Reserve Bank's trade-weighted index should include China’s yuan, economists say

Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research

The Reserve Bank of New Zealand's currency basket used to measure the broader value of the New Zealand dollar should be widened to include the Chinese yuan, given China is now the nation's biggest market and the two currencies can be directly traded, economists say.

The Reserve Bank calculates the trade-weighted index by measuring the value of the New Zealand dollar against the US dollar, euro, Japanese yen, Australian dollar and British pound, the currencies of some major trading partners.

Economists say this week's agreement to allow the kiwi to trade directly with the yuan shows how outdated the TWI has become given it no longer represents the majority of New Zealand's trade. The currency agreement, cemented during Prime Minister John Key's visit to China, reflects the rising importance of Asia's largest economy to New Zealand trade and China's desire to raise the global usage of its currency.

"The direct convertibility is a further signal that we need to start thinking about incorporating where New Zealand is actually trading rather than the historical mix of our trading relationships," said Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research. "The TWI that is commonly quoted is still quite backward looking and it has still got very large weights on things like the British pound."

Only 3 percent of New Zealand's exports went to the UK in the year ended Jan. 31, while about 22 percent went to China.

"We have to be open to the idea of incorporating the new trade pattern," Eaqub said. "Steadfastly refusing to add the yuan, which is our top trading partner now, is no longer defensible."

That view is echoed in a currency research paper published today by the Bank of New Zealand, which noted how outdated the traditionally-weighted TWI has become, no longer representing the majority of the nation's trade.

Even the broader TWI gauge of 14 currencies published by the Reserve Bank may not give China sufficient importance, given the nation's rapidly changing export and economic weight, BNZ says.

The Reserve Bank reviews the weights in the TWI annually in December and hasn't yet made a decision about incorporating the yuan when making its calculations, a spokeswoman said.

The TWI, which this month touched its highest since the New Zealand dollar was floated in 1985 on the back of higher local interest rates, would have been weaker had it incorporated the yuan and other emerging market currencies, which had appreciated over the past year, Eaqub said. The TWI is used as a benchmark indicator for the kiwi across a range of currencies and should be accurate, he said.

"It gives you a false sense of how strong the New Zealand dollar is or how overvalued the New Zealand dollar is and what conditions we are actually facing in terms of exports or imports, Eaqub said. "It is not a realistic reflection of the pressures that we face."

The yuan is pegged to movements I the US dollar. China this week doubled the yuan's trading band against the greenback to 2 percent on either side of a daily reference rate set by the central bank.

(BusinessDesk)

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