[KiwiDreamer]

The reserve bank of NZ is meeting this Thursday to set the official cash rate (OCR), and it is likely they will leave the rate at 8.25% with a view to reducing the rate to 8% when they next meet in September. I am of the opinion that if the rate falls this week or September then that will "improve" the exchange rate for those wanting to move pounds sterling to NZ.

Am I correct in my assumption?

[IanW99]

The reserve bank of NZ is meeting this Thursday to set the official cash rate (OCR), and it is likely they will leave the rate at 8.25% with a view to reducing the rate to 8% when they next meet in September. I am of the opinion that if the rate falls this week or September then that will "improve" the exchange rate for those wanting to move pounds sterling to NZ.

Am I correct in my assumption?

You are correct in your assumption that if the OCR is reduced, the NZD will not look so favourable, and so will reduce in value.

How this affects the exchange rate compared to the GBP is anyones guess and generally the effect appears very short lived. But certainly if I had any money to transfer over in the next week I would definitely wait until Thursday (IMO).

Ian

[James 1077]

Your assumption is basically right but it can be a little more complicated.

The basics are that money flows to where it can get a better return - so if NZ is offering 8.25% rather than the UK's 5% (or whatever it is now) then money will flow into NZ. This means that lots of people will be buying NZ$ and selling UK pounds which causes the pound to weaken against the dollar. At some point an equilibrium is reached where while you gain on interest rates you lose on exchange so you stop doing it and the exchange rate fixes at that point.

When the rate changes (say NZ lowers theirs) then there isn't so much need to keep it in NZ and then money will flow somewhere else, thus weakening the $.

This is, however, a very simple explanation as you then get speculation in the market. If, for example, you expect the NZ rate to drop in September then you price accordingly and the exchange rate shifts accordingly. You could, therefore, get to September, the interest rate drops and nothing happens to the exchange rate (as the market had expected it and priced a drop in accordingly).

If the interest rate didn't drop as expected the the $ could actually strengthen as the market had priced a drop in which didn't happen so it fixes itself to the "higher" rate (which isn't actually higher it is just the market was expecting a lower rate).

Having said that there may be a small movement on the day of the announcement on the basis that you price in the fact that on the day before you were, say, 85% certain the rate will go up, 10% no change, and 5% go down ... now, after the announcement, you are 100% certain the rate HAS moved - so you have an extra 15% to price in.

So the basics are that a drop in NZ rates or an increase in the UK's rates are favourable to anyone with cash in the UK wanting to bring it to NZ but the market has probably already factored any expected movements into the current exchange so what actually causes the exchange rate to move is mainly changes in expectations and things that were expected not happening.

[KiwiDreamer]

Many thanks for those replys, greatly appreciated. I'm faced with making this decision in the next few weeks and am dithering as the time closes in. I am tempted by the 2.63 rate of today but will more than likely wait for Thursday to see what happens then. I will keep in mind your views.

[IanR]

If you don't have to move everything at once you could 'pound cost average' your transfer by moving your capital in , say, 12 monthly stages over the year.

Otherwise maybe this site will give you a clue - they are pretty gened up on FX movements...this article is the latest analysis I can of the NZD on the site...

http://www.dailyfx.com/story/currency/nzd_fundamentals/New_Zealand_Dollar_2008_Q3_1215106904819.html




New Zealand dollar is Expected to Depreciate Further in the Second Half of 2008

Looking ahead, the combination of rising headline inflation, reflecting higher commodity prices, with weak economic growth, could prove to be very damaging for New Zealand’s economy. The RBNZ projects modest GDP growth over 2008 but we are expecting the June quarter to show a further contraction, satisfying the definition of a technical recession as two consecutive quarters of negative growth. In our opinion, although upside risks for inflation remain evident, they also appear to have diminished somewhat and the RBNZ is likely to focus its monetary policy on the downside risks to growth. According to interest rate swaps for deposits denominated in New Zealand dollars, traders have already priced in a series of rate cuts by the RBNZ in 2008. While the 3 month swap rate stands at 8.69 percent, the 2 year rate is being offered at 7.86 percent and the 10 year yield at a much lower 7.35 percent. Generally, lower interest rates make holding the New Zealand dollar less attractive to foreign investors and the lower level of demand for assets denominated in New Zealand dollars could place downward pressure on the value of the kiwi. On the other hand, a reduction in interest rates should help to stimulate New Zealand’s economy by making borrowing more affordable and investment more attractive. Then, easy money could stimulate spending and create the necessary conditions for a sharp economic rebound. Yet, despite the benefits of lower interest rates in the long term, they are unlikely to help the New Zealand dollar in the short-term. As a result, we expect the currency to continue to depreciate against both the U.S. dollar and the Australian dollar. We target the NZD/USD at 0.70 in three months and at 0.65 before the end of the year. In addition, we expect the kiwi to lose some ground against the aussie and we project the AUD/NZD to be trading at 1.30 by September and at 1.35 by the end of 2008.....

[Super_BQ]

You just can't look at the NZRB rate alone. Already NZ's attractive 8.25% exceeds more than double than what you can get in N. America. Even a 1% drop in NZRB rate would have little impact on weaking the NZ$. The key question is, "How much does the NZRB rate have to be lowered until investors see that it's better to move it elsewhere overseas?"

Basic macroeconomics. since the NZ currency trades on a free floating system, the strength of the $ is mostly based on how much $ leaves vs. how much is brought in to the country.

We have Free Trade with China, which IMO, NZ will benefit more. Therefore, expect a strong export sector which will again, strengthen the currency. The higher NZD $ doesn't really discourage those that import goods from NZ. Especially in the case where trade tarrifs and duties are reducing.

The relevant question would be, "Does timing matter when to move my foreign currency into NZ $?" The difference may not all be that much. In one sceario you could be waiting all year in a UK term deposit waiting for the NZ$ to tank but find, nothing has changed. Sure there's the chance of a weakening NZ$ if you moved the money over right away, but at least you would of banked in at the higher interest rate.

Last but not least, you don't want to be putting your $ in any of these Hanover like finance companies. It will take up to 4 years for all the dust to settle. At least there's far more stability in the major banks.

BQ