Note on commodity prices/exchange rate

The ANZ  New Zealand commodity price index, in world prices, rose 1% over March – or so I’ve been told.  In New Zealand dollars the index fell – as the exchange rate rose.  This lead to the following quote:

At a time when the domestic economy is still very weak, a higher NZ dollar is likely to delay any support the export sector is able to provide

I think it is essential to keep in mind what a higher exchange rate means here.  If the exchange rate rose on the back of rising commodities prices (which was part of the story – although definitely not all, hence the fall in $NZ prices) then it is perfectly natural.  The increase in returns associated with the higher commodity prices is merely being spread across the economy – rather than directly into exporters pockets.

Now, I feel that the concern comes from the fact that we currently want to avoid declines in production – because the labour market is fragile.  A lower exchange rate makes imports more expensive and exports more competitive – leading to more production than before.

However, if this is the case then we should be clear that the issue is that we are worried about production and employment declining into some sort of “vicious cycle” – rather than just saying lower exchange rates are good.

So remember, a higher exchange rate on the back of higher commodity prices “shares the good fortune” of increasing prices across the economy – this isn’t necessarily a bad thing.

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