The TWI

February 8th, 2013 at 4:00 pm by David Farrar

Brian Fallow writes at NZ Herald:

The New Zealand dollar has hit 76 on the Reserve Bank’s trade-weighted index, its highest level since at least 1990.

Surely that means manufacturers have a point when they plead for a defensive response from policymakers at the bank or in the Beehive?

Only up to a point.

The TWI is highly unlikely to reflect the relevant to any particular manufacturer, either exporting or competing with imports.

For many the US dollar will be much more significant than its 30 per cent weighting in the TWI.

For others the Australian dollar is far more important than its 22 per cent index weighting.

And remarkably, the TWI, whose composition was last revised in 1999, does not include the renminbi even though China is now New Zealand’s second-largest export market and largest source of imports.

I’d say time to reweight the TWI. However as the Chinese currency is not a floating one, there may be issues with including it.

Helpfully, though, the ASB Bank economists have compiled two alternative exchange rate indices, weighted by manufacturing import and export flows.

They define manufacturing narrowly, excluding the output of dairy factories and meat works, so as to reflect the position of more value-added, or in the jargon of statisticians “elaborately transformed”, manufactured goods. Such goods represent about 19 per cent of exports and 51 per cent of imports.

Like the official index, it includes five currencies, but with the renminbi replacing sterling.

During the last cycle – from the recession at the start of the millennium to the more recent one – the three indices tracked each other quiet closely.

But since 2009 they have diverged.

All three have appreciated, but the index reflecting manufactured imports less so than the official TWI, and the index for manufactured exports less still.

The result is that the ASB exchange rate indices for both manufactured exports and imports, and especially the former, are even now at levels lower than they were during the boom years of the mid-2000s.

I wasn’t aware of the ASB indices. It makes more sense to use them when referring to the impact on manufacturing than just the US dollar or even the TWI.

ASB chief economist Nick Tuffley says the fact that the manufacturing-relevant exchange rates have not climbed as much as the official TWI highlights a key difference between the most recent appreciation compared with that of the early to mid-2000s.

“In the 2000s the New Zealand dollar appreciated more broadly, that is, against most major currencies and to a similar degree against each. Since 2009, though, it has held broadly stable at a low level against the Australian dollar.”

Australia is the destination for nearly half of New Zealand’s manufactured exports.

A point I made the other day.

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16 Responses to “The TWI”

  1. willtruth (243 comments) says:

    The NZ dollar is way too strong, and its killing our balance of payments. I wonder if NZ’s lack of a capital gains tax (compared to every other country which does have one) is an issue. Such a tax might stop money flooding into the country, boosting the value of our dollar and inflating house prices beyond the means of many kiwis.

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  2. gazzmaniac (2,306 comments) says:

    I fail to see why people like willtruth have a problem with money flowing into the country. It would be much, much worse if money was flowing out.

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  3. James Stephenson (2,268 comments) says:

    How many times does it need to be pointed out that our dollar is not “too strong”, it’s just not been artificially debased?Anyone with savings should be happy about that.

    In effect our dollar is commodity-backed, only we’re on the Milk Standard rather than the Gold one. The reason that James Cameron has bought most of the Wairarapa isn’t because NZ is pretty, or that Weta do good film effects, it’s because productive farmland in a country with a stable currency is about the best hedge he could possibly have against the demise of the US dollar.

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  4. bringbackdemocracy (429 comments) says:

    Our currency is artificially high due to the demand for NZ dollars. The primary cause of this is the excessive borrowing by the current government.
    We need a better economic policy than the current “borrow and hope”

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  5. Rightandleft (691 comments) says:

    I’m getting so sick of hearing the centre-left parties constantly whinge about the high dollar. If they really care about the poor in this country they should consider the effect a weaker dollar would have on the price of petrol and other basic necessities. Comparing our currency to the US dollar is pointless when we export mainly to Australia. I wish the govt would point this out more often and more forcefully.

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  6. thor42 (971 comments) says:

    I do have some sympathy for the manufacturers and the effect that the high dollar is having on them.

    I think that it should be written into the Reserve Bank Act that the Reserve Bank should influence the dollar more than it is at present. The Act could say that they must try to keep it in a band of (say) US70-75 cents or so.

    The present *uncertainty* as to how high the dollar will go wouldn’t help either. If the Reserve Bank tried to keep it in a given range, that would at least help manufacturers in their planning.

    I don’t believe that policy like this would be a major change. It’s a small tweak in the scheme of things. The RB tries to keep inflation within a “band” – why not the exchange rate too?

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  7. greenjacket (486 comments) says:

    The dollar is only high relative to the USD and the Euro. BUT only 20% of NZ exports still go to the EU and US – most of our exports are to Australia, ASEAN and China, and the $NZ is pretty good relative to those currencies. And those are the markets with the highest growth and are NZ’s future.

