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Do you know chaos theory? I don’t, and just wondered if you did. I have questions. No, no, kidding.

In seriousness, you might know that the most famous part of chaos theory concerns the proverbial butterfly. It beats its wings in (for instance) California and before too long there’s a tornado in Japan. That’s all about (not too surprisingly) chaos. But in fact, when you’re changing currencies, there is something to this theory that is surprisingly relevant.

Butterfly Wings And The NZD Foreign Exchange Rate

For instance. Imagine you’re planning to emigrate from sunny Britain to New Zealand. You have the house picked out and a school in mind for the kids. Great. Except on the day you decide to change your savings into New Zealand dollars – disaster! The kiwi gains three cents against sterling, making paying for that home abroad much more expensive. What gives?

In some cases, it might be because retail sales in Britain dropped 3.0% over Christmas. In others, it might be because New Zealand has doubled its exports, as demand for sheep’s milk in China (I’m serious) goes through the roof. But in others, the thing causing NZD strength might seem (like the chaos theory butterfly) a non-sequitur. Unemployment in the United States might have dropped 0.5%.

In many cases, it’s this last thing in fact. So how does that work? How can falling US unemployment make your house in New Zealand more expensive?

The US Is The Global Foreign Exchange Haven

It’s all down to the economic continuing might of the US, in addition to market sentiment. During pessimistic periods, investors flock to the US in lieu of smaller currencies like the NZD to feel safe. (If World War III were coming, you’d want your money somewhere you think it’ll be alright after all, and there is nowhere more secure than the US. It’s the continuing backbone of the global economy.)

Conversely then, during times when global sentiment is more upbeat, such as times when US unemployment is falling, investors feel more confident. They turn to currencies that might otherwise be ignored, including commodity currencies such as the New Zealand dollar. For example then, over the weekend the New Zealand dollar gained more than a cent against sterling. This is entirely because job creation in the US beat forecasts, climbing 243 thousand last month, therefore stoking global optimism.

So there you have it.

Of course, this foible regarding US economic data doesn’t just affect the New Zealand dollar. It influences all currencies, though in particular those tied to the value of commodities such as iron and coal. Just one more thing to keep in mind when you’re changing currencies!

To find out more about what influences the New Zealand dollar, get in touch with foreign exchange specialist Pure FX. You can also email us at enquiries@purefx.co.uk or call us on +44 (0) 1494 671800.