Wednesday 28th of February 2007

By Andrea Milner

The New Zealand dollar went into decline across the board after Chinese stock prices plummeted overnight (New Zealand time).

Both the NZX and ASX opened lower this morning as the market became nervous following the overnight drops in Chinese equities, but Paul Janssen of foreign exchange service HiFX Limited says this is not really because of any fall in the value of the New Zealand dollar.

Over the last 10 years, the New Zealand dollar has bought between 0.3895-0.7476 US dollars, so Janssen says in spite of the recent sell off, the New Zealand dollar is still comfortably within 10% of the highest levels seen in a decade as against the US dollar.

“Consequently, the New Zealand-based overseas property investor still has more buying power today thanks to the strength of the New Zealand dollar than they had this time last year,” says Janssen.

However he advises investors who were just about to buy overseas property to exercise some caution.

“Property investors exposed to fluctuations in the New Zealand dollar should be particularly cautious, because due to its exceptionally high yield – the highest in the OECD – the New Zealand dollar is an attractive carry trade.”

A carry trade refers to borrowing in a low-yielding currency like the Yen and lending or depositing in a high-yielding currency like the New Zealand dollar.

“Consequently the New Zealand dollar is the victim of movements of hot money,” says Janssen, and it can be very volatile.

Today’s New Zealand dollar sell off is an example of such a move, Janssen says, as “investors have closed long New Zealand dollar positions as they became nervous because of the 9% fall in the Chinese stock market spreading to global stock exchanges and unwound some of their carry trades”.