Read­ing the mar­kets

Shel­don Slab­bert, sales trader at CMC Mar­kets New Zealand, shares his thoughts on cur­rent and fu­ture trends within the cur­rency mar­kets.

Exporter - - Q&A -

EX­PORTER: What is your ca­reer back­ground and what at­tracted you to the fi­nan­cial mar­kets?


I’ve been work­ing in fi­nan­cial mar­kets for 15 years. I have a keen in­ter­est in pol­i­tics, eco­nomics, busi­ness and psy­chol­ogy, and be­lieve the fi­nan­cial mar­kets is a place where they all in­ter­sect; mak­ing for an in­ter­est­ing work­ing en­vi­ron­ment.

EX­PORTER: What ex­cites you the most about work­ing within the fi­nan­cial mar­kets, and how risky can it be?


No two mo­ments in the fi­nan­cial mar­kets are the same. The mar­ket can be a hard taskmas­ter and im­pact hard earned prof­its if left unchecked. How­ever, busi­nesses and in­di­vid­u­als can con­trol their out­comes through proac­tive man­age­ment of their ex­po­sures.

EX­PORTER: What makes the Kiwi dol­lar par­tic­u­larly hard to man­age? And what ad­vice can you share on this?


The largest flows for the Kiwi are spec­u­la­tive and not trade-re­lated which means it may not al­ways trade ac­cord­ing to the true un­der­ly­ing fun­da­men­tals. Many busi­nesses un­der­es­ti­mate their FX risk; it’s a sort of ‘FX de­nial’. There’s also a be­lief that FX rate changes even out over time. That leads to no per­for­mance anal­y­sis of hedg­ing or no hedg­ing – which of­ten re­sults in no feed­back and no vis­i­bil­ity over the true cost of not hedg­ing. Busi­nesses have to re­alise that FX is a real risk that needs to be man­aged and when man­aged ef­fec­tively can pro­vide both sta­bil­ity and a com­pet­i­tive ad­van­tage. In a more global mar­ket place this will be­come even more im­por­tant and busi­nesses will likely be less able to sim­ply pass FX risk on to the end buyer.

EX­PORTER: What case study can you pro­vide that high­lights some of the sound strate­gies around manag­ing mar­ket risks?


The risk man­age­ment ap­proach a com­pany fol­lows de­pends on the com­pany’s own eco­nomic model. Does it op­er­ate glob­ally, is it only ex­port­ing or im­port­ing, or is it ex­posed to com­mod­ity prices and in­ter­est rates? Manag­ing mar­ket risk is not lim­ited only to the for­eign ex­change el­e­ment. Take the air­line in­dus­try as an ex­am­ple. There are so many air­lines that have been driven to bank­ruptcy due to fail­ure to prop­erly hedge mar­ket risks in the fuel and for­eign ex­change mar­kets.

GE is a good ex­am­ple of a com­pany that has sound strate­gies to man­age the mar­ket risk cre­ated by its own com­plex op­er­at­ing model. What GE does

well is fol­low a good risk man­age­ment model which fits the busi­ness gen­er­ated fi­nan­cials, and in some cases com­mod­ity ex­po­sures. Mar­ket risk strate­gies do not have to be overly so­phis­ti­cated to be ef­fec­tive.

EX­PORTER: How do the New Zealand and Aus­tralian cur­rency mar­kets dif­fer?


The size dif­fer­ence comes to mind first. How­ever, the na­ture of the trade re­lated flows are dif­fer­ent too – for ex­am­ple, New Zealand has a large ex­po­sure to agri­cul­ture while min­ing is the high­est con­tribut­ing sec­tor in Aus­tralia. Both re­spec­tive na­tions’ Re­serve Banks have dif­fer­ing mon­e­tary poli­cies that have an ef­fect on their cur­ren­cies, with the New Zealand Re­serve Bank be­ing his­tor­i­cally more con­ser­va­tive.

EX­PORTER: What do you ex­pect to be some key trends or in­flu­ences on the New Zealand cur­rency mar­ket in 2015?


I think the big­gest in­flu­ences on the Kiwi this year will mostly be ex­ter­nal. How­ever, fur­ther tight­en­ing by the RBNZ could re­sult in a higher Kiwi Dol­lar and par­tic­i­pants have been buy­ing the Kiwi in an­tic­i­pa­tion of this. Should rate rises not ma­te­ri­alise, it could drive the Kiwi lower. Global de­fla­tion and how cen­tral banks around the world re­act to this along with the risk of es­ca­lat­ing geopo­lit­i­cal ten­sions, will likely be the ex­ter­nal driv­ers. We have also seen a marked in­crease in volatil­ity across

mar­kets and I ex­pect this to con­tinue for much of the year. EX­PORTER: Do you think the US rate rises will im­pact the NZ cur­rency mar­ket in 2015?


Def­i­nitely. The USD ral­lied sharply dur­ing the sec­ond half of 2014 partly in an­tic­i­pa­tion of rate in­creases by the Fed. Should they raise rates this year and per­haps raise faster than is an­tic­i­pated by the mar­kets, it could send the Kiwi sharply lower. There are some dif­fer­ences of opin­ion in the mar­ket as to whether the Fed will or will not raise rates. I do not think it is a cer­tainty. If the Fed does raise rates in 2015, I think it will be by a to­ken amount of 25 ba­sis points, to main­tain con­fi­dence in the USD.

EX­PORTER: What are some other ma­jor fac­tors which can push up the Kiwi; fac­tors ex­porters should keep an eye on?


The Kiwi can trade higher for a num­ber of rea­sons. For in­stance, should the Fed not raise rates, or not raise by as much as some be­lieve, and the RBNZ raise or keep in­ter­est rates at cur­rent lev­els, we may see fur­ther flows into the New Zealand dol­lar in the search for yield. Fur­ther­more, we are in an en­vi­ron­ment where coun­tries are de­valu­ing their cur­ren­cies in an effort to cre­ate in­fla­tion and in some cases to achieve a com­pet­i­tive ad­van­tage. The Yen is a good ex­am­ple. It’s pru­dent for busi­nesses to re­alise that there’re many fac­tors out­side of their con­trol and to have an ap­pro­pri­ate risk man­age­ment plan in place.

EX­PORTER: What are your pre­dic­tions for the price of oil and trad­ing in 2015?


At the mo­ment the price is not be­ing set by sim­ple sup­ply and de­mand fac­tors. Geopol­i­tics is play­ing a ma­jor role. How­ever, when we look at the de­mand side of the equa­tion a lower price may be jus­ti­fied as the global econ­omy has slowed down, no­tably in China. How­ever this does not jus­tify a drop of more than $60 even with the in­creases in sup­ply. The cur­rent price is caus­ing pain across the in­dus­try and lower rev­enues may also force gov­ern­ments to cut so­cial pro­grammes in the UAE and South Amer­ica, which could lead to un­rest. I ex­pect the price to cor­rect and to av­er­age out in the late $60 to early $70 per bar­rel.

EX­PORTER: There is spec­u­la­tion that the Kiwi could be en­ter­ing into a ‘sus­tained down trend in 2015’. Do you agree/dis­agree?


I agree that the longer-term trend has cer­tainly turned neg­a­tive since the 88 cent highs in July. John Key made a com­ment not too long ago that he sees the value of the Kiwi likely in the late 60 cent range. I’d agree with his view and would like to see the Kiwi around the 65-68 cent level, which for me is a ‘Goldilocks’ level for ex­porters and im­porters. I also think that the cur­rent level of the Kiwi against the Aus­tralian Dol­lar is un­sus­tain­able.

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