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: 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.