Currency hedging strategies

The increasing global investment exposure of New Zealand investors has led to an increased level of interest in the outlook for the $NZ. This is particularly the case right now. While the collapse in the $NZ over the past few years has concerned many, for the economy it has been a godsend. The impact of last year’s global downturn on New Zealand was barely perceptible, largely because of the offsetting stimulus of a low NZ$. It has also helped protect investors with offshore exposure from the slump in global equity markets (at 44c, the NZ$/US$ cross remains around 10% below the level of two years ago).

The big concern now is that if the $NZ was to rebound it would cut into any recovery in global equity markets. This leads to the obvious question – should investors consider reducing their exposure to foreign currency by either hedging some (or all) of their international equity investments back to $NZ (where possible), investing in fully hedged international equity funds (where available), or reducing their offshore allocations generally?

The case to reduce foreign currency exposure

Given the significance of this decision it is important to carefully consider the pros and cons of reducing foreign currency exposure. In favour of hedging/reducing foreign currency exposure are the following points: