NZD Continues to Strengthen in an Uncertain and Volatile Market

As we moved into 2008 the $NZD was still experiencing the volatility it suffered throughout 2007 in an increasingly uncertain market. It moved over 16 cents in January, closing at just over the $2.50 levels. Ignoring the blip caused by the sub prime crisis in America in August, the Dollar has been strengthening against the Pound since midway through 2006, where it reached a peak of 3.06.

One of the determining factors of this continued strength has been the large interest rate differential, with NZ rates being at 8.25%. This makes it very attractive for investors who are seeking high returns on their funds, and lends itself to what is known as the “carry trade”, where people borrow in a low yielding currency and invest in one such as the New Zealand Dollar which offers such lucrative returns. Despite deteriorating global growth and market turbulence, the RBNZ kept their rates at 8.25% this month, citing high inflationary figures and an unchanged outlook for the NZ economy from previous months.

The question is, of course, how much lower can it go? Unfortunately this is very difficult to say given the current conditions, an answer that I appreciate has been given for the last few months. The UK is looking at a possible rate cut in February, down to 5.25%, in a bid to calm fears that the UK will follow the plight of the US. The RBNZ’s stance will depend mostly on how the impending US-led global slowdown affects commodity prices, and therefore inflation and growth in New Zealand. In 2005, the rates dropped to just over 2.41, and that was when the Pound was a lot stronger than it is now. In 1996, the rate was just under 2.17!

The moves we are seeing illustrate just how the markets can react and what a risky business buying and selling currency can be without the proper planning. It can be such a difficult decision deciding when to buy your currency, and whether to leave it in the UK hoping that the rate will improve, especially when it is your life savings. There are, however, ways in which to considerably reduce this risk.

The key is to address your exposure from the outset and get a strategy in place that suits you. One popular option is what is known as 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 forward contract holds many benefits; you do not need all of your funds available (the majority of peoples funds are tied up in property for example), it gives you peace of mind knowing you have secured a rate and know what you are going to achieve, and it is flexible and can accommodate changes in the time scale originally agreed due to house sales falling through, etcetera. If you had locked in at the end of January 07, you would have achieved over 2.90. In ’08 that figure would have been about 2.45, a massive 45 cent difference, or $90,000 on £200,000! Even if you take the difference in January of 16 cents, that would be a potential saving, or loss, of $32,000 on that £200,000….in just one month! Imagine how that could change the start of your new life?

Of course, it is always tempting to wait for a better rate and only you can decide how much of your wealth you want to expose to risk (you may decide to fix an exchange rate for half or all of your assets). For those of you willing to take a bit of a gamble, you can take out a “market order” or target rate, which is where you set a level at which you want to buy your currency. If and when this level is reached, the money is bought, but obviously it holds the risk that your target won’t be achieved so you will simply have to buy at the prevailing rate on the day.

Some people may not have the money available to them for a forward contract. 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 is of the utmost importance and could save you thousands of pounds to start your new life. 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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