As citizens of a small, export-dependent economy we are required to fret about the currency not that it does much good.

But it's also difficult to react dispassionately to the daily news on the dollar's whereabouts. Up, no matter how you say it, always sounds better than down.

Of course, various pundits try to counter this psychological tendency by constantly whining that the kiwi is too high and asking the Reserve Bank to do something about it.

The Reserve Bank has duly noted these concerns. In last week's Monetary Policy Statement the Bank's new governor, Graeme Wheeler, sympathised with those hurting from our persistently buoyant currency.


"The high New Zealand dollar continues to be a significant headwind, restricting export earnings and encouraging demands for imports," Wheeler said in the statement.

And the headwinds will blow for a little longer, according to the Bank as "dampening global trade, soft outlooks for major Western economies, combined with a firm outlook for export commodity prices, are assumed to contribute to lingering strength in the New Zealand dollar TWI".

Or maybe not.

Another Reserve Bank research paper, also published this month, suggests financial markets tend to think the NZ dollar has a greater chance of falling (versus the US dollar anyway) , rather than rising, in the year ahead.

The paper, authored by Michelle Lewis, interrogates the data spewed forth by the NZ/US currency options market. Most currency trading in NZ is conducted using futures or forwards (contracts to buy or sell currency at an agreed rate and date) whereas options, which may or may not result in an actual currency transaction, are less common.

Lewis cites data from the Bank for International Settlements (BIS) that shows currency options account for about 4.4 per cent of NZ currency trades (compared to the global average of 5.2 per cent).

"Although the New Zealand options market is small it appears to be reasonably liquid, where 4.4 per cent of turnover is equivalent to an average of approximately USD1.4bn a day," she says in the paper. "Therefore we can expect New Zealand exchange rate options to be reasonably accurate at summarising market expectations."

Perhaps options are the preferred currency-trading device for more sophisticated, far-sighted investors (or canny punters) some of whom may at one time or another use them to engage in "straddle, risk reversal, and strangle" strategies.

Whatever, Lewis applies a range of statistical tools (including kurtosis, skewness and probability integral transformations, or PITs) to the US/NZ currency options market to reach the following conclusions:

"We find evidence that the behaviour of the NZD/USD has changed significantly since the GFC," she says. "Indeed, although actual volatility in the NZD/USD is quite low at present, the market continues to price significantly greater risk of depreciation than of an appreciation."