Rocketing exchange rate not all bad for exporters

It might be cold comfort to exporters looking at a resurgent kiwi dollar right now, but research by Westpac economists shows the exchange rate over time has done more buffering than buffeting for commodity producers.

The New Zealand dollar tends to move in the same direction as world prices for New Zealand's export commodities. That limits commodity exporters' pain when world prices fall, though it also limits the gains when prices rise.

Over 2008, for example, ANZ's commodity price index fell 24 per cent in world price terms but the exchange rate fell too so that by the end of the year, in New Zealand dollar terms, the index was unchanged from the start of the year.

But this year most of last year's depreciation against the US dollar has been reversed, so that while world prices for New Zealand export commodities have risen 12.4 per cent year to date, in New Zealand dollar terms they have fallen 12.5 per cent.

Westpac research economist Dominick Stephens has compared the volatility of export commodity prices since 1992, adjusted for inflation, in US dollars and New Zealand dollars.

Volatility is measured in terms of standard deviations: the further and longer prices vary from their average, the bigger the standard deviation and the greater the volatility.

Over the past 17 years New Zealand's export commodities were 25 per cent more volatile in US dollar terms than in NZ dollar terms.

If we had had the Australian dollar volatility would have been one-third higher.

A significant minority of commodity exporters have been buffeted rather than buffered by the exchange rate: specifically beef, wool, seafood and forestry producers.

"These industries would have experienced less price volatility if the New Zealand dollar had been fixed against the US dollar. For these products complaints about additional volatility introduced by the currency are valid."

But on an export-weighted basis they make up less than a quarter of commodity exports and 14 per cent of all exports.

And the dairy industry, source of 24 per cent of New Zealand's exports, would have experienced 27 per cent more volatility without the floating dollar.

"That is not surprising considering that dairy is the country's biggest export industry by far and therefore has the greatest influence on the exchange rate," Stephens said.

Lamb, horticulture and aluminium have also experienced less volatility in New Zealand dollar than in US dollar terms.

On the import side, the exchange rate has also moderated some of the swings in world oil prices. Since the early 1990s, oil has been 20 per cent less volatile in New Zealand dollar terms than in US dollar terms.

The Westpac economists are not trying to minimise other negative effects of a rising real exchange rate.

The high dollar makes non-commodity exporters, including manufacturers, and firms which compete with imports, less profitable. It also makes New Zealand less competitive as an export destination.

But on the positive side a high dollar leaves consumers better off as imported goods become cheaper.

Imported capital goods needed to increase the country's productive capacity are cheaper, too.

And because inflation pressures are lower, interest rates will be too, helping borrowers but hurting savers.