$NZD Gains Momentum as The Pound Weakens

After regaining some of its losses in November, the downward trend of the Pound against the New Zealand Dollar of the past few months continued as it slipped by over 15 cents throughout December, finishing the year at around the 2.57 levels, which means it more-or-less back to where it started before the outbreak of the Sub Prime crisis.

Weaker data from the UK and continued nervousness from the credit crunch prompted the Bank of England to cut their rates to 5.5%, with increasing speculation that there could be further cuts in the early part of 2008. The housing market fell for the second month in a row and, with mortgage approvals also dropping, Sterling lost ground on all the major currencies hitting an all time low against the Euro.

The RBNZ kept their rates on hold in a widely anticipated move as inflationary pressures remain elevated. The market was quite thin on the data front in December, but many analysts are now realising that these high interest rates could well be sustained for longer than previously thought, thus keeping it as the dominant force over Sterling. If you combine this with the weak US Dollar, New Zealand remains an attractive investment for those with renewed risk appetite.

Looking at it from a yearly perspective, 2007 was an extremely volatile year for £ against the commodity currencies such as the $NZD. The Pound dropped over 12% against the Dollar in the first half of the year, from 2.90 in January to 2.55 in July, as investors took advantage of the high interest rates. The money markets then went into turmoil, the root cause of which was the US Sub Prime crisis and burst of the US housing bubble, leading to instability and panic in the equity markets. Risk aversion set in and investors were forced to realise their profits and sell back their dollars, thus pushing the exchange rate up to the high 2.90’s.

However, since the Northern Rock storm blew up, Sterling has been tarred with a similar brush and the severity of the situation led to a sharp downturn in the housing market and a sharp reversal of economic growth forecasts. Coupled with increased risk appetite among investors as the market began to settle, the rates traced all the way down to the mid 2.50’s again, representing a move or over 40 cents in just 10 weeks! It is worth noting that this dramatic move was out of the ordinary and caused by extreme circumstances, bear in mind that the Kiwi Dollar progressively strengthened against the pound throughout the course of 2007 and indeed since the middle of 2006.

Previous articles have made reference to the difficulty in predicting these moves, especially in light of current market conditions, and also highlighted the options available to protect oneself against the risks of a volatile market. One such option is a forward contract, or ‘buy now pay later’ method, whereby you can lock into a rate of exchange with just a 10% deposit, for delivery up to 2 years in the future. The migration process can be a lengthy one, but forward planning could potentially save you thousands. If you had locked in at the beginning of January 07, you would have achieved around the 2.90 mark. In ’08 that figure would have been about 2.57, a massive 33 cent difference, or $66,000 on £200,000! Put into perspective, that is your new house furnishings or even a very nice new car! Of course it is impossible to predict these moves and hindsight is a wonderful thing, but the question is what risk are you willing to take and how much can you afford to lose?

However for some people this may not be an option as they do not have the money available to them. The UK housing market is currently experiencing a slow down, with houses taking longer to sell, so many people will leave the majority of their funds in the UK. HiFX have an office in Auckland, and an account can be set up with them before you leave the UK, making the transition as smooth as possible.

For those of you who are leaving for New Zealand over the coming months, forward planning has never been more important. For a free, no obligation consultation about your situation and the options available please contact the migration team at HiFX on +44 (0) 1753 859159, or email migration@hifx.co.uk.

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