Business gains from lower NZD may be short lived

Companies expecting to benefit from a lower New Zealand dollar may get only a short reprieve as the kiwi appreciates towards the end of the year, buoyed by the prospect of an improving economy and higher interest rates, according to a BusinessDesk survey.

The local currency has dropped about 5 percent this year as improving data out of the US stokes expectations the Federal Reserve will wind down its quantitative easing programme, stoking demand for the greenback.

The kiwi, which yesterday touched a year low of 77.58 US cents, may rise to 80 US cents by the end of 2013, a BusinessDesk survey this week of 10 traders, strategists and investors shows. Expectations ranged from 76 US cents to 85 US cents with four respondents picking 80 US cents.

The Reserve Bank has said the local currency is "significantly over-valued" and sold the kiwi at its peak in April to limit gains. Governor Graeme Wheeler may reiterate that view tomorrow, when he is expected to hold the benchmark interest rate at a record low 2.5 percent. He is seen hiking from next year to cool the housing market.

"It puts increasing pressure on companies to have in place the necessary disciplines to manage the risks of a volatile exchange rate," says Peter Cavanaugh, a client adviser at Bancorp Treasury. "It's something businesses can't control and yet it's something that could impact on the business both in a good way and a bad way."

Benefits importers

A higher local currency benefits companies such as Briscoe Group, Warehouse Group and Sky Network Television, which buy most of their products overseas in US dollars.

On the other hand, manufacturers and exporters such as Fisher & Paykel Healthcare, Nuplex Industries, Fonterra and Rakon are able to bring more of their export revenue home when the currency is lower.

Traders are betting the Reserve Bank will raise the benchmark interest rate by 24 basis points over the next 12 months, based on the overnight index swap curve. Six months ago no hikes were expected.

Meanwhile, a survey by ASB Bank published today shows export and import businesses expect the kiwi to peak at 85 US cents in September before easing to 82.80 cents by June next year. The survey of businesses with annual sales of at least $1 million took place from April 26 to May 10, before the greenback advanced. Since then, ASB has lowered its expectations for the kiwi.

Some 85.8 percent of importers were planning to hedge their foreign currency exposure, up from 84.8 in the previous survey, ASB said. In contrast, just 69.5 percent of exporters were looking to hedge, down from 70.1 percent.

A stronger kiwi and softer global economic conditions have weighed heavily on New Zealand's primary sectors over the past year, according to the Situation and Outlook for Primary Industries 2013 published this month.

The Ministry of Primary Industries expects primary sector exports will increase 2.2 percent to $24.1 billion in the 2014 financial year, assuming the kiwi drops against the currencies of its trading partners.

(BusinessDesk)