Financial Commentary
Rodney Dickens
All parts of the economy are important, but when it comes to driving economic upturns and downturns, interest rates and the exchange rate some parts play a much larger role and export prices play a surprisingly small part.
The following is from the June Monetary Policy Statement: "The exchange rate has not yet adjusted to weakening commodity prices, but is expected to do so." This misguided view played a part in shaping the governor's more hawkish stance.
Some decades ago flows of money driven by international trade and export prices dominated exchange rate transactions, but since deregulation in the 1980s they have been dominated by investment and speculative flows. The critical question is what role export prices play in shaping the speculative buying and selling of the NZD?
Traders love hot economies and dump currencies of weak economies so a good starting point is to look at the role export prices play in driving economic growth. This is partly because strong economic growth means higher interest rates, but it is a self-fulfilling prophesy. Early-bird traders who buy the currency of a hot economy get rewarded mainly when "the crowd" do the same and drive the exchange rate up.
Since 2000 there has been an inverse relationship between GDP growth and export price inflation with a correlation of -0.29. Falling export prices are more often associated with strong than weak economic growth and rising export prices are more often associated with weak than strong economic growth. Even if we allow for the old adage that it takes a year for changes in export prices to filter through to domestic spending the correlation is still negative (-0.24).
Net migration, Canterbury rebuilding, interest rates and the government initiatives to boost residential building will swamp the impact of export prices on economic growth, the exchange rate and interest rates as Governor Wheeler should be starting to learn.
The chart below shows the relationship between annual GDP growth and the annual per cent change in the ANZ Commodity Price Index. The ANZ Index is measured in NZ dollars, which is what is relevant to exporter incomes.
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