By Phil Lynch
The first quarter of 2019 is ending this week, and the currency is playing it cool as we head into financial-year-end. The NZD/USD opens (once again) in the high 0.68’s, towards the top of the well-established 0.67-0.69 cent range. The key currency pair of note remains the NZD/AUD which is tickling 0.9700 – beyond almost everyone’s expectations.
The kiwi is now in search of direction – we break down this week’s key events.
It will be a busy week for the RBNZ, which kicks off on Wednesday with the second OCR Rate Decision of the year. A reminder that this year, RBNZ OCR Rate Decisions have moved from Thursday morning’s at 9:00 AM to Wednesday afternoon’s at 2:00 PM.
There is no Monetary Policy Statement this week (just the OCR decision), and rates will be kept on hold at 1.75%. Markets will be looking for hints of dovishness in the accompanying notes, which will likely state the next move could be up or down.
This week will also usher out the current era of monetary policy, and prepare markets to welcome the next phase of the revised monetary policy framework, which comes into effect next week on 1 April.
RBNZ Governor Orr will be speaking on Friday morning at 9:00 AM to talk about changes to how monetary policy decisions are made in New Zealand, including greater transparency and accountability. These changes, and the ongoing reviews of financial policy settings, will be discussed in the context of the changing landscape of central banking.
This speech packs the potential to reset the direction for the New Zealand dollar – and will come late in the week when other key announcements from further afield are due.
Other key announcements this week include:
Businesses that operate FX hedging program’s may have noticed that volatility has recently neared long-term lows. There are many measures of volatility, and my personal favourite is implied volatility. This measures the potential volatility that a currency pair may face in the future. One year implied volatility moves around – and the recent dip in NZDUSD implied volatility is shown on the chart below (click here or on the chart to enlarge).
This is a useful tool for importers and exporters to utilise when making FX hedging decisions. For starters, taking advantage of trading ranges is a good place to start – with importers taking up 0.69 cent levels and exporters targeting 0.67 cent levels. However, one of the key benefits of low volatility is cheaper Vanilla Options.
Vanilla Options are a bit like the Rolls Royce of FX hedging. They can be expensive, but they offer a very smooth ride. Buying a Vanilla Option will give you the right, but not the obligation, to trade a fixed amount of currency. The cost is known as a premium (a bit like an insurance premium), and the premium is your only obligation in this contract. It is useful to think of this as a percentage, and EncoreFX can build this into your FX rate at maturity of your contract (or as you pre-deliver).
When Implied Volatility is low, hedging with Vanilla Options is cheaper – it’s a bit like the Rolls Royce of the FX hedging world is having a sale. This means importers and exporters alike are now looking at hedging out 12 months+ with Vanilla Options. This is providing them with 100% worst case certainty, with 100% flexibility if the exchange rate moves favourably, all for a known amount of cost which is built into the rate.
If you would like to acquire some live pricing to understand how this might look for you, please contact your dealer or you can contact me directly at email@example.com.
© Copyright - EncoreFX, 2018.The information in this post is provided for general information purposes only and has been prepared without taking into account any person’s objectives, financial situation or needs and, accordingly, it does not constitute personalised financial advice under the Financial Advisers Act 2008, nor does it constitute advice of a legal, tax, accounting or other nature to any person. Before acquiring any financial services or products from EncoreFX, you should consider the appropriateness of the information having regard to your own objectives, financial situation or needs. We recommend that investors seek advice from their usual adviser before taking any action. EncoreFX (NZ) Ltd is a registered Financial Services Provider (FSP 461386), and is a licensed derivatives issuer under the Financial Markets Conduct Act 2013. EncoreFX (NZ) Ltd has lodged a Product Disclosure Statement (PDS) for each of our derivatives with the Registrar on 21-Dec-2016. A copy of each PDS is available from us or from the Registrar at www.business.govt.nz/disclose.