New Zealand has similar exchange rate volatility to Australia and Japan, says Treasury

Treasury says although New Zealand has big exchange rate cycles, they are similar to those experienced by other comparable countries.

The comments come as Treasury releases a working paper entitled New Zealand’s Exchange Rate Cycles: Evidence and Drivers that aims to decipher the evidence of just how volatile and variable the New Zealand dollar has been compared with currencies from the likes of Australia, the Euro-zone, Japan and South Korea.

"The paper finds that, on a trade-weighted basis, New Zealand does have large exchange rate cycles, but that this is also the case for several other relevant economies," Treasury says.

Although short-term exchange rate volatility is high in New Zealand, it's similar to the volatility experienced in both Australia and Japan.

"New Zealand, Australia and Japan face the highest levels of short-term volatility out of the economies included in the analysis," says Treasury.

"Factors that affect the expected relative return on New Zealand dollar assets are found to explain a significant part of exchange rate cycles. These include interest rate differentials between New Zealand and other countries, relative growth performance and attitudes to risk."

Fundamental drivers such as export commodity prices, the terms of trade, and productivity growth also drive New Zealand dollar returns.

Treasury says New Zealand has only experienced a "limited number" of exchange rate cycles since the dollar was floated in 1985. 

"The findings of this research raise important issues that will be explored in a forthcoming working paper, New Zealand’s Exchange Rate Cycles: Impacts and Policy, due to be published in early 2011."