The Best Time To Buy Your Travel Money
Booked your travel overseas? You have sorted your accommodation and your flight plans. Now….how about travel money?
Should you exchange your New Zealand dollars right away or should you wait until it’s closer to your travel? As much as this can be a tricky one to decide, it always helps to understand what some of the usual reasons are for foreign currencies to change in value against your local dollar.
If you had NZ$1,000 on you back in August last year and changed it to US dollars you would have had about US$750 to spend when overseas. Today, that same NZ$1,000 will buy you only US$660 to spend overseas. A 12% loss on your spending capacity. You could wait another month but then you may get even less. Although, there is always the probability that you could buy more in a month’s time. What follows is a simplistic view on how everything hangs together.
When exchanging one currency to another, the value of the foreign currency relative to your local currency changes largely based on demand and supply conditions. When there is more demand for the foreign currency, the price of that goes up relative to the NZ dollar.
So, for instance, when interest rates go up in the US, the demand for assets such as deposits in US banks go up (because you can earn more from them now) – meaning more foreign investors will want to invest in those type of assets. When more investors enter that market the demand for the US dollar goes up as those investors are selling their local currency and buying US dollars to spend on buying those assets. This means the US dollar grows stronger against each of those foreign currencies.
Since August last year interest rates in the US have been raised 4 times, from 1.25% to 2.25% today – the last raise was as recent as this month, when they were put up by 0.25%.
Over that same period, interest rates in New Zealand have held steady at 1.75%. This means that within just the past 12 months the US has, relative to New Zealand, gone from a lower interest earning economy to a higher interest earning economy. This aligns with the change in value of the US dollar versus the NZ dollar over the same time.
That’s the theory! You still need to decide whether you should change your New Zealand dollar today or wait. Most indicators are that the New Zealand dollar is on a downward trend against the US dollar. Why? There is speculation that we may have to cut our interest rates, whereas in all likelihood the US may actually put up interest rates again. This means the relative strength of the US dollar is going to go up even further against the NZ dollar – that means even fewer US dollars for you to spend!
Of course, you are not guaranteed of the above. A half-way measure may be to change some of your NZ dollars now and change the rest closer to your travel.
Find out how many US dollars you can buy today.