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Exchange rate is reducing export price volatility, says Westpac

Westpac economists have released research showing New Zealand's floating exchange rate has helped reduce price volatility of its commodity exports, rather than add to price volatility.

They argue that any policy designed to stabilise the exchange rate would do more harm than good to most of New Zealand's commodity exports.

Westpac Chief Economist Brendan O'Donovan and research economist Dominick Stephens said the New Zealand dollar tends to move in the same direction as NZ commodity prices, which insulates most, but not all, commodity producers from global market price volatility.

Commodities currently make up 56 per cent of NZ's merchandise exports, they said.

Their research looked at price data over 17 years and found that dairy products have benefited most from exchange rate variation.

"When world commodity prices fall the exchange rate often falls, limiting commodity exporters' pain.

Likewise, when commodity prices rise the exchange rate often rises, limiting commodity exporters' gain," O'Donovan and Stephens said.

"By offsetting global market swings, the exchange rate has reduced the overall volatility of commodity producers' revenue per unit by 25 per cent since 1992.

For the dairy industry, the exchange rate has reduced volatility by 27 per cent. Far from buffeting most commodity exporters, the exchange rate has actually buffered them," they said.

"Our results imply that a policy designed to stabilise the exchange rate would actually harm the dairy, lamb, horticulture, and aluminium industries (38 per cent of exports).

Such a policy would reduce the exchange rate's beneficial buffering effect, exposing exporters in these industries to the vagaries of world markets."

However, O'Donovan and Stephens said there were exceptions to this. "For a significant minority of commodity producers, the exchange rate has indeed been a source of volatility.

Exchange rate variation has increased the overall volatility of revenues for beef, wool, seafood and forestry exporters."

"A policy of exchange rate stabilisation helpful for the beef, wool, seafood and forestry industries (15 per cent of exports), as it would stabilise overall revenues in those industries."

O'Donovan and Stephens found that adoption of the Australian dollar would have been even worse than fixing to the US dollar for commodity prices.

"As a group, commodity exporters' revenues per unit have been 34 per cent more stable than they would have been if New Zealand had adopted the Australian dollar in 1992.

However, wool, seafood, forestry, and aluminium exporters would have been better off under the Australian dollar."

They also found that the exchange rate had reduced volatility in the local price of oil by 20 per cent.


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