New Zealand Dollar to Fall Below 0.70 vs US Dollar Over 12 Months say NZ Businesses
New Zealand businesses with international exposure show expectations for a lower NZD exchange rate over 12 months.
The NZD/USD rate, currently at 0.7250 is expected to fall to below 0.69 over the course of the next 12 months according to the expectations of New Zealand businesses who trade abroad.
The expectations are noted by New Zealand bank ASB who regularly survey companies with over a NZ$1m turnover on their expectations for the local currency.
History has shown businesses to be uncannily accurate.
Another key finding in the report is that exporters expect a drop in FX ‘exposure’.
By this they mean aggregate FX turnover, which could fall perhaps due to the negative expectations for New Zealand exports, or perhaps because feel they don’t have to hedge because the New Zealand dollar will weaken, thus making their exports more marketable.
The fall in aggregate FX demand by exporters, however, “will be more than offset by importers,” who expect to see more FX transacted.
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Business Demand for Foreign Exchange Options Grows
The final key theme in ASB’s research is the increased use of FX options as a way of hedging against risk, although some firms also note being put off their use by expensive premiums.
Options can be bought as a hedge for a relatively small premium and if the exchange rate moves in an undesirable direction the Option makes money, offsetting the loss on the asset from the unwanted fluctuation.
The beauty of hedging using FX options is that if the exchange rate goes in the desired direction and the option losses money, the trader can leave it to expire, without realising the loss.
The only loss having been the initial cost of the premium.
This means when the hedge wasn’t required it does not crystalize as large a loss as a normal cash hedge would.
Overall the ASB report states that more options are being used by firms especially in the 30m-150m band, although the total percentage of firms decreased very slightly.
For the 150m plus category the converse was true: less options were used overall but by a slightly higher share of firms in total.
NZ Dollar Projected to Depreciate over 12 months
The kiwi continues to appreciate and business surveyed by ASB actually see it remaining high in the short-term, and ending 2016 at 0.7130.
However, they see a decline thereafter and the exchange rate at 0.6870 in 12 months’ time – that is next September 2017.
The expectations of respondents contrasts with ASB’s own forecasts of the NZD/USD rate at 0.72 in 12 months.
The hold this view, “despite the outlook for a lower OCR NEW Zealand and hikes from the US Federal Reserve.”
