Forum Archive Index - February 2004

[mixtrader <mixtrader@clear.net.nz>]

David

 

You are correct in what you say regarding Cullen and his abilities as an economist.  He claims to follow the Keynesian approach to interventionist management of economic policy but to date his ability hasn't been tested as Labour have had a charmed run over the past four years.

 

With the NZ currency in free float since 1985 we have seen a bit of a rollercoaster ride as the only implement used to influence the value is the OCR.  This follows the idea that management of money supply through interest rates will control inflation, and also the short-term tradeoff that occurs between inflation and unemployment (as with all things, economists refer to this as the Phillips Curve and draw pretty pictures to demonstrate the relationship).  Inflation is still considered the major ruffian in screwing up a nations economy.

 

The exchange rate is based on the "basket" of currencies you refer to, but only as a measure of where the international markets are valuing our currency at that time - ie the value of those other currencies is not what is affecting the value of NZ$, they are just a comparison (and most of them are also in free float)

 

My understanding of the heavy "weighting" afforded the US$ is that much of the trade NZ is involved in is denominated in US$, as such we use that currency as a benchmark.  In some respects this is misleading as the US$ has lost considerable ground over recent months (and is apparently considered by some economists to be overvalued).  The NZ$ has appreciated against currencies that we benchmark against, the US$ has depreciated against most of these same currencies.

 

Regarding the bilateral trade agreement between US and Australia, with the performance of their currencies mirroring the relationship between NZ$ and US$ Australia looks unlikely to benefit from the Clayton's deal.  I believe they have probably both shot themselves in the foot to a certain extent and they have certainly worked in opposition to the ideas of multilateral free trade as is being pursued by the WTO.

 

My only hope is that Cullen doesn't attempt to micro-manage the value of the NZ$ - Muldoon was the last one to attempt that, he was far more commercially savvy than our rather academic treasurer and he made a total hash of it.  The best that Cullen could do is to "pressure" the RBNZ to lower the OCR, that would make our currency less desirable to off-shore investors and would also act to stimulate NZ business investment.