By Matthew Nolan*
What is an exchange rate?
All around the world people are complaining about exchange rates.
This is all well and good; I am well versed in complaining about things myself.
But before we consider whether complaints about the exchange rate are justified we need to first ask a very important question – what is an exchange rate?
Many people will act as if this question is far too obvious, but to be honest this is an issue we have to make sure we understand before we start banging on about exchange rates – and matters are far from as clear as many people like to pretend.
For a second, let me ask you to forget the complaints and feelings you have about what the exchange rate is and what it is doing.
Let’s start by consider the simple case of two countries – called A and B.
The exchange rate between these two countries is a simple way of measuring the value of country A’s currency relative to the value of country B’s currency. If country A uses the A dollar, and country B uses the B pound, then country A’s exchange rate tells us how many pounds can be purchased with one dollar.
When A’s currency appreciates you can purchase more pounds for each dollar, and so this number rises, when A’s currency depreciates you can purchase fewer pounds for each dollar, so this number falls.
Nice, most of you already know this story. However, things get significantly more exciting when we stop trading money with each other, and start trading goods and services which we use the money to buy.
Adding in goods and services
Here the value of A’s dollars vs B’s pounds is the foreign currency exchange rate.
However, there is also a rate of exchange for dollars against the goods A produces, pounds against the goods B produces, dollars against the goods B produces, and pounds against the goods A produces.
We know the first two as the price of goods and services within a country in local currency, while the latter two tell us the price of good and services within a country in foreign currency.
In a nice neat world where people in country A and country B could instantly and costlessly transport goods between each other, we would expect the foreign currency exchange rate to end up at a level where it costs someone in country A the same amount of dollars to buy the same good in country A as it would in country B. This extreme way of working out the currency is called purchasing power parity. Under this view, the currency is set to equalise the prices of goods and services in the two countries.
The Economist’s “Big Mac” index gives an example of this sort of logic – by comparing the price of Big Mac’s around the world to the price in the US, when they are all set in US$.
Of course purchasing power parity doesn’t always hold.
It is costly to send goods around the world, it takes time for people to recognise and take advantage of 'pricing differences' between nations, and some goods are 'non-tradable'. Furthermore, beyond all of this there is a significant time dimension.
A dollar or a pound doesn’t go off, so as a result you can hold a dollar and if the price goes up you make a capital gain.
Furthermore, currency can be used to purchase assets within a country that have a long life, and offer a rate of return.
As a result, people will buy more of A’s dollars if the capital they can buy in A offers a higher rate of return than in B (interest rates), or if they expect A’s dollars to become more valuable in the future.
In this way, a currency itself is just like an asset, and the price of this asset moves in ways that are very hard to predict (no matter how much some people like to pretend we can pick them) and nearly impossible to control in any sensible way.
Now I’m sure many of you find none of this particularly surprising. However, this is where things get a bit more serious.
Any description we have for what is going on with an exchange rate, or what we 'should do' has to be based on these fundamental elements of what an exchange rate is.
And this is where a lot of discussion around the exchange rate breaks down – because many people start seeing this relative price as a means to change real things in the economy, rather than as a signal of the underlying causes.
What is this a symptom of?
An exchange rate is a price.
It moves due to relative rates of return, relative price levels, relative inflation, and expectations of future growth/returns/changes in export and import prices.
We can’t predict the exchange rate, but as a price the exchange rate provides very useful information to us at a point in time. For example, Chen, Rogoff, and Rossi showed in a paper that movements in 'commodity currencies' such as the New Zealand dollar provide a lot of information about the outlook for commodity prices.
This makes a lot of sense if we think of currency like an asset, and a lift in export prices as indicative of an increase in the rate of return on that asset.
So given that the New Zealand dollar can be viewed as this sort of price we can say draw up a whole list of potential explanations for the high dollar (that are also consistent with the relatively higher interest rates, and persistent current account deficits in NZ) over recent years:
1. The build-up of reserves/savings in Asian countries (especially China) has both made imported goods cheap, and competing firms less competitive – showing up in our exchange rate (this is explained here).
2. The increasing value of dairy products, and to a lesser extent meat, is expected to continue in the future – as a result, people have purchased the dollar due to expected appreciation.
3. Low savings relative to investment and/or poor investment by New Zealander’s led to capital inflows, new capital that hasn’t offered a high enough social rate of return.
4. The inconsistent taxation of different investment vehicles has led to too little savings and/or too much investment with a low return (suggested by residential investment data).
