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Kiwi dollar now as strong as the Pound ....

29 Oct 2009 19:55Peter Waring
The (formerly) 'Great' Ship Britannia has sprung a leak....

The Kiwi dollar hit a 25 year high last week against the British Pound just above the 0.46 mark. At a rate of 0.46 (converting Kiwi dollars to Pounds) the New Zealand dollar Purchasing Power Parity is now basically the same as the Great British Pound. As I'm about to show you - this means that KIWIS RIGHT NOW EARN JUST AS MUCH MONEY ON AVERAGE AS THE BRITISH DO!! Yes the almighty £ is mighty no more it may seem, or at least for the time being!

Purchasing Power Parity (PPP) theory says that the same product should cost the same amount in two currencies based on converting one currency to the other at the existing exchange rate. While tradtionally we know that some currencies persistently outperform others, the theory provides a useful benchmark for comparing how wealthy a nation is, based on the strength of its currency.

The Big Mac Index - how does the Kiwi dollar stack up vs the £?:

The Big Mac index compares the price of a Big Mac in one country compared to another, converts to the USD as a benchmark, and gives a measure of how overvalued/undervalued each currency is. A Big Mac in New Zealand costs NZD $4.90, and in Britian costs £2.29. Convert £2.29 to NZD at a rate of 0.46 and you get NZD $4.97 - which is what the British Big Mac would cost if converted to Kiwi dollars. That's a paltry 1.4% difference, so for all intents and purposes, based on Big Mac (PPP) theory, the strength of our currencies are relatively equal. Check out the Big Mac Index from July 2009.

What about the earning power of the individual?

So what about incomes? Surely it's not just the cost of the same goods in each country that counts if people in one country earn way more than the other, right? Correct: To adequately compare wealth we need to look at what people in each country earn, as this gives a measure of the affordability and purchasing power of the individual. I did some research online, and found the website PayScale to be very useful - it gives median salaries in different countries for different professions: I took 2 jobs (Personal Assistant and Software Developer) in both Britain and New Zealand and compared them. Here are the results:

Personal Assistant Average Wage:
New Zealand:       $44,767 ($35, 784 after tax)
United Kingdom:    £22,295 ( £17,307 after tax)
Difference:           NZ P/A's earn 4.9% less than in the UK

Software Developer Average Wages:
New Zealand:      $52,251 ($41,064 after tax)
United Kingdom:   £27,613 (£20,976 after tax)
Difference:          NZ developer wages 9.95% less than in the UK

OK so 4-10% is not much less to earn in NZ considering you pay about £500/month (NZD $253 a week) for a room in a shared flat in London, not big enough to swing a cat in (I know this as I've just been there!). For the same money in Auckland you'd be living in the lap of luxury, probably in a huge room in a house on the edge of Lake Pupuke or something similar. There are other things we could compare, like food and energy costs, but the point is that basically right now based on current NZD/GBP rates NZ'ers are just as wealthy as their English Speaking European counterparts. That's quite a feat for a country of 4 million with a commodity based export economy, and relatively little global political influence.

How long will the good times last for?

The Kiwi dollar has been on a winning streak and the Pound and US dollar on a big losing streak since the sharemarket really took off in March 2009. I have read dozens of articles and they seem to be split halfway between "the US dollar and Pound are oversold" and "the US dollar and Pound are on the verge of an imminent collapse". Both arguments have valid evidence to back them up so who do you believe?

In my (humble) opinion, eventually the Pound will recover simply due to the enviable gateway that Britain is to Europe as an English-speaking country and its close ties with the USA. So right now a pretty good 'punt' would be to buy some Pounds, and hold them. But that's my opnion. In the meantime, New Zealanders, enjoy your wonderful country with its clean air, sunshine, oncoming summer, and strong currency. Let the good times roll!

Peter Waring
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