Our Preferred Partners Halo Financial have provided the following article on the fluctuations in the NZ Dollar exchange rate during the current economic market:
Planning your currency needs in tumultuous times
It seems barely a few weeks ago that we were all watching what the carry trade investors were doing to determine our next move on the Australasian currencies. But what am I saying; it was only a few weeks ago although so much has happened in the last month that the whole financial world is a very different place today.
Carry trade investors, for those who are not aware, were the ones borrowing money in countries with the lowest interest rates; places like Switzerland, Japan and America, and investing these funds in countries such as New Zealand, Australia and Britain which offered higher interest rates. However, when credit became harder to come by and when losses started to mount in shares and futures markets, the vast majority of this carry trade money was withdrawn and the flows reversed. That caused a sharp decline in the value of the Australian Dollar and New Zealand Dollar and an equally remarkable spike in the value of the Pound and Japanese Yen although perhaps the most amazing bout of strength was witnessed in the US Dollar.
But if I can focus on the Sterling – New Zealand Dollar exchange rate, October’s wild gyrations took us from NZ$ 2.62 on the 1st October to NZ$ 3.01 just 7 days later; and by the 4th November we were all the way back down to NZ$ 2.61. In cash terms, that meant anyone migrating to New Zealand with the average capital amount of £250,000 to start their new life down under saw the value of their life savings rise from NZ$ 655,000 to NZ$ 752,500 and, if they didn’t take advantage of these amazing exchange rates, the value of their funds shrank back to NZ$ 652,500 and all this happened in just 4 weeks. I can imagine few who would not jump at the chance to increase their worth by NZ$ 97,500 or 15 percent in just one week.
Flash in the pan? Well maybe. Certainly, the rapid decline in the Kiwi Dollar was evidently overdone, so it was no surprise when this exchange rate corrected to lower levels once the Reserve Bank of New Zealand calmed market nerves on 23rd October by cutting another 1 percent off their base interest rate to add to the 75 basis points they had cut by in the previous few months. That offered some degree of reassurance to nervous traders. As mentioned earlier, whilst interest rate advantage seeking investors were the driving force just a few short weeks ago, what traders are seeking now is confirmation that central banks and governments are on top of the financial crisis and making every effort to restore confidence amongst consumers, investors, corporations and traders alike.
The Commodity factor
The repercussions of that move by the RBNZ were felt further a field than just the trading rooms of Auckland and Wellington. The Australian and New Zealand Dollars are often considered bellwethers of global confidence; driven as they are by fluctuations in the value of their exports, many of which are commodities whose price is directly driven by global demand.
New Zealand is in a slightly more advantageous position than Australia in some ways; the commodities that NZ exports fall largely into the foodstuffs category. Before you shout at the page, I know that NZ exports timber and wool as well but dairy produce and meat are staples and these are more likely to face continuing demand than some of the hard commodities and minerals that Australia ships.
On the other side of the equation, the UK is unlikely to benefit during the downturn. Britain used to have oil and gas to export from the North Sea but supplies have dwindled and the UK is now a net importer of both products. That factor combined with a slump in housing prices, the collapse of consumer and business confidence, the highest unemployment level in a decade and with both the population and the government being burdened by immense levels of debt does nothing to make life easier for the Great British Pound.
The Sterling – NZ Dollar exchange rate will be volatile but perhaps it is unlikely we will see the same levels of volatility that October brought. Within the volatility though, there is a general trend and this momentum and market sentiment looks set to take this pair to lower levels. That is clearly excellent news for anyone moving funds from New Zealand to the UK but it makes life more challenging for anyone planning to migrate the from the Northern to the Southern hemisphere.
However, anyone planning to sell Sterling is almost certain to get unexpected chances amidst the ‘headless chicken’ trading days that will undoubtedly appear from time to time over the coming months. As any army instructor will tell you, Prior Preparation Prevents Poor Performance.
Preparation for those events is simpler than you might imagine. It is a very straightforward matter of setting out your stall with your Halo Financial Consultant and placing your requirements on record. Once your needs and constraints are known, your currency requirements can be structured in a way that will suit your plans and the availability of funds. That may include monitoring specific exchange rates, turning your requirements into automated orders which will be triggered wherever and whenever the right exchange rate is available, booking an exchange rate now for settlement at a later date or just sitting on our hands until a change in your circumstances or a particular market event triggers a need to react.
Whatever you choose to do, thankfully, the markets are volatile enough to accommodate buyers and sellers as well as those who want to take a chance on higher exchange rates and those who are risk averse. And thankfully, there are trading strategies that suit all of those requirements too.
If you want to know what they are, just ask Halo Financial www.halofinancial.com