Dollar likely to return to 20-year average by the end of 3rd quarter

The New Zealand dollar, which traded within a whisper of its post-float high against the greenback a year ago, is probably going to return to its 20-year average by the end of this quarter, benefiting exporters such as winemaker Delegat Group.

The kiwi touched 88.35 US cents in July last year, nudging its post-float high of 88.40 cents, and has since declined to trade recently at 67.09 cents. The local currency will probably slip further to 65.50 US cents by the end of the third quarter, according to the median forecast of 20 currency traders, strategists and economists surveyed by BusinessDesk last week.

The local currency is losing its allure as traders price in more interest rate cuts to bolster a slowing economy, and as improving US data stokes expectations the Federal Reserve will start raising interest rates in the world's biggest economy this year. The lower kiwi will benefit exporters such as Delegat which counts the US as its largest market.

"It certainly means for us more profitable growth in the US market in particular, but also other markets," said Delegat managing director Graeme Lord. "Returning closer to long-term averages really provides a level of profitability where we can invest further in growth, in terms of constantly investing in growth in vineyards and wineries as well, so it's positive.

"The exchange rates that we've seen over the last two years in the US, and also the UK, have been challenging in terms of achieving target levels of profitability and growth."

Lord said the company has some natural hedges against exchange rates because it buys winery equipment and wine barrels overseas, shipping is paid for in US dollars, and it pays its overseas staff in their local currencies.

And while a stronger kiwi against the Aussie may have weighed on sales in that market, it was helpful as the company invests in more vineyards across the Tasman, he said.

"It's been quite a good time to be doing that," Lord said.

The New Zealand dollar, which touched a post-float high of 99.78 Australian cents in April this year sparking speculation it may reach parity, has since declined to 90.44 cents. Participants in the BusinessDesk survey expect it to weaken further to 89 Australian cents by the end of this year, according to the median expectation of 20 responses.

For Delegat, having operations in several countries helps balance out volatility in any single currency, Lord said.

The company also enters into foreign exchange contracts and options to protection against volatility, which aims to provide coverage for sales which are highly probable.

"We try not to let it impact our long-term decision making too much because a lot of it is short-term fluctuations," he said. "In our business the planning cycle is a 10-year planning cycle so we have to take a view and stay with that view in terms of what we are going to do in terms of growth, planting vineyards and developing wineries and just weather the fluctuations as we go and manage it as best we can."

The kiwi is expected to slide further to 64.50 US cents by the end of this year, according to the BusinessDesk survey.

Meanwhile the trade-weighted index will probably fall to 70 by the end of the year, from its current level of 70.93, according to the survey.

(BusinessDesk)