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What is the impact of a falling Kiwi dollar on your KiwiSaver account?

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What is the impact of a falling Kiwi dollar on your KiwiSaver account?.

The falling Kiwi dollar has been a popular topic for the media in recent times. We live in a global market place so movements in currency have an impact on the cost of bringing goods into the country (think imports such as TVs and cars) and the price we can sell our goods for overseas (think exports like diary and forestry). By the same token, currency movements can have an impact on the value of your overseas assets and currency has an influence on the performance of your KiwiSaver account.

While contributions to your KiwiSaver account are made in New Zealand dollars, your KiwiSaver money is not only invested in New Zealand but also in Australia and further afield. At the end of July, there were a total of 41 countries in which the KiwiSaver Growth Fund, for example, had investments. This geographic spread is all part of ensuring your money is appropriately diversified.

When we make investments overseas, we buy those investments using local currency where that company is listed. To do this we need to sell Kiwi dollars to buy that currency — kind of like going on holiday.

To give you an example of the impact the moving currency can have on your returns we can look at our investment in Google. In the nearly two years since we first invested in Google not only has the share price increased by 51.8% but the Kiwi dollar has fallen in value by nearly 19% against the US dollar. As a result our investment in Google is more valuable when converted back to New Zealand dollars.

Date Google share price NZ dollar / US dollar exchange rate Value of investment in $NZ (US share price / exchange rate)
12/8/13 $US443.41 $0.805 $550.82
5/8/15 $US673.29 $0.653 $1,030.60
% change +51.8% -18.9% +87.1%


If the NZ dollar / US dollar exchange rate had not changed, our Google investment would be worth $NZ836.39 which would have equated to a return of 51.8%.

A country's currency can be looked at as an indication of the perceived strength of that economy. The New Zealand dollar may weaken if the New Zealand economy is considered to be in a weaker position compared to other countries and currencies. The combination of falling diary prices, lower interest rates and announcements to try and cool the housing market have seen the Kiwi dollar weaken significantly against other major currencies over the last year.

We have long held the view that the Kiwi dollar was overvalued, particularly against the US dollar, and as a result your overseas investments have, by and large, benefited from the falling Kiwi dollar, being worth more when converted to New Zealand dollars.

Of course, currency isn't always one way traffic and we can also have to deal with the prospect of a strengthening Kiwi dollar. One way we can minimise the negative impact of a strengthening Kiwi dollar relative to other currencies is to employ currency hedging which "locks in" the currency value of the time.

Decisions to hedge are made on a currency by currency basis and are actively managed. No two currencies have the same profile so we take a "view" on each of these currencies relative to the New Zealand dollar. Our view then dictates which currencies we hedge and how much. Hedging is typically done progressively as currencies move away from what we consider "fair value".

At the time of writing, we have partial hedges in place between the New Zealand dollar and the Australian dollar, the Euro, the Japanese Yen, the US dollar, the British pound and the Swiss franc on our share investmen

 

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