How to choose right time for a change
NZ Sunday Star Times, 26 November 2006
By Rob Stock
Shifting huge chunks of cash across international borders is not something most Kiwis do every day.
But the steady flow of people emigrating to Australia or returning from the UK, and the migrants heading this way in search of a better lifestyle, means thousands of cash transfers occur here every week.
Most, said private client currency trader Reuben Kane from HiFX, guess the best time to shift their money across and then get the bank to do the switch. They pay a fee for the transaction and the bank makes an additional profit by adding a margin on the wholesale exchange rate.
That's a pretty unsophisticated way to go about such large transactions - and it can lead to large losses if the day chosen by those moving money turns out to be bad. For example the worst day over the past 12 months would yield $33,660 less than the best day for anyone moving $300,000 to Australia.
Such big differences are testament to how volatile the Kiwi dollar is, due to its status as one of the world's most traded currencies.
Trading manager Mike Hollows from HiFX said many people could benefit from a professional and planned strategy for moving money across currency borders, but that the vast majority had no idea such services were available to the public.
Although foreign exchange dealers' popular reputation has been upset by the likes of Barings trader Nick Leeson, or the "rogue traders" behind the hundreds of millions lost by National Bank of Australia on currency transactions in 2003, managing one-off currency transactions is not about currency speculation.
The service should be a form of insurance, not a way of speculating for big gains. So how does it work?
Say a New Zealand couple heads for a sunny retirement on the Gold Coast. They sell up here and plan to buy a $A400,000 beachside apartment in which to see out their days. On August 1 they have two months to pay for the Gold Coast property and must pay a 10% deposit immediately. That day, $1 bought 80.52Ac. By October 3, the rate had moved to 87.65Ac. One month later the rate was back down to 86.28Ac. A viable strategy would have been, firstly, to buy the A$40,000 for the deposit at the prevailing market rate of 80.52Ac as it was needed immediately. That would have left two months to buy the remaining $A360,000. Given that the NZD had fallen 15% against the AUD from the beginning of the year it was perceived to be undervalued, and HiFX was advising clients against selling NZD.
Using market orders - tools whereby an individual can buy and sell a set amount of currency at a predetermined rate and which remain in place until either executed or cancelled by the client - a currency broker could place an order to sell NZD at a better exchange rate than was currently available. In this case the order might be to buy $A180,000 at 85Ac. Once that was achieved, it would have been prudent to leave another order to buy $A180,000 at 87Ac. This strategy would have resulted in an average rate of 85.4Ac.
Kane said: "Typically, individuals will have kept a distant eye on the rate, sought no advice from a specialist and dealt at a time they thought `was right'. This approach contains little discipline and is based purely on the forces of fear and greed. In the above example, had the individual purchased the entire $A400,000 at 80.52Ac it would have cost an extra $28,300." Running such a strategy does not necessarily require cash in hand.
Take the example of a family migrating to New Zealand from the UK at the end of the northern summer. They hope to have 150,000 to exchange for Kiwi dollars to buy a house here, although the sale of their property was not due for another six weeks. On August 1, $1 bought 32.89p and - as in the above example - was thought to be heavily under-valued. By October 2 the rate had moved to 34.95p, which hindsight shows represented 6% or approximately $27,000 at risk. Using a forward exchange contract, the family could lock in the exchange rate immediately.
Kane said: "The forward exchange adjustment in both examples was relatively minor and allowed the client in both instances to lock in their exchange rate to best suit market conditions and their financial goals and objectives."
HiFX has another tool for clients - the exchange rate guarantee (ERG) - which could have been used as an insurance policy in the first example. Although there was good reason to think the Kiwi dollar was undervalued, the client could have made big losses had the dollar defied predictions and fallen. An ERG could have been set below the market price to put a floor on the losses a client would experience if the market moved against them. Like all insurance contracts, there's a premium to pay - which can amount to thousands of dollars.
Clients pay for most HiFX services by the firm taking a margin on currency transactions, which equates to around 0.35% of the sums transferred - although these margins are calculated on a case-by-case basis.