Falling interest rates impacting on your travel money?
Flight tickets, check. Accommodation, check. Overseas travel insurance, check. For the suitably organised, now you may be contemplating when to purchase some foreign currency – spending money for when you are overseas. We have all been there!
It goes without saying that there is no crystal ball to look into the future. So, it’s impossible to forsee how foreign exchange rates may change over short periods of time. Buying foreign currencies by trying to predict what the future might hold is fraught with danger.
Events such as a change in headline interest rates either locally or in the foreign country can have immediate impact on exchange rates. But it is close to speculation when determining how long those trends would continue and when to time your purchase. Exchange rates are influenced by a myriad of reasons and as such are hard to pin down over the short term.
The impact of interest rate cuts
Almost a month ago, the Reserve Bank of New Zealand (RBNZ) cut headline interest rates to an historical low of 1.5%. Over the following few weeks, the exchange rate between NZ dollars and US dollars fell from about 0.6598 to 0.6484. This meant that you had to pay more NZ dollars to buy the same US dollars.
To illustrate this, suppose you need US$5,000 of spending money. Before the rate cut announcement, you would have spent NZ$7,578 to buy the US$5,000. But, if you waited for a few weeks you would have ended up paying NZ$7,711 for the US$5,000. You would have been worse off by NZ$133.
Ironically, if you waited for another week or two more you could have bought cheaper again as rates moved back up. Find out here who’s got the best exchange rates now.
You get more bang for your local buck when you are able to buy more of the foreign currency for the same amount of home currency. The obvious question then is to figure out when is it best to buy the foreign currency.
In the face of such uncertainty, a pre-paid travel money card could be handy. Especially if you are worried about the exchange rate going against you.
How does a travel money card work?
It’s pretty straightforward. You exchange your home currency for the foreign currency and load up your travel card with that amount. You then simply use the card when you are overseas to make payments in the foreign currency. Today’s exchange rate will determine the rate at which you will be able to buy the foreign currency. By doing so, you are effectively locking in today’s rate for the future use of your money.
As an example, say you are travelling to the US in a month’s time. Suppose the exchange rate today is 0.65. If you want to have US$1,000 of spending money you can pay NZ$1,583.46 today and load up the US dollars on your travel card. While you are in the US you can then use the card for all your payments, with no regard to whatever the exchange rate might be in a month’s time.