img NZ
img AUS
img CDN
img US
Call us now: 0800 00 56 17
imgOnline Dealing Login

The Week Ahead in FX Markets – Kiwi Stabilises as Fear of Recession Grows

Published August 12, 2019

By Phil Lynch

It was a move that no one expected, when last week the RBNZ cut the OCR by 50 basis points to a record low of 1.00%. This was followed by comments from the RBNZ Governor Orr, that negative interest rates are now a real possibility. The New Zealand dollar immediately plunged to 3.5-year lows and was lucky not to fall further.

The RBNZ have since been criticised about their overly dovish stance. Not a single bank economist polled by Refinitiv had anticipated a 50-basis point cut. Even more so, none had expected talk of negative interest rates.  Given that Unemployment is at record levels, and Inflation sits comfortably within the RBNZ’s target band, the RBNZ must be anticipating a huge downturn in the near future to be taking such a drastic measure. After all – the last time the RBNZ cut rates by 0.50% was after the Christchurch earthquake.

Perhaps they are onto something, after Fonterra announced this morning it is likely to make a huge loss of between $590-675 million – pinned largely on write-downs in value of subsidiaries in South America, China and Australia. It is now time to consider that some of the worlds largest economies are likely heading to (or are already in) recession. The red flags are growing, as outlined by this column on Reuters.  

Current and future events (particularly trade wars and Brexit) could also make this an ugly and prolonged recession. This is further compounded by low or negative interest rates globally leaving little room for economic stimulus.

The New Zealand Governments staunch position on maintaining a low debt to GDP ratio is now being called into question – but in a low interest rate environment, it will be a very important lever for the Government to pull in the event of a global recession.

The Week Ahead

The week ahead feels light in terms of economic and central bank releases. The two most important events will be US CPI data on Wednesday morning, and Australian Unemployment data on Thursday afternoon. There is nothing major in the way of NZ data, but markets still have plenty to think about from last week. 

Living Through a Global Recession – Time to Start Planning

The last major recession was now more than 10-years ago, when the Global Financial Crisis hit. Within a calendar year, the New Zealand dollar tumbled more than 50% from top to bottom. Volatility was through the roof and importers and exporters were forced to make hard decisions about currency that could prove to be very bad decisions. There are some basic steps to start planning for such an event from a foreign currency perspective. You can start by asking:

  • Has your business paused to consider the impact of currency in the event of a recession and developed a plan?
  • Will an economic downturn drastically reduce your exposure to foreign currency? (through decreased demand) 
  • Do you need to think about hedging longer term? Or shorter term?
  • Is there a risk of over-committing to FX hedging if demand for goods or services decreases?
  • Is there a case for buying currency options outright as insurance?
  • Are wide range Collar options a suitable strategy to add a safety net to your FX plan?

There are steps that can be taken to protect your business. If you would like to discuss the impact of a recession on your business, or would like to understand what steps other businesses are taking to protect against FX risk – please contact us today.