Nick Tuffley says bigger companies are more likely to hedge their currency exposure. Photo / NZME
Nick Tuffley says bigger companies are more likely to hedge their currency exposure. Photo / NZME
Fall in value has been swift but not extraordinary as floating currencies historically trade in a wide range.
The swiftness of the New Zealand dollar's drop in recent weeks has taken many businesses by surprise, says ASB Bank.
The bank, in releasing its latest NZ Dollar Barometer, said most Kiwi businesses hedge their foreign exchange risk rather than "hope for the best" with the spot market.
The NZdollar hit US68.57c this week - its lowest level since July 2010. The currency has dropped by about US3.4c, or 4.7 per cent, since June 11, when the Reserve Bank surprised the market with a 25 basis point rate cut and raised expectations that more cuts will follow.
"Rate cut expectations were a key driver for a softer NZ dollar with the NZD/US dollar depreciating quickly over May and early June," said ASB Bank chief economist Nick Tuffley.
"The recent US7c drop in the NZ/US dollar (since May) was not expected by the majority of businesses surveyed," he said.
However, while this drop was swift, it is not by any means extraordinary as floating currencies historically traded in a reasonably wide range.
"Since 2013 the NZ dollar had a range of around 5.5c across any quarter with a range of almost 11c in the most volatile period. Over the last three months the NZD range has been 7c, higher than average but not extreme," he said. "The moral of the story is that foreign exchange forecasting is always only a best estimate with the information available at the time."
The NZ dollar is already weaker than even the Reserve Bank's recent projections and has traded below US70c quicker than earlier forecasts anticipated, he said.
"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," Tuffley said.
"The bigger the business, the more likely it is to hedge," he said.
"Just over 62 per cent of businesses with a turnover of less than $30 million plan to hedge their FX exposure while 93 per cent of businesses with a turnover of greater than $150 million plan to hedge."
The variation was likely because the cashflow for smaller businesses could be less predictable.
"Forecasting is about what is expected to happen while managing foreign exchange risk is about protecting businesses from the worst outcomes -- whether expected or not."
