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Drop in NZD takes businesses by surprise

Drop in NZD takes businesses by surprise

(30 June 2015 – New Zealand) Businesses were caught unaware by the recent drop in the New Zealand dollar, according to the latest ASB Kiwi Dollar Barometer.

“Rate cut expectations were a key driver for a softer NZD with the NZD/USD depreciating quickly over May and early June,” says ASB’s chief economist Nick Tuffley.

“The recent 7c drop in the NZ/USD was not expected by the majority of businesses surveyed.”

However, while this drop was swift, it is not by any means extraordinary as floating currencies historically trade in a reasonably wide range.

“Since 2013 the NZD had range of around 5.5 cents across any quarter with a range of almost 11 cents in the most volatile period.

“Over the last three months the NZD range has been 7 cents, higher than average but not extreme.”

“The moral of the story is that foreign exchange (FX) forecasting is always only a best estimate with the information available at the time.

“The NZD is already weaker than even the RBNZ’s recent projections and has traded below US0.70c quicker than earlier forecasts anticipated.”

“And although businesses may have a view on the NZD that is good, bad or indifferent for their operations, the ASB Kiwi Dollar Barometer shows the vast majority of them hedge against the bad outcomes nonetheless.”

“The bigger the business, the more likely it is to hedge.

“Just over 62 percent of businesses with a turnover of less than NZ$30 million (A$26.8 million) plan to hedge their FX exposure while 93 percent of businesses with a turnover of greater than NZ$150 million plan to hedge.

“This is likely because cashflows for smaller businesses can be less predictable.”

So what can Kiwi businesses do to better incorporate volatility into their foreign exchange risk planning?

“In this ASB Kiwi Dollar Barometer Survey we were interested in finding out what experience and training is valued by FX decision makers in businesses.

“Training about managing FX risk was seen as the way forward for most Kiwi firms,” said Tuffley.

“Twenty-eight percent of businesses placed the highest value on training to develop treasury policy, risk monitoring and risk management with a further 27 percent placing the highest value on training on the cost of different FX hedging products.”

The survey found that a relatively small proportion of respondents (13.7 percent) valued economic updates and FX outlooks the most.

“Due to the unpredictability of forecasting, this preference for training about managing FX risk is a sensible approach for most Kiwi businesses. Forecasting is about what is expected to happen while managing FX risk is about protecting businesses from the worst outcomes – whether expected or not.”  

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