What is the exchange rate telling us

There is an interesting article on the Rates Blog that I have been meaning to mention by Rodney Dickens.

Although I don’t agree with him that the RBNZ is being silly – I do think he makes a good point when looking at the exchange rate.

the forex market [may have] pushed the exchange rate up because it has correctly assessed that NZ growth prospects have improved

When I read this on the 5th I agreed with it – and if anything this point of view is becoming more obviously right as a bunch of good data has come out.

However, I would take a step back and try to understand what is going on here. I don’t think that the growth outlook is the sole factor – we also have “risk taking behaviour” (as our currency is a form of investment) and commodity prices (as our currency helps to share any gains from a terms of trade lift.

Now ANZ reports that commodity prices rose in both March and April – so this is some of the reason. However, in $NZ terms they fell – implying to me that there has been more to it. With the DOW rising from 6,500 to 8,500 (among other indicators) we can tell that there is some risk loving behaviour coming back – making a high yielding currency like the $NZ attractive. If we strip these out we might find that the market expects marginally higher growth – but I’m not convinced that this view is particularly different to the RBNZ’s March forecasts 😉

7 replies
  1. Dismal Soyanz
    Dismal Soyanz says:


    This is just a routine example of media oversimplification. Look at Bloomberg and Reuters stories about the FX market. Their prime audience are market participants (traders and analysts) who ought to know that market rates and the confluence of many different factors. Yet the journalists persist in spinning stories that the market went up because of greater confidence or a went down as people bailed out of risky assets. Such commentary is lazy journalism and certainly poor analysis.

    While those of us who are more critical in our thinking view such stories with horror, many do not. This allows the journalists to get away with it. And unfortunately it seems to be a common trait across all media types and all news genres.

  2. Matt Nolan
    Matt Nolan says:

    @Dismal Soyanz

    Hi Dismal,

    Who is oversimplifying here? I agree we shouldn’t just look for a single factor to look at things – but my goal was to mention some of the reasons why the dollar might be moving, just so we can have a think about them.

  3. Dismal Soyanz
    Dismal Soyanz says:

    Perhaps a sweeping generalisation on my part. I wasn’t suggesting that you were! I am yet to be convinced that the FX market (or any other market for that matter) can be characterised in the rather bald way many do as reflecting a single phenomenon (in this case the prospects for growth in NZ have improved). perhaps my real bugbear is that journalists often do not admit that the factors they identify may well be present but there are just as likely to be other factors at play. Economists are very familiar with the idea that the factors we identify may play a significant (in the statistical sense) role but individually may well account for only a small proportion of the dependent variable’s movement.

  4. Matt Nolan
    Matt Nolan says:

    @Dismal Soyanz


    However, I did feel that it was important to note that a stronger dollar could come from improving growth prospects or rising commodity prices – as otherwise we tend to treat the dollar to growth relationship in a solely negative light.

    Coverage on movements in the exchange rate is relatively poor – perhaps we should all just admit it is a random walk and move on 😀

  5. Dismal Soyanz
    Dismal Soyanz says:

    I’d agree with you on the random walk thing – but then how many writers are going to admit that they really don’t know what’s going on. but we live in hope….

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