5. Working for Families led to an increase in consumer demand without an underlying boost in national income, pushing up interest rates relative to where they would otherwise have been and thereby the exchange rate.
6. Other countries may be expected to “overinflate” their way out of debt – in which case the relative value of their currency has been pushed down, and we will see very strong inflation overseas in the coming years. This is the 'currency war' view.
Figuring out which of these explanations is an important empirical question, and is the sort of thing that economists in New Zealand have been gradually working on.
It is the answer to questions about the cause of the appreciation which should determine what we “do about exchange rates”, if anything.
Trying to get the RBNZ to print money or cut the official cash rate now to change this 'symptom' will not solve the underlying ailment that is perceived to be causing pain to some in society.
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Matt Nolan is a senior economist at Infometrics. You can contact him here »
55 Comments
Someone drank the cool aid. Is New Zealand a sovereign nation responsible for its citizens first or an obsequeous little plaything of the all knowing, omnipresent "market". Why are we so in thrall and beholden to a bunch of faceless sociopathic financial manipulators? The sooner they are put back in their box the better. Problem is everyone is too scared to go first.
Yes, yes, we all read economics 101. BUT, so have all, sorts of institutions that find ways of manipulating what is happenning. If other countries are doing different things to countries A&B then that has an affect as well.
Have explanations all you like, but the $NZ is too high for companies to export - how does a load of manufacturers collapsing or moving overseas fit into the model?
Big Mac index, the biggest BS ever used. McDonalds charge as much for each burger as they can in each country while still selling as many as they can. Elasticity of demand/price verses their position in the market in that country, basic economics and not some quick way of checking anything else. They sell more than the competition because they are better known (kids ask for mcD's not a burger), have more shops, etc.
Indeed, many people have read econ 101 - but that is why the mistake of forgeting that we are talking about a price is unforgivable ;)
If we are talking about people "manipulating a price" we have to ask "how" and "why". And therefore "what does it mean".
Take for example the China example, which is the only clear one where we have some type of currency intervention. China does this by building up reserves, which come from domestic savings in China - savings which are then used by the government to buy US Treasuries and other assets, and thereby pushes down the nominal value of their exchange rate.
This process would be akin to them subsidising exports, and pushing down the cost of credit for us. They are making things, paying for part of the production cost, then lending us the money to buy them ... this sounds like a much rougher deal for Chinese residents who are being pushed to do this.
"Have explanations all you like, but the $NZ is too high for companies to export - how does a load of manufacturers collapsing or moving overseas fit into the model?"
Manufacturers are struggling because they can't compete - we should ask why this is the case instead of just throwing money at them. If it is because the world is changing, and we have one of the few manufacturing sectors in the world that has not become more productive (as a whole) then forcing NZ households to backstop them seems a bit unfair no?
This is the point - if we don't ask what an exchange rate is, and what the "influences are" we can't make a fair case for policy. And it all ends up sounding like interest groups throwing out press releases based on what they want people to give them!
I'm sorry, but manufacturers are not asking for handouts because they can't compete. I am a manufacturing exporter - 2 years ago I made and sold enough product to employ 40 people. We innovate in new products, market aggressively and have ongoing programmes of effeciencies (as do most manufacturers), BUT have lost almost 20% margin due to 1 thing only - the exchange rate. This is not turnover, it is margin - the stuff we use to re-invest in new product, etc. We compete globally, so have competitors from other countries and our prices have risen against theirs due to only the exchange rate.
I now employ under 30 people. If every manufacturer does the same, there will be a) less jobs and b)less making anything in NZ.
China, USA, most of Europe and now Japan think differently to us, they see further ahead and a need for what we do.
There seems to be two reasons why the currency is over valued at present,
1) Earthquake in Christchurch resulting in large inflows of re-insurance proceeds
2) Tsunami of money printing in every other major currency chasing a return and driving up again an asset bubble
The high currency seems to be a result of these two factors, one a natural disater, the second a man made one.
Both events have the same impact, destroying our manufacturing base, and the tradedy is that whilst nothing could have been done to prevent the earthquake, the damage caused by a printed cash tsunami will turn out to be alot greater and could be avoided but for the inaction by both the Reserve Bank and Bill English,
This isn't entirely the case. Manufacturing exports can (and often have) hedged against short term currency risk - the earthquake effect will be just temporary, and so shouldn't drive firms to the wall. The issue is more "why is the currency persistently so high" ... the real exchange rate issue.
