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Trying to understand NZ to US currency issues

 
Trailboss
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I have a small farm. And I need to build some shelters for animals. That requires wood. Wood is super expensive. I have lots of trees that need thinning. The local mills aren't paying much for logs right now.
One solution I've thought of is to convert my trees to usable farm lumber. There are lots of companies that sell little sawmills. A few years ago I did a lot of research and found the one I want. (If anybody is interested in this topic, start a new thread and I'll bore you to death with details)
The cost then was about $8,000. The price now is something like $12,000. The mill is made in New Zealand and the big price difference has to do with the value of the US dollar vs. the value of the NZ dollar.
I'm thinking I would like to be able to get one of these in the next three years or so and it seems it would be wise to learn more about how the dollar exchange rate thing works. I haven't been able to find a chart on the internet that shows how this has changed over the last year or more.
Anybody have any advice on how I can start to learn this sort of thing?
 
Wanderer
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Dunno much about it, but here's a chart I found on yahoo finance:
[link]
 
paul wheaton
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How did you do that?!! I hunted around on yahoo for about 20 minutes. And then a small mountain of time with google!
So I take it that this chart shows that $1.50NZ == $1.00US ???
I looked at the two year chart. If I'm reading it right, two years ago an american dollar would get you two NZ dollars, right? So that would mean that the sawmill would cost half as much as if $1NZ == $1US, right?
 
paul wheaton
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So what are the things that will change the value of the US$ compared to the NZ$?
 
Jim Yingst
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How did you do that?!!
I'm a man of many talents.
I went to yahoo -> Finance -> Currency (down under International). Then I told the currency converter to convert 1 USD into NZD, and lo, there was the chart.
So what are the things that will change the value of the US$ compared to the NZ$?
Well DVD sales have been pretty good on the Rings trilogy, and there are probably a lot of pesky American tourists showing up down there looking to scale Mount Doom or something. Other than that, I haven't a clue.
 
whippersnapper
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Popular source for currency quotes is
http://www.xe.com/
Poke around the site. I think you can get historical rates.
 
blacksmith
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I don't know how much you already know about currency effects, so I'll start from scratch in describing what I know.
There are a bunch of things that affect the value of a currency, and thus exchange rates. These include productivity, inflation, interest rates, and the popularity of the currency as an international standard of exchange, as well as short term anticipation of these effects by currency traders.
The productivity of the home country affects exchange rates because it affects how much the country produces, which affects how much a given amount of that currency can buy. Inflation affects exchange rates for the same reason, but in the opposite direction. These taken together are the biggest long term effect for stable countries, because they affect the real value of the currency (how much tangible stuff you can buy with it).
Interest rates affect currency values because they affect the financial returns of the banks and traders who hold a lot of currency - most of their holdings are typically in the form of interest bearing investments rather than just in cash. In the long term - over decades - interest rates tend to compensate for the effects of inflation, since interest rates follow inflation in the long term. In the shorter term, measured in years, they tend to move in opposite directions, since inflation rates are negatively affected by short term interest rates. Currency traders make their money by anticipating these effects, favoring currencies with high interest rates relative to inflation, since that allows them higher returns without much inflation erosion of those returns.
The popularity of the currency as an international standard of exchange is a little different. Basically, if a currency is popular for large international transactions, there will be demand for it just as a means of conducting these transactions, without much regard for the economic behavior of the currency. That will result in extra demand for the currency, which will boost the value of the currency relative to economic fundamentals.
The U.S. dollar has fallen sharply over the last couple of years because the Federal Reserve has been trying hard to avoid deflation over those years. This means they have been holding interest rates low - bad for currency traders - in order to avoid deflation - also bad for currency traders, as deflation is good for the value of the currency, even though it would be very bad for the economy as a whole. I'd guess this effect probably accounts for about half of the 50% change you've seen in the cost of that equipment in dollar terms. I expect this effect to reverse in the next year or two, as the deflationary threat has receded and the Federal Reserve has shown every sign of being willing to raise short term rates as a result.
In my opinion, the main open question regarding the dollar over the next few years is whether it will remain the international exchange currency of choice, and in particular whether OPEC countries continue to favor it for oil transactions. In the past, the dollar has achieved this position by being the premier currency from a large nation with both political and economic stability and strength. The euro is now competitive with the dollar in terms of the size and strength of its economic base, and probably in terms of the political stability of that base as well, so we might see some shift away from the dollar and towards the euro. This would reduce the value of the dollar somewhat, though in my opinion it's not likely to have a bigger effect than the reversal of the deflation fighting effect I noted in the previous paragraph.
I'm not very familiar with the New Zealand economy, but it's possible that a few years ago their currency was undervalued, perhaps for reasons of inflation that have since been fixed.
Have you looked into the issues of allowing the lumber to season properly to avoid warping after installation?
 
