Exporters engaged in risky business
Exporters could be in for a costly shock if they don't factor in the possibility of a spike in the kiwi towards the end of the year despite the souring situation in Europe and the slowing global economy.
That's the view from a cross section of currency strategists, who see the kiwi recovering from its current bout of weakness as Western policymakers are forced to inject further stimulus into the global economy.
The warning comes as an analysis of fund flows by the Bank of New Zealand shows export firms are significantly under-hedged, with just 3.2 months of cover in place.
This level was about 38 per cent below the two-year average, the banks said.
The New Zealand dollar closed the week near the US79 cent mark, having swung between a low of US74.51 in June and the February high of US84.70.
Exporters typically buy the New Zealand dollar when it hits low levels, to pad their margins for when it rises and decreases the price competitiveness of their goods in overseas markets.
The low level of cover shown by the BNZ model suggests that exporters are betting that the New Zealand currency is likely to fall as the European crisis accelerates and the global economy nears its second recession in four years.
''We put it down to the general uncertainty out there, which the euro crisis is only adding to,'' said Mike Jones, a currency strategist at BNZ.
''Exporters are tending to shy away from hedging for long periods of time on the global slow down and the drop in the currency.''
Strategists maintain that exporters' logic isn't flawed, just that an overly myopic outlook could leave them exposed to the sudden injection of monetary policy stimulus by central banks.
That could come in the form of interest rate cuts or quantitative easing - a programme whereby central banks by their own bond assets - both of which devalue their currencies.
''We think in the next few months the (European Central Bank) will be forced into printing money and buying bonds in the market, an unlimited bond intervention,'' said Imre Speizer, a market strategist at Westpac.
''That will be a major positive shock to markets.''
If that happened the kiwi would shoot up against the single currency, having recently hit a fresh record high of 65.03 euro cents.
Similarly, the Federal Reserve could be forced to rollout the third round of quantitative easing later this year if the run of economic data continues to deteriorate.
Investors have already started questioning the pace of the US recovery after June manufacturing and employment indicators both fell short of market estimates.
During the Fed's last bout of quantitative easing in the first half of 2011 the kiwi set a fresh historic high of US88.40c.
Domestically, the New Zealand economy is also seen as an outperformer over the next year or two even if that performance comes from a weakening of global peers rather than outright strength.
That's reflected in our nation's interest rate outlook, with the Reserve Bank likely to keep the official cash rate on hold at 2.5 per cent until late 2013, while Europe, Australia, Brazil, Japan, South Korea and China all slashed their lending rates recently.
Those yield differentials are likely to spur demand for the kiwi from investors.
- © Fairfax NZ News