New Zealand Dollar is also incredibly popular as a tool for international Forex traders to carry trades. It is a currency that has often offered high yields, particularly in comparison to low-yield currencies but heavily traded currencies like the Swiss Franc and Japanese Yen.

Traders will often buy NZD with a low yielding currency like the CHF and JPY for a simple carry play.

New Zealand Official Cash Rate (OCR) Source: Tradingeconomics, Reserve Bank of New Zealand

Japan Interest Rate. Source: tradingeconomics.com, Bank of Japan

This trade was extremely popular in the years leading up to 2007-2008. Interest rates in New Zealand pushed to as high as above 8%. In Japan, rates remained low and maxed out at 0.5% in 2008. Margin trading of the NZDS/JPY pair rose considerably over the last 20 years as a result. It is worth noting that interest rates in New Zealand have dropped considerably in the last 5 years, somewhat reducing the appeal of carry trading New Zealand Dollars.

Carry trading is a trading style that originated from Forex but it has now spread to other financial instrument trading markets. During a carry trade, a low-interest rate currency is obtained, generally by borrowing, and then traded for a currency with a higher rate of interest.

If the purchased higher rate currency appreciates against the lower rate currency, or doesn't depreciate to the point where the interest rate difference is wiped, the trader stands to earn some interest income. The difference between the cost of initial acquisition and the interest paid from the higher currency is the ‘carry’. Capturing this gap is the goal of the carry trade.

Forex Decentralized Finance protocols like DFX platforms open a whole new world of currency carry trading opportunities. A trader can conceivably borrow USDC from Compound for 3.23%, they can then use a portion of their borrowed USDC to purchase NZDS from DFX. They can then deposit their NZDS on DFX and earn a yield that is currently above 30%.

“NZDS” is a New Zealand Dollar stablecoin backed 1:1 with physical New Zealand

Dollars in cash and cash equivalents.

NZDS was launched in March 2021 by Techemynt, a registered New Zealand Financial Services provider, using the FiatToken framework developed by Centre that is the basis for USD-Coin (USDC). As a blockchain-based stablecoin, NZDS combines the stability and value of the New Zealand Dollar with the utility of cryptocurrency to allow arbitrage, remittance, and digital payments.

What is particularly powerful about this carry trade is the stability of the high-yield currency, the New Zealand Dollar Stablecoin, and the underlying currency it represents, the New Zealand Dollar.

5 Year performance NZD/USD pair Source: Tradingview

5 Year performance Euro/USD pair Source: Tradingview

5 Year performance JPY/USD pair Source: Tradingview

The performance of the New Zealand dollar against the US dollar in the last 5 years is admirable in relation to that of the Euro or the Japanese Yen.

The New Zealand Dollar has been popular in traditional forex because it offers the interest rates of an exotic currency but the currency stability and macro fundamentals of a developed OECD state.

These characteristics have been transferred over from traditional forex to DeFi forex markets powered by Web3. Thanks to the power of web3.0 and liquidity incentive programs, the interest rates of NZDS are enormous and make carry trading more viable when compared to the low rates offered by the New Zealand Dollar.

The term web3.0 was first coined by Ethereum and Polkadot co-founder Gavin Wood. Web2 is the internet we know today, dominated by large companies that provide services in exchange for personal data. Web3.0 is the internet that DeFi users interact with — decentralized applications that are powered by blockchain technology and don’t monetize or collect personal data. The Ethereum foundation explains that there are four key characteristics of Web3.

* Web3 is decentralized- This version of the internet is not largely controlled by centralized entities, ownership gets distributed among builders and users

* Web3 is permissionless- Everyone has equal access to participate in web3

* Web3 has native payments- Cryptocurrency payments are used. There is no reliance on banks or payment processors

* Web3 is trustless- Applications are governed by incentives and economics instead of by trusted third parties.

Parallel to the high-interest rates, carry trading through applications like Compound and NZDS is appealing because users don’t have to worry about signing up to platforms that require personal information, minimum incomes or deposits, escrow, wire transfers, platform operators, or region locking.

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