The TWI

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 exchange rates 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.