Sentiment turns against NZ dollar, further falls seen

A clear turnaround in sentiment has taken place over the fate of the New Zealand dollar, with respondents to an ASB Bank survey now expecting to see still more weakness in an already soft currency.

The bank's Kiwi Dollar Barometer, which tracks exporters' and importers' exposures to foreign exchange risk, through surveying 432 businesses with annual foreign exchange turnover of at least $1 million, said expectations were for a big shift lower.

"A clear turnaround in NZ dollar sentiment was evident in the survey, with respondents having significantly revised down their NZD/US dollar outlook," the bank said.

Surveyed respondents now expect the NZD/US dollar to average US65.9c by the fourth quarter of 2018, which compares to a 12-month outlook of US75c three months ago.

"Respondent groups have a similar outlook, irrespective of their trade focus or size of operation," the bank said.

The US6c fall in the NZD since the August survey partly explained the change in view, but the change in government and offshore factors are likely to be influential, it said.

The survey results were in contrast to ASB's own published currency forecasts, which have the NZ dollar strengthening to US75c by the end of next year.

The Barometer also surveys businesses' expectations for the NZD/USD and businesses' hedging plans for managing foreign exchange risk.

Given recent NZ dollar volatility, it was little surprise to see an increase in hedging intentions, with the 84 per cent of respondents planning to hedge exposures -- the highest in the close to four-year history of the survey, the bank said.

There were differences by trade orientation, with the lower NZ dollar reducing hedging intentions for exporters (52.4 per cent), increasing intentions for importer/exporters (at 97 per cent, the highest on record), with those for importers steady at around 90 per cent.

For those enterprises that plan to hedge, the cover is equivalent to 93.7 per cent of foreign exchange exposures, the highest on record.

More than 80 per cent of respondents believed there had been an election impact, with around three quarters believing the outcome had weighed on the NZ dollar.

"We caution that there are likely to be other factors also impacting on the NZ dollar," he said.

More than one-third of respondents felt that the next bout of foreign exchange volatility would be the result of US President Donald Trump and subsequent US trade policy and protectionist sentiment.

Trump was the most likely source of volatility for exporters and importers, whereas for more than one third of importer/exporters, domestic politics was seen as likely to be the catalyst.

Over the past couple of years, political events have triggered sharp exchange rate movements or periods of heightened volatility.

"NZ dollar volatility and subsequent weakness around the recent New Zealand election are a case in point, in which the NZD has traded in a US7c range over the past 5 months and has moved from around US73.5c cents just prior to the election to around US69c by early November.

The Kiwi traded on Friday afternoon at US68.2c down from US71c just before the Labour, NZ First, Greens coalition deal was stuck in October.