Wednesday, 26 November 2008

NZD/USD thoughts

The NZD/USD has fallen from the highs of 0.8216 on 27 Feb 2008 to lows of 0.5191 on 20 November 2008, a fall of over 30 cents, or 36.81%.

The average move from high to low (in a calendar year) over the last 17 years is 15%, with the greatest move being in 2001, of 26%. So the NZD/USD is clearly oversold, by any measure, even bearing in mind the turbulent offshore markets.

There are three main drivers of the NZD/USD:

Capital Markets
I was advised last week by a major bank that in their view some 40-50% of the normal foreign exchange volume is absent from the markets due to volatility and the lack of M&A activity. I believe that a good deal of the offshore investment present in New Zealand over recent years has departed our shores. Corporate offshore investors simply would not stand by and watch a fall of the above magnitude without hedging or withdrawing funds. The key barometer of this is the NZD/JPY, which has fallen nearly 40 cents from the highs of 88.10 to lows of 48.69 or 45% this year, a record move that surely means they have departed New Zealand for now.

The import community has been engulfed with a wave of global negative news, and lower forecasts from the various banking forecasts. Hence many have taken large amounts of NZD/USD cover, not dissimilar to the events seen a few years back when they covered some years ahead. The key time of the year for importers is right now, Christmas, with the bulk of payments for Christmas stock occurring in November and December. The import community is largely fully covered in the NZD/USD, and their selling of the NZD/USD will diminish as we move into year end and they go on holiday.

The vast majority of exporters have low levels of cover. Manufacturing exporters have various levels of cover but all the agricultural and horticultural exporters have low levels of cover, firstly because their season has yet to begin, and secondly they are waiting for lower levels as indicated by the banking forecasts.

So with the capital market players absent, and the importers largely hedged, who of substance is left to sell the NZD/USD? If the rate starts to rise then importers will only be in a position to watch, and exporters will be scrambling to hedge export receipts, as we go into the thin markets in January. There may even be buyers attracted to our (still high) interest rates given that the rest of the world will be closer to zero, even if we have dropped another 1% next week.


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