Also with regards to the "money printing" ... it is no different to cutting the official cash rate, they are merely loosening monetary policy in order to reach their inflation target. Central banks don't control the quantity of credit, they control a price and use that to try and keep demand growing on an even keel.
We only have a "currency war" in the negative sense if we believe foriegn central banks are going to overstimulate their economies ... given what has happened in recent years this doesn't seem like the most likely outcome.
Matt,
My perspective of a currency war is a country pretending to stimulate their own economy by printing extra money, in the full knowledge (and even clear support for) some or all of that extra money being turned into foreign currency, and invested overseas. In that event, there is no extra stimulus of domestic consumption- in fact the opposite, as the local currency will be depressed by the money printing. Countries doing this benefit by buying foreign assets, largely for free (and paid for by the target countries), and boosting their own industries. The fiction that they are primarily looking to boost their own inflation should be laughed at. Think Japan, Switzerland, China, Germany
Some countries have a middle ground, where there is a wish to stimulate locally, but not to borrow from foreigners to do so. The US and the UK are arguably in this camp. They could have followed the NZ model, and borrowed trillions from, or sold assets to China, Switzerland etc to fund their fiscal deficits. There probably wasn't anough foreign currency to go around, selling more to the Chinese would have been politically unacceptable, and they would have missed out on the currency competitive gains they have had for their exporters, import substituters. More importantly, they could print, so they did.
We not only have not done any of this, but have made matters worse by funding most of our fiscal deficit by foreign borrowing, lifting the exchange rate, hurting local employment and profits, hurting taxes, lifting the deficit in a vicious circle. This cause of the exchange rate price, I don't believe you have covered.
Matt, you say
"We can’t predict the exchange rate"
And
"Manufacturing exports can (and often have) hedged against short term currency risk"
So a manufacturer, who is an exporter, has to also learn to be a gambler and speculate on what currencies are going to do. Reading your article makes it sound cheap and simple.
Margin compression is difficult, and I can see where you are coming from there. I have no doubt that you put a lot in, and that the drop off in NZD manufacturing prices has been a kick in the proverbials.
But unless we ask why that is happening we aren't getting anywhere. Again, the dollar is a price, the low rate of return you are making on investment is saying something - and we have to figure out what that is to understand what to do! A lift in the NZD because the return to some NZ investors (read farmers) has gone up it an entirely different beast to a lift in the NZD because government spending has lifted, or because people want to invest in houses, or because of overseas subsidies, or because rates of return have collapsed overseas, or because savings rates have shot up overseas ...
Yelling about the exchange rate, and saying we should change it, misses the fundamental point of trying to understand why there is a lack of competitiveness - and what ability policy actual has to "influence this price"! There are a huge number of issues we can point out that have changed rates of return - the six I point to in the article are the tip of the iceberg. But it is only by understanding those we can think about moving forward.
The only things I see China, USA, Europe, and Japan doing different is corporate welfare. If we want to go down that path as a nation that is unfortunate, but I'm not going to agree with it.
Im trying to work my head around what you are driving at here, I do agree that I suspect that the exchange rate is a symptom but I cant prove / articulate it yet. I odnt think its economics 101 either, ie its complex.
In terms of corporate welfare this does seem a surprising issue ie it looks like it is indeed occuring, what I dont fathom is why. Maybe because its a confidence game and keeping the corporates making money means the GDP figures look good, even if the mainstreet voter is on his knees.
regards
China does this by building up reserves, which come from domestic savings in China - savings which are then used by the government to buy US Treasuries and other assets, and thereby pushes down the nominal value of their exchange rate.
What say the so called savings in China are in fact USD receipts from the sale of goods unloaded from one way container traffic into ports such as Los Angeles. And those same USD are made available to US citizens to pay for Chinese products via easy US Fed induced domestic credit creation.
The Chinese authorities relieve the domestic exporters of these USD export sales in return for freshly printed local currency which has fueled overbuilding of cities in addition to creating manufacturing capacity. Subsequently the Chinese USD are employed to purchase US Treasuries or whatever.
Pegging the Yuan is not a matter to be diminished but is not the primary source of USD investments. No?
But all these countries are targeting a level of inflation - and so this implies that it is underlying relative real interest rates that are higher in New Zealand.
We need to ask why this is - again, we come back to the same questions we ran into in the initial post.
but are they really targeting a level of inflation? I'd suggest no they are not...at least they are not following any economic policy thats working that I can see. Austerity while in the zero bound tray certianly is anti-inflationary to the point its causing havoc...