Ranch Hand
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I looked at the two year chart. If I'm reading it right, two years ago an american dollar would get you two NZ dollars, right? So that would mean that the sawmill would cost half as much as if $1NZ == $1US, right?
The two year chart shows that NZ dollar is about 1.4 times more expensive than it is now (from 2.25 to 1.6). So, yes, if the New Zeland-manufactured mill cost US $8,000 two years ago, it would be 8,000 * 1.4 = $11,200 now. Notice that this is close to the $12,000 figure that you mentioned.
To complement Warren's comments about the factors affecting the exchange rates, I would add the political stability. In times of war, the country's currency becomes less attractive to investors, and they tend to sell it in favor of other investments. This is yet another reason the US dollar has been sliding recently. It also provides an intuitive way to understand the other factors -- the investors are simply trying to find an asset that will provide the maximum return for the lowest possible amount of risk.
 
paul wheaton
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"Have you looked into the issues of allowing the lumber to season properly to avoid warping after installation?"
The coolest thing I have come up with so far is that I've designed something I call "a sled shed".... I'm gonna start a new thread
 
paul wheaton
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So theoretically we'll be pulling out of Iraq this summer, so the US dollar should get stronger again. And if the feds don't lower the interest rate anymore, that should make the dollar stronger too, right? So maybe in a few months, the price will have dropped quite a lot.
 
John Smith
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So theoretically we'll be pulling out of Iraq this summer, so the US dollar should get stronger again. And if the feds don't lower the interest rate anymore, that should make the dollar stronger too, right? So maybe in a few months, the price will have dropped quite a lot.
Maybe. This is where it gets complicated, for two reasons.
One reason is that the investors around the world think along the same lines as you do, so in anticipation of the currency appreciation, they buy it, thereby making it more expensive. The modern capital investments theory states that the price of an asset fully reflects not only what's currently known, but also the expectations of the future news. In other words, the current rate of exchange already discounts the effect of future interest rates and the future political situation, and when these changes occur, you may not see any change in the rate at all. The recent demonstration of this fact was the spectacular economic news released last week, and the dismal performance of the stock market. The market is said to discount the current news and focus on the future news.
The other reason is that the future events are exceptionaly difficult to predict. When the Second Iraqi War started, it was very reasonable to predict that the US will win the war and the gas prices will drop to the floor. If you made an investment decision based on that reasoning, you would end up in the poorhouse.
In much simpler and intuitive terms, if it was easy to forecast the price of the asset, no one would work. If you think that the US dollar will jump by 5% in a few months from now, you could simply buy a US dollar future (the financial instrument), and make an enormous amount of money in a very short time (because of the leverage buit in futures/options, your actual return on investment would be around 250%). An overwhelming number of studies demonstrated that virtually no one can do it consistently, over an extended period of time. Incidentally, lumber is a commodity traded on the Chicago Mercantile Exchange. With as little as a few thousand bucks, you can open a commodity account and see for yourself just how difficult it is to make money making predictions about the future prices.
[ May 09, 2004: Message edited by: Eugene Kononov ]
 
Sheriff
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Paul,
We should try to get George Soros to hang out here a bit more. Not only could he navigate any currency exchange rate concern, but he's also been known to invest in the occasional IT company.
 
Warren Dew
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Eugene Kononov:
One reason is that the investors around the world think along the same lines as you do, so in anticipation of the currency appreciation, they buy it, thereby making it more expensive.
Plus, the currency traders make a living at this, so they may be better at it than even well informed lay people. If I'm reading the charts at this currency futures site correctly, prices for New Zealand dollars deliverable at the end of this year and the middle of next year are only slightly lower than for current New Zealand dollars (60c to get a NZD in a year, 61c in six months, 62c now), so it looks like the traders don't think that particular exchange rate is going to change very much in the next year. The slight discount probably just compensates for the interest one could earn on the US dollars in the meantime if one waited to exchange the money later rather than buying futures now.
 
Ranch Hand
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Plus, the currency traders make a living at this, so they may be better at it than even well informed lay people.
That's the same argument stockmarket advisors use to sell people their crystal balls.
They're just as much in the dark about the future as is everyone else.
All they go on are computer predictions based on historic data (in the past after a 3 months lapse the currency on average gained 20% in a week which is supposed to happen next week so we should buy now kinda thinking).
In fact, the computers typically have buying power these days and the humans are there only to sell on the things the computers buy to the small investors who are not hooked into those computer systems.
The entire commodities market is now so highly automated that the small investors and their dealers are the only human element in there apart from the guys inputting the historic data and the guys writing the software.
 
Warren Dew
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Originally posted by Jeroen Wenting:
That's the same argument stockmarket advisors use to sell people their crystal balls.


