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Foreign Exchange Explained

8th February 2017

Foreign Exchange Explained

If you have ever been overseas and exchanged your Kiwi dollars for a foreign currency, then you have delved into the often complex world of the currency exchange market. One of the biggest markets in the world, trillions of dollars in foreign currencies are traded every day by governments, large companies and banks. With all of those trillions being exchanged come a ton of rules, regulations and complicated things that don’t really mean much to the average person going on holiday – you and me.

So, let’s forget all of that stuff and just focus on the stuff that does mean something to us. Let’s look at the parts of the foreign exchange world that affect you, and how much money you get to take on your holiday.

What are Exchange Rates?

An exchange rate tells you what your currency is worth in another currency - it is the price you will be charged to buy one currency with another. So for example, if you want to buy US dollars (USD), the exchange rate will tell you how many US dollars you will get for your New Zealand dollars (NZD). 

Exchange rates are needed because one country’s currency isn’t always accepted in another. So you can’t go into a shop in Italy and buy a loaf of bread with NZ dollars. First you will need to purchase Euros (EUR) with your NZD, and then you would be able to buy the bread with EUR.

You can use the exchange rate available on that day to find out how many Euros you would get for your dollars. We have a handy exchange rate calculator on our website that will help you figure out just how much money you can get in exchange for your NZD, based on today’s exchange rate.

How are Exchange Rates Set?

There are two main systems used to determine a currency’s exchange rate – a floating exchange system and a pegged exchange system.

Floating Exchange

This is when a currency is worth whatever buyers are willing to pay for it. The exchange rate is affected by supply and demand, and this is determined by foreign investment, import and export ratios, inflation and other economic factors, and the rate can fluctuate daily.

Pegged Exchange

This is when the exchange rate is set and artificially maintained by the government as the rate is pegged to another country’s currency, often the USD. In this instance, rates don’t fluctuate each day.

As an example – the rate of exchange between NZD and USD fluctuates daily, however the Hong Kong dollar is pegged to the US dollar, at a rate of 5.65 HK$ = 1 USD.  This means you can be certain that, if you wanted to exchange $100 USD, you would get $565 HKD.

So Why Do Exchange Rates Change?

For currencies that use the floating system, the rate of exchange between one currency and another can change daily, and there are a number of reasons as to why. But basically, buying one currency in exchange for another works just like shopping at a department store – it’s all about supply and demand.

If the goods – whether it’s a homewares at a department store or a particular currency at Travel Money NZ – are in demand, the price goes up as the supply goes down. If demand is less, then the price goes down to try to get you to buy more.

Lots of things affect the supply and demand for a currency – such as interest rates, political factors, economic performance and trade data. Any of these factors can make a foreign currency more or less popular on the exchange market, and can affect value and therefore the exchange rate.

The rates you see available at a Travel Money NZ store will reflect all of these things in the form of the value of foreign currencies against the New Zealand dollar.

How Do I Know if a Rate Will Go Up or Down?

The short answer here is you don’t.

If you are inclined to spend a bit of time doing some research, you could look at historical trends for the currency you want to buy, and you can try use theories and science to predict what will happen next, but essentially it will just be a guess – no one knows what will happen and what impact it may have on the value of a currency, so all historical data and trends will do is tell you if the value has been going up or down in the past – they won’t tell you if they will go up or down tomorrow or 6 months from now.

Why is the Rate Different on TV?

If you watched the news this morning and saw the rate of the NZD against the USD, and then went to a Travel Money NZ store later in the day, you may have noticed that the two rates are different.

And there is a reason for this!

The rate reported on in the news is the wholesale rate – it is the exchange rate available to governments, banks and big businesses trading trillions of dollars on the currency exchange market. It’s not a rate that is available to the general public.

The rate you see in a Travel Money NZ store, on our website, at your bank etc. is the retail rate. We purchase a foreign currency from a wholesale provider and then sell it to the general public at a retail rate. It’s the same as  a large homewares supplier buying their products from a wholesaler, and then selling them to you at a retail price.

So I'm Ready to Buy, But All the Jargon Confuses Me

If you’re confused by all of the jargon in the foreign currency world, here is a quick snapshot for you:

The world of foreign exchange can be a confusing one, because we are exposed to all of the information, jargon and rates used by the wholesale world through TV, newspapers and the internet, but when we – as the general public – want to go on holiday, it is the retail aspect of this world that we operate in.

Hopefully this has helped explain some of the difference to you, but if you still have any questions, any of our FXperts will be more than happy to help simplify it all for you! Just call one of our stores on 0800 732 294 or visit us in store today. You can find your nearest store on our website, and don't forget to print out our handy Budget Planner to organise your travel money better before heading overseas!

*Travel Money NZ does not charge fees or commission on foreign currency cash transactions. Fees may apply if paying by credit or debit card.

This blog is provided for information only and does not take into consideration your objectives, financial situation or needs.  You should consider whether the information and suggestions contained in any blog entry are appropriate for you, having regard to your own objectives, financial situation and needs.  While we take reasonable care in providing the blog, we give no warranties or representations that it is complete or accurate, or is appropriate for you.  We are not liable for any loss caused, whether due to negligence or otherwise, arising from use of, or reliance on, the information and/or suggestions contained in this blog.