"and so this implies that it is underlying relative real interest rates that are higher in New Zealand." that is causing a higher exchange rate?
regards
So you are saying they are not doing enough to meet their inflation target, so "implied" interest rates overseas are too high? That would mean relative interest rates are lower here, and so if they were trying to meet their inflation target our dollar would be even higher!
""and so this implies that it is underlying relative real interest rates that are higher in New Zealand." that is causing a higher exchange rate?"
Yes indeed! Higher relative real interest rates (or at least the expectation of them) are likely to see the real exchange rate higher. And this is all well and good.
It could well be a symptom of a lack of competitiveness between NZ and the rest of the world - why are relative interest rates higher here? It is another price, suggesting the same series of potential causes we mentioned above.
It is important to note here that the RBNZ doesn't set the interest rate - it chases the underlying interest rate in the economy with its OCR in order to keep inflation near its target and ensure that nominal growth is relatively stable. If real interest rates are high, issues such as a low savings rate (relative to investment) or misallocation in asset markets (say an overinvestment in housing) could well be the cause.
The key thing here is bringing this all back to the fundamental causes of any problem - by pointing at an exchange rate we are only pointing at a symptom, and we are not really giving a fair representation of what could be done to improve outcomes and what the tradeoffs are!
I'd use the F word as I spent 45mins replying only to see this site lose my reply...it does it many times a day!
cant be assed trying to write it again.
:(
Im so p*ssed.....
:(
"So you are saying they are not doing enough to meet their inflation target, so "implied" interest rates overseas are too high?"
Using Keyes zero bound trap theory yes, they should actually be negative which they cannot be, hence QE.
bugger it back to the real world.
"The key thing here is bringing this all back to the fundamental causes of any problem - by pointing at an exchange rate we are only pointing at a symptom, and we are not really giving a fair representation of what could be done to improve outcomes and what the tradeoffs are!"
yes toally agree....
regards
Its especially important in the mornings while they send emails out, loses then seem very high. (and u appear to be online right now like I.)
yeah i should....sometimes though i aim to do a quick reply then it balloons out as I think into it and whammy its a few paras, then I forget to cntrl-c and its lost
:(
regards
Interest rates abroad should be -ve, I think Ive seen -4% mentioned, they cannot do that, so that suggests NZ's OCR should be lower that 2.5%
Lets justify that, a) I think JK said that with the present level of stimulus we should be growing at 6%, clearly we are not after 4 years, suggesting the OCR is too high. b) Inflation is down to 0.8%...suggesting the OCR is too high. c) Unemployment is too high, suggesting the OCR is too high...
I suppose the Qs is why cant we lower it 1%? what are the pluses and minuses?
btw you seem to be taking some flak, but good on you......it opens the debate and shows to me how shallow or blinkered many of your detractors are.
regards
"Higher relative real interest rates (or at least the expectation of them) are likely to see the real exchange rate higher. "
In which case lowering the OCR would "cure" our high exchange rate and help manufacturers....I cant see a lose here myself.
Real interest rates higher imply an expectation of inflation? at least tahst how I see it. This opens one huge can of worms.
For instance the difference between push inflation and pull inflation. Pull inflation is where more money in ppls pockets and lack of capacity causes prices to rise. Push inflation is where the inputs to manufacturing rise so prices have to rise. without wage incrases of course ppl cannot pay, so they dont buy, so profits are squeezed and ppl dont buy so we ahve excess capacity...
"And this is all well and good." no its not it suggests dis-inflation and job losses...that leads to a recession IMHO.....personally I think that's very bad.
regards
Currencies according to theory should reflect the fundemental outlook of their respective economies. Instead the NZD is a speculative risk on/risk off plaything of the financial markets. Ask our PM. Momentum bets for capital gain like any other "market". Who knows what its value based on trade flows alone would be
Are you saying that there is a "bubble" in the NZD? This is not inconceivable in of itself, for the past 3 months - at least my impression is that the RBNZ feels this may be the case. If that is what they truly believe, then that is the single area where I see justification for them looking at intervention.
Bubbles make me nervous though, for every 10 bubbles that people vemenently claim exist, only 1 probably does - so if we acted on all of them we'd end up really hitting NZ taxpayers.
I'm saying the NZD and AUD are playthings for large speculators. The correlation with US sharemarket would be stronger than any other indicator. GFC the NZD got smashed by 50% against the USD and JPY. Did the economic fundementals of New Zealand change by 50%? Of course not. The NZD like any other speculative risk asset got dumped to cover other trading positions all of which were borrowed at massive margin. Even gold got dumped. Flash crash 2010. Did the fundementals change 10% in 30 minutes? Did the "efficient markets" have a sudden epiphany on the New Zealand economy? The currency market like every other market is neither efficient or rational.