    Willtruth: How will a capital gains tax affect the currency?
    House prices are high in Auckland because of steady population pressure and limited land (the law of supply and demand – if demand is high and supply is low, then prices will rise. It staggers me that so many people don’t get this iron law of economics). A CGT will do precisely nothing to affect that supply and demand except to raise the price by the amount of the tax. I am baffled at how a CGT would affect the currency. A CGT was introduced into Australia, and it has made zero difference to house prices or the Aussie currency.

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  8. Jack5 (5,286 comments) says:

    Shallow Fallow and DPF keep up the line that it is manufacturers who are hurting and grizzling about the high kiwi dollar. It of course affects all export sectors, including farming, fishing, forestry, and (at least a currency earner) tourism.

    If you are in one of these sectors you must be wondering if your bank is one of those also pushing this line and maintaining our high exchange rate is okay.

    I don’t understand why National is painting itself into a corner with its intransigence on currency strategy.

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  9. kowtow (8,945 comments) says:

    Currency is a commodity.

    And as our economy is in “less worse” condition than many others ,it makes trading in the NZ dollar very attractive.

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  10. Jack5 (5,286 comments) says:

    Re James Stephenson’s (4.37 post):

    productive farmland in a country with a stable currency is about the best hedge he could possibly have against the demise of the US dollar.

    Stable? Stable? We are running continual balance of payments deficits over decades without commensurate high growth. A correction is inevitable,but sadly that will likely be after most of our exporting industries have been devastated.

    Swiss francs, yuan,Swedish krona, platinum, perhaps gold, would be better hedges for Americans.

    Stephenson is right that the NZ dollar is, with Australia’s and Canada’s currencies, regarded as a commodity currency. But there is more at play than the price of milk. The NZ dollar is a favourite of international speculators.

    And even the strong role in our currency of our lead exports, dairy products, must come under long-term threat. China is rapidly expanding its own dairy industry (evidence the thousands of dairy cows it is buying in NZ), and problems loom from the likely return of solid farm subsidies as the European Community fades away. There is also big potential for dairying in East Europe, the Ukraine and big areas of South America.

    Fonterra and the Government are putting something of a spin on our dairy exports in Asia. Infant dairy products from other Western countries are also becoming well known in China and Hong Kong, and a big Western backed infant formula plant has been built in southern China. Also the NZ fertiliser problem has received more coverage in the Chinese-language press than Fonterra has acknowledged.

    The point is we haven’t got this market to ourselves, and if I were an American investor I would be careful about buying land in NZ high in the land price cycle.

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  11. Jack5 (5,286 comments) says:

    Right and left posted at 5.20:

    …I’m getting so sick of hearing the centre-left parties constantly whinge about the high dollar.

    C’mon, National’s solidly in the Centre-Left!

    The banks etc are trying to make currency strategy a Left v Right issue. That would mean solidly enterprising Hong Kong, Singapore, Israel, Switzerland have to be classified as Leftist. That, of course, is bullshit.

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  12. Ross Nixon (517 comments) says:

    The TWI uses such an old formula, as pointed out by Brian Fallow, that we should either update it or use the more accurate ‘Big Mac’ index.
    And according to that the NZD is priced almost exactly right at the moment.

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  13. Jack5 (5,286 comments) says:

    It was wrong of me in my 8.05 post to label Brian Fallow “Shallow Fallow”. He’s not shallow.

    Sorry, Brian.

    I follow Brian’s column and I was wrong to make such an ad hominem jest merely because I disagree with him on one issue, albeit an important one.

    Hammering politicians and fellow blog posters is one thing, picking on a serious journalist like Brian is another.

    I still think he’s wrong about NZ currency strategy, however.

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  14. pq (728 comments) says:

    soon reality bites
    $NZ dollar = $USA dollar
    $AUD 75cents $CANADA 78 cents , complain here

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  15. JC (951 comments) says:

    So which nation has the lowest foreign direct investment in manufacturing in the world? Yep, NZ, we are the Hermit Kingdom of the world:

    http://nzinitiative.org.nz/site/nzinitiative/images/Issue%2013%20Graph.jpg

    Same goes for FDI general investment.. about the fourth most restrictive.. just behind more liberal countries like China, Japan and Saudi Arabia.

    Who has the least FDI component in their exports.. NZ.

    Which NZ firms generally pay the best salaries.. those that are foreign owned.. and I wouldn’t mind betting they are at the top of the R&D tree as well.

    What was our exchange rate when we were one of the richest nations on Earth?.. in 1960 we relied on sheep and beef exports and the exchange rate was $1.40 to the USD.

    Like Brian Fallows says.. there’s a bit more to manufacturing woes than the exchange rate.. and our economists tell us that our current high exchange rate reflects imbalances in our economy.. like too much government.

    Incidentally, at least one group of businesses (and Govt) is pleased no one is looking at them and thats the importers.. they are buying cheap from overseas and selling the product to us at the same prices they charged when the dollar was at 70 cents.. thats where the real scandal lies.

    JC

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  16. Ed Snack (1,941 comments) says:

    Interesting that the ASB excludes Meatworks from their “elaborately transformed” manufacturing index, they obviously haven’t been near a meatworks for 20 years or more.

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