The kiwi looks less likely now to rise past US80c compared to a few months ago. What’s certain is more volatility for the local currency.
It’s still a tough call between the kiwi having seen its peak or whether it will pass US8c. Whatever the next direction,exporters who have survived a tough past 24 months should brace themselves for more volatility.
“It will be choppy. We could see a 5% to 8% movement over a period of month or two during the next year as it slowly moves lower,” says Mike Hollows, director of trading at HiFX. “We think we’ve seen the high in the kiwi-US,” he says. “I wouldn’t be surprised if we went down to the mid-60s, maybe US63c- US64c this year.
The Reserve Bank said in its end-of-year Monetary Policy Statement that prospects for some exporters have improved but the higher exchange rate “is likely to have put more pressure on some exporters, particularly those not selling commodities”.
On the trade weighted index, the NZ dollar fell 0.9% in December but was 17.3% higher than a year earlier; it gained 2.3% in January, then fell 2.3% in February.
Against the US dollar, it eased from an average US71.62 cents in December to US68.3c by February 9 then rose to almost US70c at the end of February.
By then it had fallen against the Aussie dollar from an average A79.29c in December to A77.85c, and against the yen from an average JPY64.15c in December to JPY61.61c.
REASONS FOR EASING OF KIWI
The shrewd exporter – having survived probably the toughest period for years – should brace for more volatility.
The US dollar, valued against major trading partners, generally has trended down for around 10 years. HiFX’s Hollows believes it will be subject to a few years of corrective recovery against those currencies, which could have a flow-on effect in keeping the kiwi dollar down.
Unchanged interest rates until mid-year in New Zealand should keep the kiwi away from investors who are chasing yield, too. Another factor is that government stimulus of global economies is starting to wear off, and the effects of the recession are likely to drag on economic activity for the next few years. That’s not a good environment for trade growth and commodity-based currencies.
“It will be a choppy ride,” Hollows says. He advises exporters to stick to the age-old rules of having protective strategies when tendering for business so they don’t get caught in an exchange rate squeeze during a bounce-back.
Weakness against the Aussie dollar is great for New Zealand businesses exporting to Australia. If it slips much below A77c, Hollow believes, it could slide to A73-A74c.
His general advice: if you see dips, “leave a little bit of powder dry for lower levels, but do some hedges according to your company policy”.
Exporters with pricing geared variably according to contracts and one-offs need discipline to avoid too much reliance on the currency doing what they need. It’s important to smooth out the bumps. “Get good advice and use discipline,” Hollows adds.
BNZ chief economist Tony Alexander says exporters basing currency strategy on currency forecasts “are making a big mistake” because currencies can not be reasonably forecast.
VULNERABILITY
Only the last 5% of decision-making should reflect someone’s view of where the currency is going, Alexander advises. The rest should take account of your vulnerability to whatever the exchange rate might do.
Having said that, the risk is the kiwi will appreciate once the Reserve Bank starts tightening monetary policy in June.
Reaching US80c is less probable than Alexander believed a few months ago, but “we could get there mainly on the back of slightly improving world economy, so people will be more willing to buy risky currencies like the NZ dollar.”
Moreover, our interest rates are likely to rise before they start rising in the US, Europe and UK.
The kiwi has fallen to around A77.5c, near the lower end of the range it has traded against over a 10-year cycle, but Alexander regards a strong bounce-back as less and less likely because of the strength of the Australian economy.
But the kiwi could rise “quite a bit more” against the pound, because of the dubious outlook for the UK economy and the interest rate differential favouring the NZ dollar.
Consult your currency adviser, he says. The trick is to identify your currency risk.
DEGREE OF MOVEMENT
Cliff Brown, client adviser at Bancorp Treasury Services, says the focus should not be on whether the kiwi will rise or fall but on the degree to which it could move either way.
Levels around US70c and A78c may or not be good for a business. Exporters will have their own numbers to crunch on what’s acceptable.
But no one knows what direction the market will take and following a forecast – from the banks, economists or whoever – is likely to lead you astray.
It’s more important to ask what happens to the business if it goes to US75c or US65c. “So it is really the potential volatility that’s concerning for us. That’s where we focus our advisory recommendations,” Brown says.
The outlook in those terms is that 2010 is likely to be as volatile as the past two years, adds Brown.
Major swings in either direction can’t be ruled out.
He says if the rate available now is good enough for a business, and helps to lock in the expected gross profit margins, “then you would need to have a decent reason not to do the trade through a forward exchange contract or an option, or some other hedging tool”.
“If they turn the question around, instead of asking when should I do it, ask is there any reason why I shouldn’t do it now?”
The critical issue is having a reasonable estimate of business volumes over the coming year and knowing what cash flows to expect in foreign currency.
