Our dollar is remarkably volatile. It goes up and down like a yo-yo. It has fluctuated between 45c and 80c against the United States dollar in recent years – although the trend is to be in the 60s.
That can have a huge impact on our finances and investing. In the case of finances, it makes the consumer goods we buy more or less expensive. It's worth buying those big ticket items – but only if you need them – when the dollar is high, and keep your hands in your pockets when it is low.
Foreign based investments such as equities, property, and commodities including precious metals, are cheaper to buy when the dollar is high. Some investors and their financial planners will go overweight in these deliberately when the dollar is high, and cash in once it drops – making a profit that way.
The logic is that if you bought $1000 worth of any United States-dollar-based investment when one New Zealand dollar bought 0.75c US, you would have paid $1333.33. Even if the unit price of that investment didn't rise, but the dollar dropped to US$0.65c, your investment, ignoring any commissions or charges, would be worth $1538.46. That's more than $200 difference. At US$0.45c you'd be laughing all the way to the bank.
It's certainly worth keeping an ear out when analysts start saying the dollar is over or under valued. All financial markets, currency included, overshoot and undershoot and there is money to be made if you do a good job of picking the bottom or the top of the market. But beware, that even the best of economists and analysts can't always nail this equation.
There's another trick to be aware of. If you're buying NZ-based funds that invest in overseas securities you need to be aware that most fund managers hedge back to the New Zealand dollar to offset or reduce the risk of losses on the fund from fluctuations in the exchange rates.
One manager, who I quoted in a NZ Herald article on the subject said that his investors wanted the returns from commodities, not from the movement of currency. But another, who was opposed to hedging said hedged funds were too closely tied to New Zealand's small and fragile economy.
Equities and funds aren't the only way to make (or lose) money on currency movements. The foreign exchange (forex) market is the world's biggest and most liquid financial market. Although it's not common, there are private investors in New Zealand who play the markets. It is possible to simply buy foreign currency and put it under the mattress – although I wouldn't recommend it. Some banks let you switch funds between foreign currency accounts. At the other end of the scale there are companies that allow investors to trade on margin – which means borrowing money to trade in foreign exchange.
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