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Exporters need to hedge currency risks, not plead for subsidies

Exporters need to hedge currency risks, not plead for subsidies

By Roger J Kerr

Various export industry and business lobby groups are yet again asking for 'something to be done' about the high NZ dollar exchange rate value.

There have been calls for direct RBNZ intervention in the FX markets, the Government to introduce controls on inward capital flows, a transactions tax on currency speculators and a return to a fixed exchange rate regime.

What the protagonists are really asking for is someone - that is, the taxpayers and consumers - to subsidise their profits paid for by other sectors of the economy.

These are selfish and ignorant demands by one section of the economy and it is reassuring to see the RBNZ and Government ignoring the pleas.

Should the NZD/USD rate stay above 0.8000 for a prolonged period this year it is likely to be negative for the economy in that exporter’s profits will be less than expected and thus business investment and jobs from the export led recovery lower than what they would have been under a lower currency value environment.

However, any move away from the current free-floating exchange rate system would be disastrous for the New Zealand economy; we would lose the automatic stabiliser mechanism, the shock-absorber, when global commodity prices move sharply down.

To maintain NZD-based incomes our primary sectors need the NZD to depreciate when international commodity prices reduce.

We saw a prime example of this stabiliser at work when commodities prices collapsed in early 2009 and the NZD/USD plummeted from 0.7500 to 0.5000.

The spectacular rise of all commodity prices since this time has proven that the strong linkage goes both ways.

It is a well recognised fact of life that the NZD at times can be the plaything of global currency speculators and moves around completely unrelated to our economic performance.

However the speculative-induced volatility does provide market liquidity and is something that has to be dealt with as the alternative of not having a floating exchange rate is far more negative for the economy in the medium to long term.

The result is that exporters who are financially exposed to an appreciating NZD/weak USD must either actively manage the risk under disciplined currency hedging policies or sell their product in another currency to other markets.

The latter is often not possible, therefore pro-active hedging is required.

It is still surprising to read of the number of exporters who do not hedge and then make the biggest noise of complaint when the FX market moves against them.

The NZD/USD currency risk is theirs to manage appropriately for their shareholders.

Exporters who do operate disciplined hedging policies will not be currently converting USD export receipts above 0.8000, most would have weighted-average portfolio hedged rates below 0.7200 after the opportunities to sell USD’s forward at 0.6600 in May 2010 and at 0.7150 in March this year.

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 * Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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17 Comments

Roger J Kerr: Your argument would be valid if "annual currency inflows" corresponded closely to annual export incomes. So the questions are these: What is the total annual currency inflows and total annual export incomes? Interesting that you should remain silent on that small issue. You may find support for your propositions should you provide such detail. Without it you don't pursuade me.

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Hi Roger

I agree with you entirely. Possibly John Key's former profession as a currency trader helps here, I'm sure he's well aware that intervention is generally a good way of transferring wealth from taxpayers to hedge fund managers.

Is some of the impact of this because we tend to have a lot of smaller, financially unsophisticated businesses here? I'd guess that many of our importers and exporters wouldn't have the first notion how to hedge currency exposure. And are the banks offering suitable products and advice, or are they too busy throwing money at the already inflated property market?

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I'm sure that is true James, I work for a company that provides back office and accounting services to many fund managers around NZ and some of them don't even know how to hedge their portfolio's. It's embarrassing when they ring up and ask how do we do a hedge FX. (it's even more fun when it comes time to rollover.....)

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Sir, your justifications for a floating exchange rate seem so narrow as be an argument of one.

That is to say the float provides a shock-absorber that buffers downward movements of commodities.

This has a benefit to our primary sector, but only in that event -- of a downward movement of commodity prices.  The rest of the time no benefit exists.

That our dollar is used as a financial speculation device is only a fact of life because we design it that way.

What you fail to explore is any middle ground where steps are made to limit or hinder pure financial speculations whilst providing a largely floating exchange mechanism.  The idea that an exchange rate shock absorber can only have one design or one size seems simple and naive.

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Tobin tax seems hard to argue against....take away the speculators...

regards

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So wotcha saying , Roger Kerr , is that Bernard Hickey is wrong in his call for capital controls and a greater reserve bank action in controlling the $NZ ?

...... is that what you are saying , mate ........ well is it ?

Bloody good thing , man .....  The Hickster is way off beam on this one .

..... good on yer , Rogie .

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"It is a well recognised fact of life that the NZD at times can be the plaything of global currency speculators and moves around completely unrelated to our economic performance."
Shouldn't that be all the time? isn't it every single day one of the worlds most traded countries?
From a country that's share of world trade isn't even a drop in the ocean on even one of the big counties.

