Hedging strategies and QEIII

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The effect of quantitative easing by governments around the world is likely to lessen each time they get their money printers out, according to one investment funds manager.

Thursday, September 27th 2012, 6:37AM 2 Comments

by Susan Edmunds

Pathfinder Asset Management says there are arguments for and against continued strength in the New Zealand dollar – one of which is the fact that quantitative easing seems to generate a smaller shockwave each time it is employed. The US recently signalled it would embark on another round.

But currency trader Hugo Phillips says Pathfinder’s predictions are inaccurate. He says there will soon be a massive oversupply of US dollars and because New Zealand is primarily pegged against the United States, that will mean further strength for the Kiwi.

And ASB’s latest Institutional Kiwi Dollar Barometer seems to agree – businesses think the dollar will remain high and peak at US85.6 cents in the middle of next year.

Pathfinder has signalled a possible reduction in the after-tax hedging it recommends for investors, flagging concerns for the reliability of predictions for the Kiwi dollar against the USD and Euro.
It is not changing its current guidance of a 75 per cent after tax hedge. But it says a lowering of hedging guidance to 50 per cent is likely in future.

Pathfinder says the future for the New Zealand dollar is unclear and currency predictions, particularly short-term, are notoriously unreliable.
It says there are several factors that may push the dollar up: Money printing in major economies, people chasing higher interest rates and the fact that a slowing of the Australian economy and falling interest rates there could drive the Kiwi dollar up in comparison to its transtasman counterpart in the short term.

Pathfinder said New Zealand remained one of the “least worst” currencies due to better economic conditions compared to other countries and a relatively buoyant soft commodity export market.

But it says there are equally sound arguments for a fall in the dollar. Events in Europe could send the dollar down if investors lose their appetite for risk. Exporters and farmers suffer under a higher dollar.  Eventually a softening in Australia and China would have an impact here and quantitative easing seemed to be creating smaller impacts.

“We expected the NZ dollar to rise more strongly than it has since the announcement of QE3 … To us this indicates a risk that the NZ dollar may not trend significantly higher from here.”

Phillips said there was “slight truth” in the idea that Australia could eventually drag the Kiwi dollar down. But he said he expected the dollar to retain its strength for some time to come.

DOWNLOAD the Pathfinder document here

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