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Businesses see the NZD peaking - (from ASB)

Posted by Akhilesh Ganti on Jun 11, 2013 10:00:00 PM
  • The ASB Kiwi Dollar Barometer tracks exporters’, and importers’ and importer/exporters’ exposures to foreign exchange risk, through surveying businesses with annual turnover of at least NZ$1 million. The Barometer also surveys businesses’ expectations for the NZD/USD and businesses’ hedging plans for managing foreign exchange risk, as well as special questions on topical issues in the FX markets.
  • Businesses, on average, expect the NZD/USD to peak at 0.85 in September this year, before easing to 0.828 by June 2014. The survey was taken over the period 26 April to 10 May, when the NZD/USD ranged between 0.83 to 0.855. The currency has since depreciated, largely reflecting USD strength. ASB Economics has recently revised down its forecasts for the NZD/USD, and expects the currency to oscillate around 0.81-0.82 over the coming year.
  • Growing expectations that the NZD would soon peak saw increased interest in hedging from importers. This is reflected in the increased proportion of importers planning to hedge, as well as importers indicating they intend to hedge a higher proportion of their FX exposure.

Businesses expect the NZD to peak soon

The ASB Kiwi Dollar Barometer indicates businesses expect the NZD/USD to peak in September this year. This survey was taken over the period 26 April to 10 May, when the NZD/USD ranged between 0.83 to 0.855. Since then, there has been a steady depreciation in the currency, largely reflecting USD strength. It is possible the survey results, particularly in regards to near-term expectations of the NZD, may have been very different had the survey been taken over that latter period.

  • Importers, on average, expect the NZD/USD to peak at 0.855 in September this year, before easing steadily over the year to reach 0.833 by June next year.
  • While exporters also expect the NZD/USD to peak in September, this is expected to be at a slightly lower level of 0.842. From there, exporters expect the NZD/USD will steadily decline over the year to reach 0.821 by June next year.
  • Across the businesses surveyed, average expectations are for the NZD/USD to peak at 0.85 in September this year, before easing to 0.828 by June next year.
  • ASB Economics recently revised down its forecasts for the NZD/USD, largely reflecting expectations of a stronger USD. We now expect the NZD/USD to track around 0.81 to 0.82 over the coming year.

There has been a narrowing in the NZD/USD expectations between importers and exporters over the past year, although importers continue to have higher expectations for the NZD/USD.
The AUD Barometer finds that Australian businesses are also expecting the AUD/USD to peak soon.

Importers increase hedging plans

Hedging currency exposures is a way of managing possible future adverse changes in the currency. Interest to hedge amongst businesses continued to grow, with the increased interest particularly evident amongst importers. This may reflect expectations the NZD/USD is nearing its peak, with importers likely wanting to lock in a favourable exchange rate while they still can.

  • 85.8% of importers indicated they were planning to hedge their FX exposures over the next three months, up from 84.8% in the previous quarter. In contrast, 69.5% of exporters indicated they intended to hedge, slightly lower than the 70.1% in the previous quarter.

Despite the higher proportion of importers indicating intentions to hedge their FX exposures, exporters continue to indicate plans to hedge a higher proportion of their FX exposures. This is in line with the findings in the Australian Dollar Barometer, where a smaller number of Australian exporters indicated intentions to hedge, but of the ones that do exporters plan to hedge a greater proportion of their FX exposures, relative to Australian importers.

  • The Kiwi Dollar Barometer finds that of the importers that planned to hedge, on average they intended to hedge 76.6% of their FX exposures. This is an increase from the 74.9% of FX exposures indicated by importers in the previous quarter.
  • The proportion of FX exposure planning to be hedged by exporters has remained steady. On average, exporters plan to hedge 91.1% of their FX exposures, slightly higher than the 90.6% indicated in the previous quarter.

Importers in the survey appeared to see increased opportunities for hedging and showed a greater desire to lock in a favourable rate, given growing expectations the NZD is nearing its peak.

Larger firms see greater success with hedging

This quarter, we asked businesses to rate their success in hedging their business’ FX risk. Just over three quarters of businesses surveyed said they had been successful in hedging business risk. This is a similar proportion to when this question was asked a year ago.

As was the case a year ago, larger businesses tend to report a higher success rate. This likely reflects the more extensive resources larger companies have for managing their foreign exchange exposures.

Larger firms make more use of external advisors

We were also interested in how important businesses see external advisors in their decision-making process when it comes to hedging. The Kiwi Dollar Barometer finds larger businesses make more use of external advisors, and are more likely to consider them useful in the decision-making process.

  • Just over 33% of businesses surveyed with annual turnover of at least $150 million said they did not use external advisors in hedging decisions. This is much smaller than the 89% of businesses with annual turnover of between $1 million to $30 million who said they did not use external advisors.
  • Meanwhile, 25% of businesses surveyed with annual turnover of at least $150 million said external advisors play an important role or are key to hedging decisions. This is higher than the 2.9% of businesses with annual turnover of between $1 million to $30 million who said the same thing about the importance of external advisors.

These results suggest there is scope for smaller businesses to make more use of external advisors when it comes to making decisions about hedging. However, the feasibility of external advice will depend on the size of FX exposures relative to any added cost of that advice.

Interest rate differentials again seen as key driver of strong NZD

Interest rate differentials were again seen as a key factor behind the strength in the NZD/USD, with just over 44% of businesses surveyed seeing it as the key driver. This was the case across all types of businesses. Interest rate differentials tend to become more important for the direction of currencies in times of low market volatility. Markets expect the RBNZ’s next move to be an increase in interest rates, in contrast to the substantial amount of stimulus expected from the other major central banks over the coming years. This difference is underpinning NZ’s relatively high interest rates.

Quantitative easing by the major central banks is seen as the second most important factor behind the strength in the NZD/USD, with almost 30% of businesses surveyed seeing it as the key driver. This represents a shift in views. When this question was asked six months ago, only 11% of businesses surveyed saw it as the key driver. The substantial amount of stimulus injected by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan into their respective economies has generally placed downward pressure on their currencies over the past year. In particular, the large bond purchase programme announced by the Bank of Japan has seen a surge in the NZD/JPY over the first half of this year. The RBNZ also highlighted the influence of the BoJ action on the NZD TWI, which reached record highs on the 11th April 2013.

Key “take-outs” from the ASB Kiwi Dollar Barometer

The results from the Kiwi Dollar Barometer indicate businesses are generally expecting the NZD to peak soon. As a result, importers in the survey saw increased opportunity for hedging, in order to lock in a favourable exchange rate. Over Q2, there has been an increase in both the proportion of importers intending to hedge, as well as the proportion of FX exposures these importers planned to hedge.

The Kiwi Dollar Barometer again finds that larger businesses tend to report higher rates of success with hedging. This likely reflects the more extensive resources larger companies have for managing their business risk. Larger businesses also tend to make more use of external advisors, and are more likely to see them as playing an important role in decisions on hedging. The results suggest there is scope for smaller-sized businesses to make more use of external advisors.

Interest rate differentials were still seen as the key driver of the NZD strength. However, quantitative easing by the major central banks has become the second most important perceived driver of NZD strength. This is a significant shift in view from when the question was asked six months ago, when quantitative easing ranked last in terms of being a key driver of NZD strength. This change is likely to reflect the increased focus on the substantial amount of monetary policy stimulus the Bank of Japan will undertake, and the effects this is having on the yen.

 

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