The New Zealand dollar is getting fundamental support from an improved economic outlook but remains prone to shocks from any bad news.
BY: YOKE HAR LEE
The whacky New Zealand dollar is unlikely to make a straight breakaway from 67c to head towards the 80c level against the greenback but a crash back to the 50c level is also unlikely, currency watchers and business leaders say.
Several global factors will continue to provide underlying support for the US currency which is seen making a recovery from its anemic former self. A stronger us currency will help rein in persistent gains by the kiwi.
“The base story (for the kiwi) is that the economic fundamentals have improved over the past four to five months, past the deep dark tunnel. In a general sense, the New Zealand recession is starting to bottom out. Against this, the global backdrop is also improving,” says Danica Hampton, currency strategist at BNZ Capital Ltd.
However, the kiwi is also strongly influenced by the global economy which is still likely to be spooked by signs of the global recovery being less than what the market expects.
“The kiwi won’t see a smooth path up. There is a risk of correction (from the current 68c level as at August 31). We’ll see patches of weakness for Kiwi exporters to take opportunity,” Hampton says.
WHIMSICAL MOVES
Bob Fenwick, founder of Planhorse systems, which makes filing systems for plans and drafts, says the whimsical moves of the kiwi make it hard for larger exporters with fixed operating costs offshore to forecast.
“For those exporters who did their costings based on the NZ dollar being at 60-62c this year – and we are now 12% or so more than that (in November- December) when last year we were at 55c – the situation is tough.”
The kiwi’s volatility also makes it hard to price products. “When you have to quote your prices 12 months ahead — required in many cases — or if you want your products to go into a trade catalogue, you would shudder at the vagaries of the movement of the New Zealand dollar,” Fenwick says.
Fenwick’s company exports over 90% of its products and receipts come in six to seven different currencies.
A strategy that has worked for him is holding the different currencies in foreign currency accounts and remitting back to New Zealand dollars only when the rate is in his favour. “But in this economic climate, this (keeping money in foreign currency accounts) is not easy to do as most companies need their cash,” he says.
Fenwick reckons the Aussie is overvalued against the US dollar and when the Aussie makes a correction against the US, it will correct against the kiwi.
But on balance, the Australian currency will hold better than the kiwi as the former has a bigger economy that is more diversified and less reliant on agriculture, he says.
Design and engineering consultancy rml Engineering’s managing director, Larry Greene, says his company has recently taken cover on its Aussie dollar needs as he fears the NZ dollar may rise further against the Australian.
His view is that finding a comfortable level to go with and then eliminating as much risk as possible is a good policy to adhere to. “Our view has been that the level is about 85c to (the) Australian dollar and if it gets above that we are looking for downward movements and, if it gets too far below, it is not permanent.
FOCUS ON PRODUCT
From healthcare product company Good Health New Zealand, the advice is not to be fixated on the currency but focus on creating a premium product that will hold its own even though the product will cost a little more.
Its chief executive, Paul O’Brien, says: “We have some natural hedging around our US dollars as our plastic resins (input) are bought offshore and priced in US dollars. I think the noise we hear from exporters is more about the volatility of the swings – which makes it hard to plan purchasing and promotion – rather than the strength of the New Zealand dollar per se. “If I know the kiwi is going to be 72c to the US for the next three years, I would say, I can live with that, and get on with my business.”
Neven Fisher, corporate foreign exchange dealer at LatitudeGT, says: “For those exporters or importers out there looking to mitigate any currency exposure, the only real course of action is to take advantage of swings to historic highs or lows, depending on the exchange rate that you are exposed to.
“Many of Latitude’s clients work on low margin and turnover in order to make money. As an example, the 40% appreciation we have seen in the NZD/USD since March has had very material bottom line-effects on companies.
The ability to manage these risks and take advantage of favorable market moves is paramount to staying competitive and, more importantly, staying in business.
“And for those exposed to the NZD/AUD cross, at current levels of 81.50c, this has represented value to some of the client base looking to gain some levels of cover,” Fisher says. the NZD/AUD cross has ranged between 85.10c in January to a low of 77.35 in April 09.
