A Question of Exchange Rates

Question

Hi,

I have 45 000 EU. It brings me interest of only 1.75% and I pay 33% taxes on interest.
I would like to invest that money to make it grow.

Is this moment good for exchanging money into $NZ and what do you think how long NZ $ is going to stay artificially high? Or, EU is really low?

If I would invest this money in the property that investment would have to run on negative balance. How that works and what happens if I want to sell that property after i.e. 8 years or even sooner?

What other investments I might consider with that amount of money?

Answer

You do not fully explain the type of investment you hold offshore but I suspect it is some kind of term, cash management or cash savings account. The 45,000 EU is currently worth around $87,600 NZ. The investment interest return of 1.75% per annum is fairly typical of current rates in Europe (and the US) at present.

Your tax cost is suggested at 33.00% and I’m not sure if you mean deducted at source as a withholding tax or your marginal tax rate in New Zealand. Either way the income earned should be declared here in New Zealand (if you are a resident tax payer) and will be at your local marginal rate.

Over the last few weeks our New Zealand dollar has been retreating off a long term position of strength which has been great for folk importing consumer goods, and great for us buying all manner of products but not good for those folk exporting or for those wanting to bring funds from an overseas destination to New Zealand.

While the currency cross rate with our major trading partners, Australia, USA, UK and Europe has reversed the above pattern slightly, our dollar is still stronger than longer term trends would suggest reasonable. Most expect our dollar to lose strength over the next year or so.

A cross rate movement of say one or two full euro up or down does impact the landed value of your funds significantly. By example if the Euro moves from say .5100 to .4800 (admittedly a significant further shift), your funds will grow to $83,750 conversely if the NZ dollar strengthens further the local value will be less.

Many folk ask us about timing of the currency. It is a difficult call to make with regard one off transactions. Professional currency traders working a desk make many decisions per day or week and the incremental movements with which they deal are miniscule by everyday folk expectations.

If you do bite the bullet and bring the funds to NZ you then need to consider your second question. If you just invest into a term deposit or account similar to current you could expect around 7.35% to 8.50% gross of tax per annum without undue risk.

Whether to buy a property (residential?) depends upon many factors and you appear to be considering a ‘negative gearing’ situation. My advice is to take some advice from somebody who can clearly explain to you the issues surrounding investing in this manner.

Negative gearing, in my view, is not always the great experience folk might be persuaded it is.  Agreed, there are times when it might be an advantage to contribute to a loss making activity to save tax in another entity but it does need close examination and success is really dependant upon high marginal taxation (or maybe also tax losses already held), continued high growth or high inflation driven appreciation to bring the rewards promised.

 

Original Article published March 2006

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