Cash in on high currency exporters told

Photo / Herald on Sunday

New Zealand exporters struggling with an unfavourable exchange rate against the greenback need to re-evaluate their business models, say experts.

Instead of worrying about the high New Zealand dollar, Bancorp client adviser Cliff Brown says local exporters should use the situation to their advantage through making US-sourced capital investments.

A strong New Zealand dollar against the greenback means goods purchased from the United States become cheaper.

"Exporters probably have a factory and machinery that needs replacing and if they're wondering about the next batch of capital investments, then now might be a great time to do that - investing for the future," said Brown.

It was also a good time to spend up on other input costs undertaken in US dollars, such as componentry.

Last week BNZ markets strategist Mike Jones said the kiwi dollar was likely to trade in the US72c to US76c range until early next year.

Brown said there were currency hedging tools available for businesses to manage exchange rate risk.

A hedging programme did not mean a business could beat the market, Brown said, but it could buy a firm time to change its business model, or add value to its products, which would in turn help it cope with currency volatility.

"Unfortunately in New Zealand a lot of companies seem a bit reluctant to use [currency options] - mostly because there's a cash payment involved in buying it."

Peter Sherwin, chairman of Grant Thornton's Wellington office, said larger businesses - especially publicly listed companies - were more likely to make use of currency hedging than smaller ones.

Some small-to-medium sized exporters might view foreign exchange hedging as a costly, time-consuming exercise, he said.

"[Hedging] is not unlike insurance - all you see is the cost," Sherwin said.

"But when you see the position go for you and against the bank, that's when it can be quite rewarding."

Export New Zealand executive director Catherine Beard said exporters struggling with exchange rate issues should add value to their products to cope with the problem.

"Plenty of really successful exporters are trying to put themselves at the top of the market in terms of price," she said. "I think exporters have got to head in that direction - that's where you get greater productivity for the country as well."

How it works:

Forward exchange contract

* This involves a company "locking in" a set amount of currency with a bank based on the current spot rate. For example US$50,000 at US75c to be delivered at an agreed date.

* When the company sells its products and receives its payment in US dollars, it will then be able to sell those dollars back to the bank at the agreed US75c, rather than the current rate, which may have gone up or down, or stayed the same.

* If the kiwi dollar has risen in value against the greenback since the contract was purchased, the business is unaffected. However, if the kiwi devalues, the company will miss out on that benefit.

Currency options

* These are a kind of insurance policy, where a company purchases the right to sell a specific amount of foreign currency at a chosen rate on a future date, for example US75c on December 1, 2010.

* Unlike forward exchange contracts, a business is not committed to making a trade at a future date, so if the kiwi dollar devalues instead of getting stronger the business can take advantage of that fall.