By Roger J Kerr
Local importers should be on their bikes today ringing their banks to put in place additional hedging of forecast USD payments over the next six months.
The sudden and unexpected spike up in the Kiwi dollar last Friday night to 0.7650 provides an opportunity to secure very acceptable rates on top of what hedging is already in place.
The independent and separate NZD strength is not expected to be maintained as it appears solely related to a particular single NZD/USD transaction for a sizeable amount that went through the forex market in US trading on Friday night.
Rumours are that the NZD buying was related to Warner Brothers hedging (buying NZD) their NZD film costs for the Hobbit movie that is now certain to be made in New Zealand.
Typical of large American multi-national corporations who have little understanding of exchange rate risk (they only know and trade in USD’s) they are now hedging at 0.7500 after budgeting on a 0.5500 exchange over 12 months ago.
Warner Bros complained to our Government about the NZD exchange rate going against them, making NZ less attractive as a film-making destination.
Our exchange rate has not appreciated; their currency, the USD has depreciated and they were exposed to that financial risk.
Perhaps our Prime Minister as a former currency trader himself gave them some gratuitous advice last week about foreign exchange management. Looks like they have bitten the bullet and hedged their NZD costs at the highs.
Unfortunately for our exporters selling in USD’s, the large hedging transaction hitting a thin and illiquid offshore NZD FX market has propelled the Kiwi sharply higher.
The longer the NZD/USD rate stays above 0.7500 the greater the negative impact on our export led recovery to stronger GDP growth next year.
The high agricultural commodity export prices still point to 3.5% to 4.0% GDP growth in 2011, however a prolonged period of the exchange rate above 0.7000 is certainly taking the gloss off that positive outlook. There is nothing much anyone in New Zealand can do about it, it all comes back to the USD value and direction on global currency markets.
While the last 1½ cents rise in the Kiwi dollar is NZ specific, so much of the near-term direction depends on what the USD does against the major currencies post the US Federal Reserve QE2 announcement this week. We should know on Thursday morning whether the markets are happy or disappointed at the size and timing of the US monetary stimulus.
There appears to be plenty of room for disappointment and thus the unwinding of sold USD FX market positions once the detail is known. The EUR/USD rate has not been above to push on above $1.4000 and looks prone to a sharp correction downwards after the QE2.
The Australian dollar has recovered back to 0.9850 on higher commodity prices after dipping to 0.9650 at one point last week. Last week’s lower than expected inflation data in Australia may mean that the RBA is thinking hard about the merits of another official interest rate increase at this time. There appears to be heavy political pressure on the RBA not to increase as mortgage rate increases, mega bank profits and the high AUD hurting non-resource sector exporters are attracting a lot of media attention in Australia. A decision by the RBA tomorrow not to increase will be negative for the AUD, and thus the NZD.
Unemployment statistics for NZ on Thursday will be closely watched by the financial markets. The historical data series for the March and June quarters looked really quite dodgy with a big reduction in the unemployment rate to from 7.1% to 6.0% and subsequent increase to 6.8%.
A lower rate (our forecast is 6.3%) on Thursday will make the RBNZ think again about their quite negative outlook on the domestic retail and housing sectors.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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2 Comments
The NZD currency market has a turnover of near 10 USD billion per day [1], about 1.6% of the global daily total [2].
10% of GDP per day is not very illiquid.
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