Kiwi dollar one of most unstable currencies
2 May 2006
Kiwi dollar one of the World’s most unstable currencies
The Kiwi dollar and the Japanese yen are joint winners of the world’s “wobbliest currency award”, according researchers in Victoria University’s School of Economics & Finance.
Professor Roger Bowden and PhD student Jennifer Zhu investigated the variation of 13 major currencies since 1986, measuring all exchange rates off a common reference base.
Using a technique called wavelet analysis, they placed exchange rates into different bands of shorter and longer term variation. Both the Kiwi and the Yen had major variations in a cycle of about seven years. By contrast, the Australian dollar was the world’s third most stable currency in all bands, though the United States dollar was among the less stable.
Professor Bowden said the analysis showed the difficulties New Zealand business has faced.
“It shows what Kiwi exporters and importers have had to put up with over the years compared to their competitors across the Tasman. We were surprised at the stability of the Aussie dollar and it reinforces our findings from another study that Australian shares have been an excellent stocking filler for NZ investors, in terms of the stability they provide to the portfolio.”
The new findings come at a time when monetary policy in NZ is under the microscope, with the fear that the exchange rate has become a major de facto policy tool with more direct instruments less effective. The study raises afresh the issue of whether a common currency with Australia would help.
Professor Bowden does not believe the instability will go away some time soon.
“I think the best thing is to realise that these cycles do occur, they are partly predictable, and firms exposed to medium term currency swings should put in place active programmes of hedging and risk management. Likewise, offshore investors should think hard about the best timing for investment and repatriation. In the meantime, hang on for the ride.”
Professor Bowden and Ms Zhu’s research paper, Which are the world’s wobbliest currencies? Reference rates and their variation, can be viewed at: www.vuw.ac.nz/sef/pages/info/research/working_papers-2005.aspx