Dollar drop an opportunity and a threat

Wednesday, 2 September 2015, 9:02 am
Press Release: ASB

Dollar drop an opportunity and a threat

• Exchange rate expected to trade near the US65c level.

• Firms have budgeted for the NZD to be higher.

• Lower NZD is impacting hedging decisions – more exporters plan to hedge, and for longer.

After a significant decline against the US dollar, businesses expect a period of stability for the NZD, according to the latest ASB Kiwi Dollar Barometer.

Having traded as high as 88c in July 2014, the NZD/USD has fallen more than 26c to trade very briefly at 62c in late August. Currently the NZD/USD is trading near 63c.

The latest ASB Kiwi Dollar Barometer indicates that businesses have factored the dollar’s recent drop into their forecasts, but now expect a period of stability with the NZD/USD expected to trade around 65c over the year ahead.

The predictions in the September-quarter ASB Kiwi Dollar Barometer are significantly weaker than the previous quarter’s findings, when businesses were expecting the NZD to trade above 75c over the year ahead.

ASB Chief Economist Nick Tuffley says that ASB has also revised its currency forecasts.

“We now expect the NZ Dollar to trade in a range centred on 61c by early next year,” Mr Tuffley says.

“A high proportion of businesses rely on the forecasts of a consultant, a bank or an average of several banks for setting their own forecasts and budget rates. For some, it will be a point of interest that our forecasts, and those of other analysts, are even lower than the average response in the latest ASB Kiwi Dollar Barometer.”

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Budget rates
A standout feature of the latest Barometer is that the vast majority of businesses have budgeted on a higher NZD/USD.

“Recent rounds of the ASB Kiwi Dollar Barometer highlight how quickly both our own and businesses’ forecasts can become out-of-date,” Mr Tuffley says. “The high budget rates are understandable given how strong the NZD has been over recent years.

“For exporters, the lower prevailing NZD/USD exchange rate may provide a boost to profits. In contrast, for importers, it’s an unexpected challenge,” Mr Tuffley says.

Hedging and pricing intentions
The September report reveals 94% of businesses with turnover greater than $150 million plan to hedge, whereas just over 65% of businesses with turnover less than $30 million plan to hedge their foreign exchange exposure.

In general, a greater proportion of importers hedge relative to exporters. But compared to a year ago, fewer importers and more exporters are now planning to hedge.

Importers who locked in hedging at higher rates a year ago will have some protection from the NZD’s subsequent decline, Mr Tuffley says. But others who didn’t hedge will now be facing higher purchase costs for their imports.

And the September Barometer showed surprising results for importer’s pricing intentions.

“We expected a higher proportion of businesses would be looking to pass on the higher costs of their imports, given the extent of the NZD decline. Even importers who have been fully hedged over the past year will eventually face a lower NZD and, subsequently, rising import costs,” Mr Tuffley says.

“In contrast to our expectations, the ASB Kiwi Dollar Barometer found some 54% of importers see lower chances of raising prices over the year ahead.”

ENDS

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