Don't do the dollar dance

By Mary Holm

Tuesday 11th June 2002

The New Zealand dollar has been rising against other currencies, and many experts expect the rise to continue. On the strength of this, people are talking about moving out of overseas investments.

The rising Kiwi, they say, is exacerbating already lousy recent returns on investments such as unhedged international share funds.

So, the argument goes, wouldn't it be better to exit such investments in the meanwhile, and perhaps come back when the Kiwi settles?

Sounds reasonable. But only if the experts' forecasts are right. How likely is that?

Let me quote from two recent newsletters:

- The first is from Money Online.

"Even the experts (especially the experts) on average make the wrong short-term calls on currency.

"In our July 2001 newsletter we highlighted errors from consensus surveys of 400 globally based economists.

"Over a four-year period their 12-months forecasts for the NZ dollar versus the US dollar averaged 8 cents too high."

That's no small error.

Generally, the newsletter went on to say, "when the gap between NZ and US interest rates widens, (as it has recently), the Kiwi strengthens and vice versa. But the change in not always immediate or reliable enough to be of much use in picking the next move."

From late 1998 through mid 1999, it says, the Kiwi rose "during a period when our short-term interest rates were actually lower than in the USA."

- The second quote is from BNZ's Weekly Overview. Tony Alexander, who writes it, makes currency forecasts. But he is more honest than most about how reliable they are.

He looked at monthly data from the Consensus Economics survey of about a dozen New Zealand economists. They were asked where they saw the NZ dollar/US dollar exchange rate in a year's time.

From July 1996 to April 2001, the average year-ahead prediction was too high in 56 of the 57 months. Often, it was way too high. Only once was it correct.

"Now finally we are in a position where our pick is too low," says Alexander.

He adds, "You know an exchange rate is going to move in a particular direction one day. You just have no model for accurately forecasting when."

The experts, then, are often out by miles or years.

I'm not saying that current Kiwi dollar forecasts are wrong. Just that they might be.

So what? Well, I've written before about trying to time share markets. People who try to buy before a boom and sell before a fall usually do worse than those who hang in for the long haul.

This is partly because it's impossible to tell, until later, when a share or market has turned. Also, as you buy and sell, you incur brokerage, fees and sometimes taxes.

The same applies to trying to time dollar movements [dash] only more so.

At least with shares the long-term price trend is upwards. If someone is in and out of the markets, on average they should make gains when they are in.

Foreign exchange, though, is a zero sum gain. Every time one currency rises against another, the other currency must fall. In total, the rises and falls cancel one another out.

The average currency's long-term trend, then, will be wobbly but neither rising nor falling.

And there's no particular reason why the Kiwi dollar should perform differently from average.

So where are we?

Let's say that a couple of years ago you put some of your long-term savings in overseas shares, probably via a share fund.

That was almost certainly a good move. Through it you gained wide diversification.

Don't let short-term fluctuations in either the share markets or foreign exchange divert you from that course.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached at maryh@pl.net. Sorry, but she cannot respond directly to readers.

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