Personally I would favour a high FTT of about 5% on every transaction in and out of a bank account and get rid of most of the other taxes and all tax deductions. Simple, collected by the banks daily like RWT and impossible to avoid for corporates with their lawyers and accountants creating paper writedowns. You either make a profit and stay in business or you lose money and fold. Owners can concentrate on their business rather than admin and paper work. The more you earn and spend, the more you pay. The speculators looking for a quick couple of basis points on currencies or a few cents on shares would hate it. "Liquidity" is just an excuse for scalping at the expense of long term investment.
WTF - 95% of business already fail within the first 5 years of starting up. Under your FTT proposal there would hardly be a farmer or NZer in business as most experience bad years where no profit is made. I think it would be a pretty quick way to sell the country out to foreigners.
Don't know about that. Business owners including farmers would just have to set up and run their businesses differently. At least it would be based on real cashflow not paper figures. Nothing worse than having to pay provisional tax in a bad year based on a previous good year. Would become an effective stamp duty and capital gain tax as well on property, shares and business sales that isn't captured at moment, without the enforcement or calculation difficulties. Farmers probably couldn't afford to pay a lot for a property and hold it for 5-10 years for the capital gain with only a small return from their farming activities. But if you are paying no income tax or company tax in a good year I'm sure it will cover a poor year.
I'm definitely in favour of restrictions on foreign ownership to stop them taking advantage of a small country. Hot money would disappear leaving only long term direct investment.
Would reduce property turnover too I imagine as sellers would need at least an 13% capital gain to cover their 5% at purchase, 5% at sale and RE commisions etc
I did not understand why the NZD would drop in concert with the Dow when the two seemed quite unconnected until I got a quick lesson from an investment guru one day. It is all about the hedge funds and their algorithms. The Kiwi is considered a risky or speculative asset and when the light says green for risk on the computers buy the Kiwi. When the light is red for risk off they sell it along with equities and commodities. Not much to do with our current account deficit. All about what the quants have got programmed into their black boxes.
Over 80% of trades on the NYSE are held for a second or two - often only a fraction of a second. The big players have a high speed connection between the exchange and a super computer and get their information a few tenths of a second faster than others and use the computing power and alogorithims to scalp minute percentages but because of the volume they add up to billions of dollars. But when they all flash sell at once or one player falls out of line and prompts the others to sell, the crap really hits the fan and they dump everything including NZD. Again its neither rational or efficient
When you have massive amounts of money being handed out by the Fed and effectivly zero interest Im not so sure there isnt wild speculation and hence actually multible bubbles.
So I think the NZ property market is one huge bubble/ponzi scheme, ditto OZ market.
US Share market has dead cat bounced from 2008, but really what has changed in the performance of the companies? diddly IMHO so a probable bubble.
I wonder about commodites as well.
Lots of ppl in here try and gauge value against gold (I think they are wrong btw), but maybe thats the issue so much is inflated that we have no reference point.
regards
You're right. There is no longer any reference point. Everything is free to be speculated against on margin. There is no relativity of one asset class to another and very little connection because of the huge margin and the massive use of derivatives with the underlying fundementals of either individual companies or nations. Its just one big pump and dump after another hoping your super computer can get you out before everyone else.
WFF involved tax redistribution as you say - it was done for equity reasons, knowing that it would reduce economic efficiency. The cost in terms of economic efficiency (from distorted tax incentives, changes in labour supply etc) are captured in higher real interest rates ... which also shows up in a higher real exchange rate.
ah but why has it reduced economic efficiency? sorry but it looks like we are going down the voodoo economics path here. For instance take a look at the historic levels of re-distribution, and I'd suggest that such levels are quite low today in comparison. We can also say that keeping WFF recipiants in $s actually sees the money spent in the economy and not "hoarded by the rich" so we have not suffered so bad a downturn. So Im struggling to understand what you are driving at here. I will also add that I suspect the top 1% actually damage the world's economy and the incomes of much of the rest of us...ie parasitic.
NB. Are interests rates artificially high because of policy? ie if the NZRB dropped to 0.25% (or say 1%) what would happen?
regards
What is "voodoo" about pointing out that redistribution distorts labour market participation incentives? Taxation means that the incentive to work is reduced, and benefits mean that the cost of not working is reduced.
