Asia-Pacific Risk Management Limited has joined with the New Zealand Export Credit Office to establish and sponsor a regular quarterly survey of currency hedging by NZ importers and exporters. The first survey has been a while coming, but was conducted in late March with the results released today. We took the initiative to instigate this survey as we became sick of being asked the question as to the current level of hedging by the Governor of the Reserve Bank every time we ran into him!
The degree of hedging of the NZ dollar against foreign currencies is an important economic variable due to the high level of import penetration and dependence on export performance. Currency conversion rates have a material impact on inflation, GDP growth and business investment in New Zealand . The first hedging survey was a pilot study, with 140 responses to a questionnaire emailed to over 400 importers and 400 exporters. A higher level of participation/response rate is anticipated for the next survey in June.
The “weighted-by-volume” average period of hedging by importers was 9.2 months (i.e. importers had foreign exchange contracts in place on average to cover 9.2 months of forecasted foreign currency purchases). The term of hedging in place was somewhat longer than what we would have anticipated, likely driven by the widespread expectation that the NZ dollar will depreciate significantly this year. If the NZ dollar does depreciate the higher level of hedging will limit and delay the impact on domestic inflation. Importers (apart from the oil companies) will clearly not be immediately raising their prices on a NZ dollar fall. By contrast, exporters on average are hedged to 6.5 months. They too must expect NZ dollar depreciation and wish to benefit from that. Shorter hedging horizons however, have been costly to all exporters over the last three years.
Through the 2002 to 2005 period exporters entered and maintained higher percentages of long-dated forward cover protection against the appreciating NZ Dollar, well above that observed in previous NZ Dollar up-cycles. This resulted in the overall economy remaining “stronger for longer” in 2004/2005.
Respondents were also asked if credit restrictions by their bankers were limiting their ability to hedge currency risks. Only 15% of respondents indicated that this was currently the case. However as banks tighten all lending/credit criteria this percentage could be expected to increase in the future.
It will be interesting to observe how the level of hedging changes over future quarters relating to the direction and volatility of the NZ Dollar exchange rate. Exporters in EUR and AUD have spot rates below historical averages, thus at attractive hedging entry points. Exporters in GBP, USD and JPY are hoping that independent NZ dollar weakness will drive down these cross-rates over coming months.