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New Zealand Economic and Financial Overview 2015

Foreign-Exchange Rates and Overseas Reserves

Foreign-Exchange Rates

The New Zealand dollar has floated freely since March 1985. There are no exchange controls on foreign-exchange transactions undertaken in New Zealand. Foreign reserves are held primarily for the purpose of intervention in a crisis situation, when there may be no ‘market makers' in the New Zealand dollar.

The Reserve Bank has a limited capacity to intervene in the foreign-exchange market to influence the level of the exchange rate for monetary policy purposes. The Bank has noted that such intervention may occur when the exchange rate is exceptional and unjustified on the basis of economic fundamentals and when doing so is consistent with the Policy Targets Agreement. The Bank does not generally comment publicly on such intervention. However, the Bank's net foreign-exchange position is disclosed publicly with a lag at the end of the following month.

The Trade Weighted Index (TWI) is a basket of exchange rates for 17 of New Zealand's major trading partners, including the United States dollar, the Australian dollar, the Chinese yuan, the Japanese yen and the euro. Following a large decline early in the GFC, the TWI appreciated rapidly over 2009 and continued to strengthen steadily in the following years. The appreciation of the New Zealand dollar was the result of a more optimistic global outlook, increased demand for commodities, and weakness in the US dollar owing to large-scale US monetary stimulus. The TWI received a further boost between late 2012 and mid 2014, driven by a surge in commodity export prices, large depreciation in the Japanese Yen, softness in the Australian economy and monetary tightening by the RBNZ in March 2014. The TWI was at a post-float high of 81.9 in July 2014, which represents a 45% increase from its seven-year low of 56.6 in early 2009.

The TWI began to fall in the second half of 2014, but remained at an historically high level at the start of 2015. This fall was driven by large declines in dairy export prices over 2014, a pause in the RBNZ's monetary tightening from July 2014, market activity from the RBNZ, indications that the strength of the New Zealand dollar is unsustainable, as well as appreciation in the US dollar and Chinese Yuan.

The TWI is expected to remain broadly steady at a high level over the next couple of years. The New Zealand dollar is expected to appreciate further against the Japanese yen and the euro, as weak growth in Japan and the euro area leads to further monetary policy easing. The New Zealand dollar may also appreciate against the Australian dollar, as growth is expected to remain below trend in Australia over the coming year. At the same time, the New Zealand dollar is expected to fall further against the US dollar, as the US recovery becomes entrenched and monetary policy is tightened, and also against the Chinese yuan, which is partially pegged to the US dollar.

Table 18 - Foreign Exchange Rates
  USA Mid-rate
US$ per NZ$
Japan Mid-rate
Yen per NZ$
Trade Weighted
Exchange Rate
Index (1)

June Year Averages

     
2010 0.7215 63.28 68.9
2011 0.7911 63.10 71.0
2012 0.8106 64.71 73.4
2013 0.8205 80.04 76.6
2014 0.8308 87.77 79.8

Monthly Averages

     
July 2014 0.8697 88.43 81.9
August 2014 0.8435 86.82 79.9
September 2014 0.8166 87.48 78.5
October 2014 0.7869 84.93 76.8
November 2014 0.7832 90.95 77.4
December 2014 0.7764 92.64 78.3
January 2015 0.7640 90.38 78.18

(1) The Trade-Weighted Exchange Rate Index is calculated on the basis of representative market rates for a basket of currencies representing New Zealand's major trading partners. On 30 June 1979, the basket equalled 100.

Source: RBNZ

Figure 5 - Trade-Weighted Exchange-Rate Index
Figure 5 - Trade-Weighted Exchange-Rate Index.
Sources: RBNZ, the Treasury

Overseas Reserves

New Zealand's official external reserves, as shown in the following table, include the net overseas assets of the Reserve Bank, overseas domiciled securities held by the Government and the reserve position at the IMF. New Zealand's quota at the IMF was SDR 895 million as of 30 June 2014 (approximately $1,578 million).

Table 19 - Overseas Reserves
Last Balance Day in June
(dollar amounts in millions)

Reserve Bank
Overseas Reserves (1)

Treasury Overseas
Reserves
Reserve Position
at IMF (2)
Special Drawing
Rights
Total Official
Reserves
2010 19,724.3 2,755.2 370.6 1,822.0 24,672.1
2011 21,795.0 2,475.0 510.0 1,650.0 26,430.0
2012 19,305.0 3,853.0 663.0 1,578.0 25,399.0
2013 19,334.0 1,041.0 713.0 1,570.0 22,658.0
2014 16,940.0 2,000.0 703.0 1,433.0 21,076.0

(1) Comprises foreign-exchange reserves and overseas investments of the Reserve Bank of New Zealand.

(2) Equal to New Zealand's quota, less its New Zealand currency subscriptions and any reserve tranche drawings.

Source: RBNZ, the Treasury

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