Southern Hemisphere Currencies get walloped!

Posted 21 October 2008 at 23:50

Posted in Currency Exchange

Currency Exchange

Southern Hemisphere Currencies get walloped!

Submitted by:               Harry Sharpe

What are the exchange rates at the moment?

GBP>EUR        1.28

GBP>USD        1.67

GBP>NZD        2.75

GBP>AUD        2.50

GBP>ZAR       18.00

Now if you really want to know all about Foreign Exchange and why this market has the ability to shake even the strongest monkeys from the trees then have a look at the following graphs which depict the foreign currency or exchange rate movement for Sterling against the three antipodeans or southern hemisphere currencies for only the last month.

Now if you are having a hard time putting movements like this into perspective then allow me to demonstrate its worth in monetary value by giving you the following example. If you were looking to purchase a property in South Africa or Australia in the last month and you had a realistic budget of around £200k, you would have just saved yourself £ 40,000 pounds by doing nothing.

The biggest question is why has the exchange rate hit the skids so quickly and will it go any further - in reality forget about the answer to the second question, in fact forget about the second question altogether because you are just getting greedy and you shouldn't gamble with money that you cant afford to lose - plus I don't know anyway?

The first question is more straightforward - there is significant emphasis being placed on emerging markets at the moment, countries like Australia and South Africa have experienced rapid growth in recent years but are more risky. Given the current state of the market investors are not prepared to take risks and are therefore liquidating their risky assets by unwinding their foreign portfolios. The movement of money in or out of these countries causes the exchange rate to either weaken if it is being sold off (as per the graphs above) or strengthen if it is being bought.

The reversal of carry trades has helped push these rates up. Investors who once borrowed low yielding currencies like the US Dollar or the Euro (at a rate of 2-3%) in order to invest in high return currencies like the Aussie or the Rand (where the interest rates range from 7-15%) are now closing out these positions by selling the higher interest earning currencies in order to pay back the original loans. The result - Aussie & Rand weaken while the US Dollar strengthens to levels that we haven't seen in over 5 years despite the credit crisis.