Reserve Bank widens TWI currency basket to better reflect trading patterns

Friday 17th October 2014

The Reserve Bank of New Zealand will broaden the currency basket it uses to calculate the value of the local dollar, to better reflect the nation's trading relationships.

From Dec. 11, the number of currencies in the benchmark trade-weighted index will increase to 17 from five, the Wellington-based RBNZ said in a statement. It will weight each currency on direct bilateral trade with New Zealand and remove a reference to relative GDP, while including trade in services for the first time, it said.

The TWI has reflected the weighted average of five exchange rates since it was introduced in the 1970s. The calculations measured the value of the New Zealand dollar against the US dollar, euro, Japanese yen, Australian dollar and British pound, capturing what were at the time New Zealand's main trading partners.

"As trade has grown, particularly with China, these five countries now account for less than half of New Zealand's trade," Reserve Bank assistant governor and head of economics John McDermott said. "The new approach will include the exchange rates of countries that now account for more than 80 percent of New Zealand's foreign trade."

The updated TWI will include China, New Zealand's main trading partner, as well as Australia, the US, the Eurozone, Japan, Singapore, the UK, South Korea, Malaysia, Thailand, Indonesia, India, Canada, Taiwan, Hong Kong, Vietnam and the Philippines.

Economists have said the five-member TWI, which this year touched its highest since the New Zealand dollar was floated in 1985, had given a false sense of the strength of the local currency and the conditions faced by exporters and importers.

The bank said it will continue to publish the current 5-country and 14-country TWI series and will provide more information on the changes in December.

BusinessDesk.co.nz

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