Jim Eagles: Dollar's journey into the unknown

COMMENT

If you're planning an overseas trip later in the year, when is the best time to buy your foreign currency? And where is the best place to buy it?

The short answer to the first question is that your guess is just about as good as any economist's.

On the one hand the kiwi's value against most other currencies - especially the greenback - is higher than it has been for some time.

On the other hand most economists have been forecasting it to go higher.

On the other hand such predictions have been wrong before.

And on the other hand - economists need a lot of hands - whichever way the long-term trend goes there will be lots of fluctuations, like the dramatic drop following last week's Monetary Policy Statement by the Reserve Bank , which could spoil your plans.

The fact is that short-term currency movements are extremely difficult to predict (otherwise it would be an easy way to make a fortune).

That is because there are so many factors that have to be taken into account.

Will the US economy continue to boom? Which central banks will raise interest rates? Will the Japanese Government continue to intervene in foreign exchange markets? Will the Chinese Government allow the yuan to rise in value? What will Michael Cullen say next?

Above all, what will the world's money market dealers - appropriately described as "reef fish" for the way they suddenly zoom in one direction and then another for no apparent reason - feel about the New Zealand dollar.

Even the experts have difficulty figuring it out.

Last year I surveyed the chief executives of 50 top companies, most of them involved in exporting and vitally interested in foreign exchange, asking where they thought the kiwi might be in 12 months.

The predictions ranged from 57USc to 68USc and averaged 62USc.

The 12 months is not up yet but it has already surpassed the top end of those predictions and most forecasts have been predicting it will be around the 71USc mark by the end of the year.

If those guys can't pick what's going to happen then what hope has the ordinary punter got?

Most economists and currency strategists readily admit that they aren't much better than chief executives at forecasting currency movements.

But they do offer a few basic suggestions.

First, they point out that whatever the kiwi does over the next few months this is still a great time for New Zealanders to travel.

"If you look back over time at the New Zealand dollar against the US dollar, UK pound, Japanese yen, Euro, any of the major currencies, we're in the upper part of the cycle," says Johnathan Bayley, senior currency strategist with Westpac.

"Whether you think we've already seen the peak of this cycle at 71USc, or whether you think it will go to 72USc or 73USc, these are still historically high rates. So now is not a bad time to buy."

Second, they mostly think the kiwi will go a bit higher, especially against the greenback.

"If my mother was asking me what to do and she was travelling in about a month," says National Bank's chief economist John McDermott, "I'd tell her to change her money now.

"But if she was going in six months, well, I wouldn't necessarily be in a rush.

"You've got to keep in mind that if you buy foreign currency you're not going to get any return on it. You can afford to leave your money in the bank a while and be patient.

"I don't think the sky is going to fall in on the New Zealand dollar tomorrow.

"But," he adds with a laugh, "I could be wrong ... and if it does start to head suddenly south then you need to move quickly."

The answer to the second question, which is the best place to buy your foreign exchange, is that it doesn't much matter.

Strolling up Queen St one morning last week I noted the US dollar rates offered along the way.

Interforex in the Ferry Building was selling greenbacks at 0.6555 (in other words it would cost you $1525 to buy US$1000).

The National Bank was offering 0.6681 (ie your US$1000 would cost $1497).

At Westpac it was 0.6689 (so you'd pay $1495) and at ANZ 0.6705 ($1491).

Those were all the banks I passed but the BNZ's rate in the Business Herald when I got to work - though the actual rate would have altered overnight - was 0.6730 (so you'd be paying $1486 for your US$1000) and the ASB rate on line was 0.6700 ($1492).

Of course all those figures are only indicative because the rate varies all the time and may even have changed while I was walking up the street.

In addition, most of the banks charge a fee of 1 per cent on cash or travellers cheques (with a minimum fee of $5-10 on small transactions) though ASB quoted 1.25 per cent on cash and Interforex said it charged 2 per cent on less than US$500.

If you exclude Interforex - which was easily the most expensive - then the difference between the highest and lowest deals on offer that morning was about $5 on a US$1000 purchase.

Which rather suggests that unless you're dealing in millions it doesn't much matter which bank you go to.

In fact, really, the same message also applies to when you change your money.

"If you're looking at fairly modest amounts of money, as most of us are, then even a 1c movement in the currency is not going to make that much difference," says McDermott. "It's probably about the cost of going to one cafe and maybe that's one cafe you don't want to visit."

So what should you take out of all that carefully balanced advice?

* Don't waste a lot of effort trying to pick what the kiwi is going to do because no one can.

* In the absence of the currency trending clearly downwards - which it is not doing yet - leave your money in the bank and earn ing interest until about a month before your trip.

* All the banks seem to offer pretty much the same deals.

* Unless you are going to buy huge amounts of foreign exchange, it probably isn't worth getting too exercised about when or where.

Above all, whatever rate you get, be grateful that it's so much better than what was on offer a couple of years ago.

And if that isn't the sort of straightforward answer you were looking for, it's because the question is much tricker than it seems.