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NZD business sentiment falls after the election

Fuseworks Media
Fuseworks Media

Businesses are less optimistic about the New Zealand Dollar (NZD) following the New Zealand General Election, and expect recent NZD weakness to continue for the year ahead, an ASB survey reveals.

The quarterly ASB Kiwi Dollar Barometer finds businesses now expect the NZD/USD to average 65.9c by this time next year, which compares to a 12-month outlook of 75c when they were last surveyed three months ago.

That outlook is broadly shared by businesses irrespective of their trade focus or size of operation, although exporters and firms in the $30m to $15m bracket are slightly more pessimistic regarding NZD prospects, whereas importers and smaller firms are slightly more optimistic.

ASB Chief Economist Nick Tuffley says the US 6c fall in the NZD since the previous survey partly explains the fall in sentiment, but the change in Government and offshore factors are likely to be influential.

During the quarter, the NZD has been through a period of considerable volatility, trading in a US 7c cent range over the last five months.

"The key take-out from this survey is that respondents expect the recent bout of NZD weakness to persist," Tuffley says.

The drop in expectation was in contrast to the forecasts of ASB’s economics team, which have the NZD strengthening over the next 12 months.

Election impact

More than 80% of respondents believed the election outcome had weighed on the NZD, which has moved from trading around 73.5 US cents just prior to the election to around 69c by early November.

Overall, around 77.1% of respondents felt the election outcome had weakened the NZD by more than would otherwise have been the case.

"The results are not surprising given the post-election dip in the NZD, part of which occurred during the period of the survey," Tuffley says.

"We caution there are likely to be other factors also impacting the NZD. Narrowing NZD interest-rate differentials have coincided with the weaker NZD, whilst the Australian dollar has gone through a similar cycle against the USD in recent months."

Hedging intentions rise

Hedging intentions for the next three months touched a new record high, with 84% of respondents planning to hedge exposures.

Tuffley says this is not surprising given the recent NZD volatility.

The weaker outlook for the NZD likely contributed to declining intentions for exporters (52.4%), which offset the proportionate increase in importer/exporters planning to hedge exposures (at 97% - the highest on record).

Outlook - post-election dip expected to persist

More than one third of respondents (35.6%) expect the next bout of foreign exchange volatility will be the result of Donald Trump and subsequent US trade policy and protectionist sentiment.

"The US President’s unpredictable nature and trade protectionist bent was an obvious concern for respondents," Tuffley says. North Korea (21.3%) and domestic politics (close to 30%) were also reasons cited as the source of increased foreign exchange volatility.

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