NZ dollar may fall in second quarter, benefitting winemakers, exporters, in face of US recovery

Tuesday 1st April 2014

The New Zealand dollar may weaken in the second quarter, benefitting exporters such as wine makers grappling with a bumper harvest, as economic recovery and a wind-down of stimulus in the US helps lift the greenback.

The kiwi, which recently traded at 86.73 US cents, may slip to 84 cents by the end of June 30 as higher local interest rates are offset by a strengthening US economy, according to the median forecast in a BusinessDesk survey of 15 currency traders and strategists.

A lower currency would benefit wine growers who are about half way through their harvesting period, which stretches from late February to early May. Specialist rural bank Rabobank expects New Zealand's wine crop and exports to surpass previous records this year on favourable growing conditions and strong demand from the UK, Australian and US markets.

Foley Family Wines "is concerned about the consequence of the continuing high exchange rates and the very large forecast volumes from the 2014 harvest and the impact that this will have on the industry as a whole in terms of wine sales volumes and prices," chief executive Mark Turnbull said after the release of the company's first-half earnings.

The Marlborough-based wine company posted a 21 percent drop in revenue in the six months ended Dec. 31, as adverse exchange rate movements crimped export sales compared to sales a year earlier that were boosted by the clearance of large amounts of bulk and bottled wine following a merger.

NZAX-listed Foley Family Wines, which produces Te Kairanga, Grove Mill, Vavasour, Clifford Bay, Dashwood and Goldwater wines, is mainly exposed to US dollars, British pounds, Australian dollars and the Euro, according to its most recent annual accounts. A 10 percent decline in the New Zealand dollar against the US dollar would increase the company's profit before tax and equity by $182,000, it said.

The New Zealand dollar will trend lower along with other major currencies as a recovery in the US and the winding back of stimulus programmes strengthens the greenback, traders said.

"It has taken awhile for people to realise that the kiwi tap is being turned off and we are going to see an appreciation of the US dollar," said Tim Kelleher, ASB Bank head of institutional FX sales.

Still, the kiwi's decline will be limited as higher local interest rates increase its yield appeal for overseas investors. Reserve Bank governor Graeme Wheeler hiked the official cash rate from a record low last month and expects to raise the OCR another 2 percentage points over the next two years.

Traders are betting there is a 96 percent chance Wheeler will hike rates again at the central bank's April 24 meeting, according to the Overnight Index Swap curve.

"We could definitely get another rate hike in April," said ASB's Kelleher. "If we weren't getting a rate hike then it might be a little bit lower. The kiwi is going to hold up longer because of the rate hike."

Expectations for the New Zealand dollar at the end of the quarter range from 78.90 US cents to 89 cents, according to the BusinessDesk survey taken March 24-25. The kiwi rose 5.9 percent against the greenback in the three months ended March 31.

The survey shows the trade-weighted index, which tracks New Zealand's currency against those of Australia, Japan, the US, the UK and the euro area, will likely weaken to 79 from 80.95 currently. Expectations range from 75.1 to 81, according to 12 respondents. That compares with the Reserve Bank's expectation for the TWI to average 78.4 over the quarter, according to its latest forecast published March 13.

BusinessDesk.co.nz

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