Kiwibank's Nigel Gaudin explains why and how many exporters and importers are hedging their revenues and costs to reduce their risks from big currency moves

By Bernard Hickey

The New Zealand dollar's often violent moves can produce big unexpected swings in profits for those exporters and importers who choose to 'go naked' and take a punt on where the currency will be when they have repatriate export receipts or pay for imports.

Kiwibank Head of Financial Markets Nigel Gaudin explained to me recently how, for example, the New Zealand dollar's drop of more than 5% in just a week would have cost a small importer more than US$1,000 on a US$20,000 shipment. 

By not hedging, this importer was effectively taking a punt the currency would stay high or even rise further. That can be a dangerous approach when the New Zealand dollar can move so far and so fast.

Some business owners may effectively choose to believe they can pick the market better than the market, but it's a tough thing to achieve.

"Nobody is an expert. The market is huge. Trade flows have very little impact on the currency here in New Zealand. There is a lot foreign investment and capital flows," Gaudin said.

"If you don't hedge your risk down, all you're doing is opening yourself up to that speculation," he said.

Those who choose not to add currency speculation to their day jobs should look at the various forms of currency hedging, he said. The best type and use of these tools will depend on the business owners' risk appetites and the cash flow profiles of their businesses.

For example, an exporter with a long gap between paying for their input costs in New Zealand dollars and receiving their receipts in US dollars would look at different tools and techniques than, for example, an importer with a short lead time between ordering and paying for the goods or services.

"You can convert your foreign recepits at the spot rate of the day. You can take a forward exchange contract or you can take a foreign exchange option, which is like an insurance policy," Gaudin said, adding there were also more complex transactions such as trade finance facilities and foreign currency overdrafts.

It's very much 'horses for courses'.

"If you have a very short cash flow you may be happy to convert at spot, but if you've got a long lead time with a 5, 6, 7 month duration you might want to use a forward exchange contract or a foreign exchange option," he said.

"It sounds complex and it can be, but it's just another financial tool and not something to be scared of. They have an absolute purpose. Lock in your exchange rate, guarantee what margin you're going to make, and move on to the next part of your business."

Gaudin explained that Kiwibank's staff will sit down with a business owner or operator to work out which horse suits which course.

"We sit along-side clients, understand their cashflow requirements, what currencies they're dealing in,  the hedging levels they need to hit, or the costing levels they have and help them through what are the best hedging tools and the best time to instigate those hedges," he said.

Changing hedging trends?

Gaudin has seen appetites for hedging wax and wane over the years. The New Zealand dollar's relatively strong and high levels over 80 USc for much of the last two years may have made some importers complacent. The currency's recent sharp falls through May and June may have surprised some of those importers.

"People may have become a little bit comfortable with it up here, so importers have been taking less hedging than exporters," he said.

But businesses are becoming more sophisticated about hedging and avoiding becoming 'accidental' speculators.

"We are starting to see people be more proficient with forward exchange contracts. We're starting to see exporters use options a bit more."

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