Trading Nation

Small country, big problems—New Zealand dollar tanks

New Zealand dollar plunges

Soured by dairy prices and the likely moves of its central bank, the New Zealand dollar is tanking, falling 15 percent against the U.S. dollar this year to hit five-year lows.

One of the main culprits is the freefall in milk. Dairy exports make up a large part of New Zealand's economy, and prices have fallen 40 percent since the start of March, according to Global Dairy Trade.

"That's pretty disastrous, because it's the lifeblood of New Zealand, so if their main export is falling in value, that's going to have a direct impact on GDP as well as the incomes of farmers," currency trader Kathy Lien of BK Asset Management said Thursday on CNBC's "Trading Nation." "So the currency trouble, and everyone thinks the Reserve Bank is going to respond with a rate cut next week."

Indeed, the key question around the upcoming Reserve Bank of New Zealand decision has simply become: How big will the cut be?

And with New Zealand ready to reduce rates even as the U.S. Federal Reserve muses about raising them, the case against the New Zealand dollar, which is known affectionately as the "kiwi," is clear.

Read More Fed rate hike fears ripple through Canada, world

As the Fed hikes, "the New Zealand dollar is going to see a wider interest rate gap, so I think there's a very good possibility that we get the kiwi dollar at 62 cents, maybe even 60 cents," well below current levels near 65 cents, Lien said.

Bloomberg | Getty Images

In general, the wider the gap between rates in one country and rates in another, the greater the demand for the higher-yielding currency.

The problems in New Zealand are somewhat mirrored in the economy of its partner across the Tasman Sea. The difference is that while New Zealand is getting hit by the demise in milk prices, Australia's big problem is the drop in iron ore.

"In general, both are grappling with the broad-based commodity selloff, and both are struggling with softer growth and low inflation, which is sending their central banks into easing mode," said Brown Brothers Harriman currency strategist Win Thin.

Read More Traders watch for whiff of inflation

Traditionally, currency traders group the New Zealand and Australian dollars together and refer to them as the "antipodeans," after a word meaning "the opposite side of the world."

The one issue for those hoping to short the antipodeans now is that while the catalysts for further losses are clear, a big and highly anticipated move to the downside has already been missed.

"The professional community is short of both AUD/USD and NZD/USD, and in the latter case, they are record short," Neil Azous of Rareview Macro wrote to CNBC.

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