What is the source of your statement that redistribution levels today are low in historical terms?
What do you mean by money being "hoarded by the rich" and hence not benefiting the economy?
Not one of Matt Nolan's 6 answers to why the NZ$ is higher than it should be address the real fact that the Auckland property market is high.
I would ask if the thousands of properties now valued at a cumulative multi billion dollars were bought with NZ dollars.
The answer is clearly NO. Those overseas buyers (some real immigrants but most with no intention of long term residence other than as a bolt hole) exchanged their various currencies for local dollars and I would contend that has created a significant pressure upwards on our currency. Just watch the reverse effect when some outside influence induces those same buyers to quit NZ en masse.
The answer is?
That's why NZ is a perfect pump and dump economy. Small, relatively illiquid and completely open to hot money to arrive and leave at will. Foreign property speculators get a capital gain at the moment from the house and the currency and they will drive each other up until momentum suddenly reverses. A ban on non resident foreigners owning property would pop both the currency and house prices in Auckland
BB3 and WTF
Keep it up guys - one day, only when it gets too bad, too blatant, will they do something about it
For those disbelievers, here is a prime example that its happening
Headline in NBR today - happening right here in NZ - dont usually hear about them, do you
Analyst sacked for refusing 'criminal' foreign exchange trade
Think the implications of that one through
It is disappointing when somone holds themselves out as an authority, simply waffles around, salutes the flag, offers a few motherhood statements, then assuming the lemmings are fed, the 600 word article is finished .. the day is done ..
This conjures up a picture of a guy who breaks his leg, compound fractures and all, gets toe to hip plaster on his broken leg and off he goes, he goes, and over the next few months while walking develops a limp to accomodate the weight and height differential of the two legs, one with plaster and one without.
12 months later he still has the limp. Limping badly.
Goes back to the hospital and complains something must be seriously wrong .. maybe requiring surgery, break and reset the leg, metal pins etc ..
The attending intern takes a look and says, maybe it might help if we remove the plaster.
as far as the high dollar is painful, its not easy to correct, without some unintedned consequences
Good exporters will still do well.
I'd like to see more domestic economy action. Answer is simple - much more govt financed housing. Raise income taxes, and reduce WFF, to fund, please
Sorry but the answer given is not simple but simplistic.
The excuses given by both Government and RB about exchange rate are just that. Exchange rate can and will relieve many of the pressures we experience and our version of QE has to be a goer. China is in the position it is today because of a policy of competitive exchange rate even more so than its developments internally.
The actions that can be taken are alll within the scope of Government policy moves and not the RB. Immigration pressure come to mind. We do not need as many houses for example if we cut immigration to the bone.
Employment will be vastly improved if we can find more to export or get better prices (read same prices at more attractive exchange rate). More tax take and less unemployment benefit.
There are more I could go on to.
Just get on with it. Not with National I am certain so we are left in limbo.
further to my previous comment...the $15-$20 pw lost from WFF payments for low-middle income earners and for higher earners with my proposed tax increases for them to fund mass house building would be compensated by the fact that rents would not rise as much, AND the OCR could be lowered because the housing boom would be quietened by the big supply response
There you go guys, a pretty simple solution
Matt,
The Reserve Bank of Australia has apparently landed on the main reason for their A$ overvaluation being intervention in their currency, by other central banks.
http://www.afr.com/p/national/dollar_could_be_to_pc_overvalued_KpltBnOJ…
They believe the A$ is 4-15% overvalued.
While buying of A$ government bonds by other central banks may be a reasonable holding of foreign reserves, one assumes a clear reason is to hold down their own currencies.
Why not invest it in their own countries, or not actually print the money in the first place?
No currency war? I don't think so.
Pretty clearly the same countries are very likely to be invested in NZ$.
Instead of Big Mac prices, then, or money in/money out trade and investment flows, investors and market speculators should analyse promises, observe QE purchases as a percentage of gross domestic product or outstanding debt, and sell the most serial offender or obsessive-compulsive printer.
The yen is a first choice, the pound a close second based on incoming Bank of England governor Mark Carney’s inaugural addresses, with the euro holding up the rear. European Central Bank President Mario Draghi may promise to support the euro, but to date that hasn’t meant printing many of them.
Once an investor has picked winners and losers based upon the increasing size of a central bank’s balance sheet, however, he or she should understand that all of these QE bullets are reflationary attempts that may produce a semblance of real growth, but rather more inflation in future years.
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