Nick Tuffley –
The swiftness with which the New Zealand Dollar (NZD) dropped last week took many by surprise.
Most Kiwi businesses hedge rather than hope for the best and the recent drop highlights the wisdom of this approach.
Businesses value training for managing FX risk.
The latest ASB Kiwi Dollar Barometer finds many businesses were caught unaware by the recent NZD drop.
Rate cut expectations were a key driver for a softer NZD with the NZD/USD depreciating quickly over May and early June. The recent 7 cent drop in the NZ/USD was not expected by the majority of businesses surveyed.
Not extraordinary
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 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.
Uncertain cash flow
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% of businesses with a turnover of less than $30 million plan to hedge their FX exposure while 93% of businesses with a turnover of greater than $150 million plan to hedge. This is likely because cash flows for smaller businesses can be less predictable.
Therefore, what can Kiwi businesses do to better incorporate volatility into their FX risk planning?
ASB Survey
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.
About 28 percent of businesses placed the highest value on training to develop treasury policy, risk monitoring and risk management with a further 27% 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%) 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, irrespective of expectations.
Nick Tuffley is Chief Economist at ASB Bank based in Auckland.