I agree the floating currency is a good natural stabilizer, and I don't think that we should get rid of that, nor should the RBNZ be encouraged to go wasting billions like Aussie Reserve Bank did.
But surely using just a tiny wee bit of imagination to bring in some measures to reduce that massive anomaly in the way the Kiwi dollar is wildly speculated on, isn't a bad idea is it?

Can't help but feel this article reeks a little bit of self interest, chastising those who weren't smart enough to go and spend good money getting currency advice from currency advisers, like Roger Kerr.

Can't have a stable currency can we, all these guys making a killing around advising on it would be out of pocket.
 

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What the protagonists are really asking for is someone - that is, the taxpayers and consumers - to subsidise their profits paid for by other sectors of the economy.

Well that is just bullshit Roger....poorly researched and argued.....crapola matey potatey.

These are selfish and ignorant demands by one section of the economy and it is reassuring to see the RBNZ and Government ignoring the pleas.

Boy ...I really think you've put your balls on the block with that one.......maybe you were looking for  a bit of controversy.....but to call a wide group of niche exporters "ignorant and selfish" after having had years of having thier dicks knocked to the dirt...is jus plain IGNORANT on your part....This one Rogie is gonna get your balls busted and bite you in the ass....a bit like a recurring dream.....ouch!

P.S. just how much do you think we should borrow for the purpose of hedge....for many it's taken all the investment capital to keep the door open in parts of Europe /Blighty/etc

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Perhaps we should peg our currency.

But who would you peg it to at the moment? 

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You wouldn't pick one currency, you wouldn't pick a basket of different currencies.

Although as pointed out in the article pegging has it's downside, there are perhaps other ways to slow speculation.

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"best aspect .......some intellectual debate......here"

Indeed, the papers are useless....I like that ppl can post in there good articles from around the world, its a very powerful educator....

regards

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April 18th

"Roger J Kerr doesn't see currency intervention soon, but does expect a correction lower"

 

While the Governor’s comments were correct in one sense, his comments were interpreted as very bullish fore the Kiwi and it was sent another two cents higher.

The Governor’s musings are in sharp contrast to his deliberate jawboning down of the currency just a few months ago.

Non-commodity exporters will not be too pleased at this seemingly reversal in currency opinion from the head of the central bank.

The NZD/USD exchange rate has never been able to sustain rates above 0.8000 when is has been here before. I do not think it will hold onto its gains this time either, due to two expected currency market changes over coming weeks:-

When taking it under advisement to hedge from such as yourself I cannot help but thik of the Quote..."predicting currency is a mugs game"....I have a plethora of articles from your good self to varify there is truth in the quote....and hereby award you The MUG of 2011 beating off some pretty stiff competition. Congradulations  Roger. 

 

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Roger, I am sure you will get your balls handed to you on this one - or maybe people busy keeping their copany running just won't bother with you?

In short, typical economist crap. Keep on with what we have as it has done OK?

My main issues (and there are many) with your type is that you always talk down about exporters as if we don't know about hedging and also say we should become more efficient - well guess what, we already do and we are. No company can become 30% more efficient to keep up with the financial toy that is our currency. You twist the argument to say we are being selfish, but the $ has risen and cost this country 30% in exporter $ in 12 months.

And... 'sell their product in a different currency' has to be the most stupid of all comments. You sell to Americans in $US because that is what theu want.

Maybe we should all go overseas, take our designs, money and employment and leave NZ to the economists? You are seeing now the problems created when there is no investment in exporting industries, it isn't getting better. And to think you seem to expect NZ will survive on primary exporting only...really?

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Now I've calmed down a bit...not much...but a bit..! Roger... the question I pose is do you see a Tobin Tax as some kind of currency intervention....a negative to the non productive speculatory markets..?...a pain in the ass for those who would  produce nothing ...? or would you be able to view it... or even the talk of it as leveling the playing field a mite.....? have you even polled the NZMEA and wider market non members to gleen what might be preferential in the way of options...? ...I suspect not.

Ever heard of fat cat syndrome..?.....you get lazy and the place gets over-run with rats.

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Has Roger ever replied to any article he writes? Or, is it print and run.

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pretty much ...print ...run...hide ...cringe....ring the commodity boys to see if he got it right...get the nod ...stand upright.....kiss J.K's poster pin up....and carry on to smash the oiks ra ra ra..!

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Roger Kerr's argument is a little like a real estate agent trying to convince you not to sell your own house, the self interest is there for all to see.
If he can do anything to further encourage the Kiwi to be wildly speculated on, he will, it's in his best interest, that's how he makes his money, giving advice on things like where the Kiwi dollar will go.
Just don't be naive enough to expect an impartial opinion from someone in his position, about something like this.

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