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The Week Ahead in FX Markets – Kiwi breaks lower | How to hedge the NZDAUD

Published April 23, 2019

By Phil Lynch

The New Zealand dollar has broken below recent support levels at 0.67 cents, and opens this morning 0.7% lower than pre-Easter holiday levels. This is the first time since November 2018, that the NZD has opened a trading week below 0.67 cents.

The move lower reflects the changing interest rate environment locally, with the RBNZ recently indicating that their next move in the OCR is likely to be lower. This was followed with news from Statistics New Zealand that our inflation rate had dropped to 1.5% (lower than the expected 1.7%). These two components have collectively shunted the NZD about 2.0% lower.

For the better part of 2019, we have commented that the NZDUSD is sitting comfortably within a 0.67 – 0.69 cent trading range. Whilst it is too early to confirm where the NZD will settle, it is safe to say this trading needs be adjusted lower. Markets have since taken their lead from international data – such as US Retail Sales.

US Retail Sales Surprises

US Consumer’s have surprised markets, with month on month Retail Sales numbers lifting by 1.6% for March. The surge in spending has boosted the US dollar, and is a key reason why the kiwi has broken lower. The data is continuing to paint an upbeat picture of the US economy, which is in contrast to the markets view that Federal Reserve rates need to be lowered to support the US economy.

Oil Prices Surge

Oil prices surged higher yesterday, with West Texas Crude up 3.0% after the US confirmed it was not extending waivers for Iranian oil export sanctions. The move from the US may have a wide ranging impact, including damaging trade relations with China – where a trade agreement is still being negotiated. Rising oil prices tend to bolster the ‘commodity’ currencies, however this has done little to support the NZD on this occasion.

The Week Ahead – What to Watch

There is plenty in the way of key economic data to watch out for, despite the short week in New Zealand. These include:

  • Australian CPI – tomorrow at 1:30 PM. This is expected to come in at 1.6% – unless it follows kiwi inflation lower?
  • Bank of Canada Rate Decision– Thursday at 2:00 AM. Given the recent inflation data and higher oil prices it would not surprise if Stephen Poloz sounds cautiously optimistic – moving away from the markets perception of a dovish tilt.
  • Bank of Japan Rate Decision– Thursday, when the meeting concludes. No doubt the central bank will continue their staunchly accommodating stance.
  • US GDP Data – Saturday at 12:30 AM. This will be key for NZDUSD players this week.

Hedging the NZDAUD

For the last six years, importers and exporters alike have battled with conflicting forecasts on the NZDAUD. On one hand – some forecasters are jumping at the opportunity to call for a ‘parity-party’ the moment the NZDAUD heads higher (perhaps for the publicity it generates?). On the other hand, most reputable analysts hold a view that long-term the NZDAUD would sit more comfortably somewhere in the 0.80’s.

Yet for the past six years, the NZDAUD has very comfortably traded in a relatively tight range, just four cents either side of the 0.93 cent mark. For this to change, we would need to see a fundamental, sustained change in the underlying economic conditions of either Australia or New Zealand.

So how should a business hedge against currency risk on the NZDAUD? As always – EncoreFX encourage hedging against a documented plan. Let’s say that plan was to maintain between 50-100% of your forecast exposure over 0-12 months.

  1. Always maintain hedging at your plans minimum levels – be covered at 50%
  2. When the NZDAUD is 1-2 cents more favourable than 0.9300 – shift to a higher level of cover (e.g. 75%)
  3. When the NZDAUD is 3-4 cents more favourable than 0.9300 – shift to the highest level of cover your plan allows (e.g. 100%)

This sort of approach is an effective method of ‘making hay whilst the sun shines’. If you would like to learn more about how to develop a plan that works for you – feel free to contact me directly.

Chart of the Week – NZDAUD Long-Term

This week we look at the NZDAUD over the past ten years. Demonstrated on this chart is the relatively tight 8-cent range of the NZDAUD over the past six years.