Well, yes, that's why I said "may".
I would point out that "investment advisors", unlike traders, don't actually make their money playing the market - they make their money getting other people to place trades. Analysts also often don't invest in the stocks they recommend, because of possible conflict of interest issues. Their skills are a little different from actual traders.
Commodities markets are kind of interesting, because there are two kinds of participants - on the one hand, traders who are just trying to make money and have no interest in ever taking delivery, and on the other hand, people who actually have the goods to sell or want to buy the goods in the future. It seems that in some markets, the traders can make some money by assuming risk from the people who actually do things with the goods; in a way, what they're selling is insurance.
 
author
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The huge deficit in US foreign trade (thanks to Walmart) and federal budget (thanks to the war and tax cut) also put a lot of pressure on US dollar. The budget deficit is especially worrysome in the long term. Since it is in US dollars. the US government can always print more money (deflate the value) to pay for it if it grows too big. Talking about hidden tax rises!
For the short term, the trade and job growth have more effects though. Even as we speak, the US trade rep in China is pressuring China to increase its currency value against US dollars today. I do not know whether the same is going on with NZ.
 
lowercase baba
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has anybody ever tried writing a program that checks all (well, some...) the conversion rates? i mean, is it possible that if i trade my dollars for yen, then my yen for pesos, then pesos for euros, then euros for Canadian dollars, and then those for u.s. dollars, i could make a profit? or would the comissions just kill me? or is there something else i'm missing?
 
Jeroen Wenting
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yes, you could certainly make a profit.
It all depends on how long you are prepared to sit on the money waiting for favourable rates on each transaction.
The provision would kill you only if the amounts traded are small.
Trade $10K and you're paying more than you gain. Trade $10M and you win (the provision is a percentage + a fixed amount usually. The larger the total sum the smaller the fixed amount in comparison until is evaporates (plus I think many traders will give you a better deal once the size of the transaction goes up).
 
John Smith
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has anybody ever tried writing a program that checks all (well, some...) the conversion rates? i mean, is it possible that if i trade my dollars for yen, then my yen for pesos, then pesos for euros, then euros for Canadian dollars, and then those for u.s. dollars, i could make a profit?
The futures markets are extremely competitive. The types of transactions that you are referering to are called arbitrage and they are performed on a routine basis, continually during the day. You may have heard of the "program trading", -- this refers to the discrepancies between the pricing of the various financial instruments and the trading opportunities that arise from these. Many powerfull computer systems monitor the markets 24/7, detect very minute disbalnaces and make advantage of them. These systems trade enormous amounts of money at very low commissions. You are also competing against the fellow traders like you are, and the statistics show that 95% of all the futures traders lose money. If you think that you can beat these poor souls, along with the computer systems, go for it. But before you do, you may want to look at the past news and find a company called "Long Term Capital Management". Their business was arbitrage. The core of the company consisted of the physisists and mathematicians with doctoral degrees and Noble Prize winners. After some initial success, the company lost some astronomical amount of money mismanaging risk and went bancrupt. The Federal Reserve had to bail it out.
 
Ranch Hand
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you could always take your money to a roulette wheel... or try your hand at some Hold'em... sounds like it might be a safer investment
 
Jeroen Wenting
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Originally posted by Eugene Kononov:

The futures markets are extremely competitive.


Terry Pratchett writes about the Pork Futures business in one of his books.
A huge warehouse holds the future of pork, the owners just wait for the future to become reality and voila, a warehouse full of pork.
Now if it only were so simple in this roundworld
 
Ranch Hand
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go work for FONTERRA
 
fred rosenberger
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i wasn't thinking about buying futures, i wanted to do it all instantly...
i dont' know how often rates change - once a day? once and hour? minute? second? or is it like stocks - whatever the buyer pays, it's instantly updated around the world...
i figure that at any moment, i can trade my U.S. dollars into any of 50 or so other currencies. once i do that, i can instantly convert THAT to a third, then that to a fourth...
in other words, at any instant in time, could there be a loop that would result in a net gain?
 
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has anybody ever tried writing a program that checks all (well, some...) the conversion rates? i mean, is it possible that if i trade my dollars for yen, then my yen for pesos, then pesos for euros, then euros for Canadian dollars, and then those for u.s. dollars, i could make a profit?
ha ha, go to the wilmott.com site, this is a classic thread - not sure if it's true...

So I'm trying to do these 'gutted time spreads' (don't ask why, that's another story)....
Theo is like 730.0
French Market maker (Big Bank): '710-755'
American Market Maker(Big Bank): '725-740'
let me call one more here.... see if I can't get this any tighter.
American Market Maker (Big Bank): '900-920'


http://www.wilmott.com/messageview.cfm?catid=15&threadid=8415&FTVAR_MSGDBTABLE=&STARTPAGE=2
 
John Smith
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i wasn't thinking about buying futures, i wanted to do it all instantly...
A commodity and financial future is a contract. It can be bought and sold at any time, normally within 1 second from submitting a (market) order. Think of the presidential elections -- the actual event will occur in November, but the bets (prices) are changing every day, depending on the relevant factors.
If you want to execute multiple transactions, no problem -- you can do it simulteneously, within the same 1 second. However, it's almost certain that your gain will be less than your commission for that trade. The markets are said to be efficient, -- whatever the short term and risk-free trading opportunity existed, somebody has already taken it. The "somebody" is normally a trader or an institution with large capitalization. An example of a transaction would be to buy an asset on one exchane for $20.00 and simulteneusly sell the same asset on the other exchange for $20.001. If you put $1,000,000 in this transaction, your profit is $50. Suppose your comission is $25. That leaves you with $25 risk-free profit.
 
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