Nick McDonald: How to hedge your firm against the volatile dollar

The volatile NZ dollar gives rise to SMEs opportunities to manage price movements. Photo / Supplied

SMEs contending with a high dollar need to be nimble, writes Nick McDonald.

This one simple step could save a business tens of thousands of dollars. Where should importers and exporters with heavy exposure to the New Zealand dollar go to learn a bit about what moves to make and where they should start? There are two main methodologies when it comes to predicting the future movement of a currency: fundamental analysis and technical analysis.

Fundamental analysts are attempting to calculate a currency's value by assessing the strength of one country's economy against another. This is done by comparing economic factors from both countries such as interest rates, inflation, unemployment and GDP, to name just a few.

Fundamental analysts believe the strongest economy will attract investment and trade which will result in increased demand for the currency which eventually will result in an appreciation of that currency's value.

Technical analysts do not have much interest in economic figures that tell them what "should be happening" (for instance, the kiwi dollar should be going down) and instead study price charts that show them what "is actually happening" (the kiwi dollar is actually going up and is likely to continue to).

Technical analysts study historical price movements and look for recurring patterns to give a high degree of probability as to what will happen in the future.What can SMEs learn relatively easily?I believe technical analysis is the easiest to learn, the least time-consuming and the most accurate methodology to use.

For a busy business owner it is nearly impossible to keep up with the constant stream of macroeconomic data that can make fundamental analysis time-consuming and complicated. Anyone, however, can find freely available price charts on the internet and with minimal time each day (or even week) can keep abreast of current price movements and make an assessment about likely future price direction.

There is a wealth of free information on the internet but the key is finding the good stuff. At Trade With Precision we run free foreign exchange and technical analysis webinars that are a great starting point for those new to the markets.

You will learn the basics of how a professional trader interprets a price chart and how they use that information to better understand likely currency movements days, weeks and months ahead.

Once a business owner has formed an opinion on the likely future direction of the New Zealand dollar, they can hedge against (take advantage of or protect their business against) that future price movement.

For example, if the charts are indicating the New Zealand dollar will increase in value versus the Aussie dollar, and your business imports its stock from Australia, you may want to postpone replenishing stock for as long as you possibly can so you can take advantage of the stronger future kiwi dollar.

This one simple step could save a business tens of thousands of dollars.

You could equally take a spot forex trade where you sell AUD/NZD to generate profit from the likely forthcoming price move.

Nick McDonald is chief executive, founder and head trader at Trade With Precision,
www.tradewithprecision.com