The NZD has fallen 7% against the USD in the past year. For unhedged NZ investors, that's a meaningful tailwind - one most people haven't noticed, haven't planned for, and won't necessarily keep.
If you hold international shares through an unhedged fund - and if you followed the reasoning in Issue 7, you probably do - something has been quietly working in your favour this year. Not because of strong market returns. Because of what the New Zealand dollar has been doing.
The NZD sat at around USD 0.61 a year ago. Today it's trading around USD 0.567 - a fall of roughly 7% over twelve months. June alone saw the kiwi drop 5.2%, its largest monthly fall since December 2024. The New Zealand dollar is sitting near its lowest level in seven months, and most of the people holding unhedged international investments haven't really thought about what that means for their returns.
This issue is about that. What's driving the NZD lower, what it's doing to your returns in practice, whether it changes anything about how you should be invested, and - importantly - what happens when it reverses.
Let's start with the mechanics. When you hold an unhedged international fund, your returns are denominated in the foreign currency - usually USD for a global or US equity fund. When you convert those returns back to NZD, the exchange rate at that moment determines what you actually got.
If the NZD falls against the USD while you're holding the fund, two things happen simultaneously. First, the NZD value of your investment goes up, even if the underlying USD price didn't move at all. Second, any future dividends or proceeds from selling are worth more in NZD than they would have been a year ago.
You invested NZD $100,000 into an unhedged US equity fund when NZD/USD was 0.61. Your investment bought roughly USD $61,000 of underlying assets. Twelve months later, the US market is flat - no gains, no losses in USD terms. But NZD/USD has moved to 0.567. Your USD $61,000 is now worth NZD $107,585. You have made NZD $7,585 - roughly 7.6% - without the underlying market moving at all. That is the currency tailwind working for you.
This is not a small effect. A 7% currency tailwind on a $200,000 international portfolio adds around $14,000 in NZD value over the year - on top of whatever the underlying market returned. For an investor who checked their Hatch or InvestNow balance and noticed their portfolio was up nicely this year, some of that gain almost certainly came from the exchange rate, not from stock selection or market performance.
The flip side, which we'll come to, is that this works in reverse too.
Currency movements are almost impossible to predict with precision, but understanding what's driving them matters because it shapes how durable the move might be.
There are three main factors behind the NZD's weakness this year.
A broadly strong US dollar. The USD has been firm globally, driven by the Federal Reserve's hawkish stance and the US economy's relative resilience. When the USD strengthens across the board, the NZD/USD rate falls - not because anything specific happened in New Zealand, but because the denominator got bigger.
The Middle East oil shock. The conflict in the Middle East since early 2026 sent oil prices sharply higher and created significant uncertainty in global markets. Commodity-linked currencies like the NZD tend to weaken in risk-off environments when investors move toward safe havens like the USD, JPY, and CHF. New Zealand is a small, open, trade-dependent economy - when global risk appetite falls, the kiwi tends to go with it.
Domestic economic uncertainty. NZ's economic recovery has been slower and more uneven than hoped. GDP contracted in late 2025, consumer confidence is below its long-run average, and the labour market is still digesting a difficult two-year period. When domestic growth disappoints, it softens investor confidence in the currency.
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This is the question that actually matters - and the honest answer is: probably not much. But it's worth thinking through.
In Issue 7, I laid out the case for most long-term NZ investors to hold unhedged international funds rather than hedged ones. The core argument was that the compounding cost of hedging - typically 1% to 2% per year in a high NZ interest rate environment - is a permanent drag that outweighs the currency variance it removes over long investment horizons. A 7% annual currency move sounds large, but over 20 to 30 years, these moves tend to mean-revert. The NZD doesn't trend indefinitely in one direction.
That argument still holds. The fact that the NZD has fallen 7% this year is not a reason to switch to unhedged if you're currently hedged - you'd be locking in the gains you've already missed and taking on the full currency exposure just as the NZD might start recovering. Chasing currency moves after the fact is not a strategy.
The NZD falling 7% is a good reminder that currency exposure is real and meaningful - not a reason to make reactive changes to a portfolio that was already structured correctly.
What it is a good prompt for is checking whether your current funds are actually doing what you think they're doing. A few questions worth asking:
This is the part that doesn't get talked about when returns look good. Currency movements are symmetric - they go both ways, and the NZD doesn't stay weak forever.
There are already catalysts that could push the NZD higher from current levels. The RBNZ is widely expected to begin hiking the OCR in the second half of 2026, with most bank economists now forecasting hikes starting from September. Higher NZ interest rates relative to global rates tend to attract capital inflows and support the NZD. If the Middle East situation stabilises and oil prices fall further - which is already beginning to happen as of late June - the risk-off pressure on the kiwi eases.
If the NZD recovers from 0.567 back to 0.61 over the next twelve months, that's roughly an 8% headwind for unhedged international investors, all else equal. Not catastrophic over a long investment horizon, but real. An investor who made 15% in USD terms on their US equity fund would net roughly 7% in NZD terms if the currency fully reversed.
This is not an argument to hedge. It's an argument to understand the exposure you're carrying - which is what the series has been about from the beginning.
One thing worth reiterating from Issue 7, because the current environment makes it concrete: most NZ investors have the majority of their income, home equity, and other assets denominated in NZD. Their international investment portfolio is often the only meaningful source of non-NZD exposure in their entire financial life.
When the NZD weakens - as it has this year - NZ-dollar assets lose purchasing power in global terms. Your salary buys fewer US goods. Your home equity is worth less in international currency terms. But your unhedged international portfolio is a partial offset to that. It goes up in NZD when the kiwi falls, which is exactly when your other NZD assets are losing relative value.
That's a genuine diversification benefit. Not zero-sum noise - an actual structural reason why unhedged international exposure makes sense for most NZ investors as a complement to their NZD-heavy balance sheet. The year we've just had is a real-world demonstration of how it works.
The NZD's 7% fall this year quietly boosted every unhedged international portfolio in New Zealand. Understanding why - and building that into how you think about currency exposure - is more useful than reacting to the number itself.
None of this requires a portfolio change if your allocation was already deliberate. But if you haven't thought explicitly about whether your international funds are hedged or unhedged - and a lot of investors haven't - now is a good moment to check.
Pull up your fund holdings. Look at the PDS or the fund name. Understand whether you've been benefiting from the currency move this year or whether your hedged fund has been paying the cost of hedging while missing the tailwind. Either outcome might be the right one for your situation - but it should be a conscious choice, not an accident of which fund was the default option on your platform.
That's the whole point of this series. Not to tell you what to do - but to give you enough context to make the decision deliberately rather than finding out after the fact what you were actually exposed to.
One email a week. Straight writing on investing from New Zealand.
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