The tumultuous events in global markets have been well publicised. But what is the impact for us here in New Zealand? And specifically what does it mean for foreign exchange and interest rates?
In April 2008 the NZD/USD was in excess of 0.8100. By October 2008 it was below 0.6800 and in March 2009 had reached 0.4900. Just when market commentators were calling for it to move even lower, it moved back up to 0.5800 within a matter of days! See graph: NZD/USD.
In July 2008 the Official Cash Rate (OCR) was 8.25%. At the end of April 2009 it was down 2.50% with the risk that it could fall further. During this time the Reserve Bank reduced the OCR by 1.50% on two occasions – huge moves compared to the moves of 0.25% or 0.50% that were previously the norm. The 90-day bill rate (a commonly quoted floating rate benchmark) peaked last year above 9.00% and now is closer to 3.00%. See graph: 90 day bank bill rate.
“Businesses with exposure to foreign exchange and/or interest rates have to deal daily with extreme volatility,” says Westpac’s Head of Mid Corporate Sales for Financial Markets, Wayne Dickson. In this environment poor or uninformed decisions can be costly, and so a prudent approach to risk management is recommended. If your business is exposed to a level of risk that could have a material impact on profits, then a formal policy is advisable. Even businesses with smaller exposures should at least have some formal guidelines to give comfort to management and reduce the impact of an individual’s decisions on hedging.
NZD/USD
March 08 – April 09
90 day bank bill rate
Feb 07 – April 09
What can be done in this environment to manage these risks?
Even in these volatile times there are still things you can do to manage risk. For both foreign exchange and interest rate risk management, it still basically comes down to three alternatives: Float, Fix or Insure - or a mixture of the three.
New Zealand businesses have been exposed to unprecedented levels of volatility in recent times, so the need to manage this risk to protect your bottom line has taken on an even greater importance.
| Interest Rates | Foreign Exchange (FX) | |
|---|---|---|
| Float | Do nothingAn option to consider if you’ve assessed interest rate risk as having a low impact on your buisness.
If the lower rates don’t materialise this will leave you open to extra funding costs. |
Do nothingAn option to consider if you’ve assessed FX risk as having a low impact on your business.
Leaves your business exposed if expectations for favourable FX rates movements don’t eventuate. Some businesses operate foreign currency accounts as a way of minimising some risk – by reducing the frequency of currency conversions. |
| Fix | Interest Rate Swap‘Fix’ your base funding cost for 1-5 years.
Creates some certainty around interest costs, and is designed to provide protection agains increases in base rates. |
Foreign Exchange ContractsAbility to fix a rate today, so you’ll know exactly how much you’ll receive or pay for NZD at a defined point in the future.
Your business is protected from unfavourable rate movements above the rate fix. |
| Insure | Interest Rate CapProvides against an upward move in rates beyond the cap.
Enjoy a lower rate if the base interest rate drops. |
Currency OptionLike an insurance policy, your business is protected when rates move against you.
If rates move in your favour, you don’t need to use your Option, and can benefit from favourable rate movements. |
For more information please call our BusinessDirect team on 0800 177 567.
