Tale of Three Dollars

January 16, 2014

The Canadian, New Zealand, and Australian dollars are hybrid currencies.  These monies are used in well developed, industrialized economies, but they  are nevertheless strongly influenced by factors affecting the currencies of emerging markets.  Each economy has a strong commodity sector.  Economic conditions in each vary with the ups and downs of a strong regional power, China in the case of Australia and New Zealand and the United States in the Canadian instance.  The current account deficit in each of these countries is significantly large, making their currencies vulnerable when global interest rates are rising. 

In all three cases, central bank officials have shown impatience with the effects of excessive exchange rate strength.  A statement released by the Reserve Bank of New Zealand after a policy meeting last month observed, “the high exchange rate is a particular headwind for the tradeables sector, and the Bank does not believe it is sustainable in the long run.”  Officials at the Reserve Bank of Australia also met in December and remarked afterward that “the Australian dollar, while below its level earlier in the year, is still uncomfortably high.   A lower exchange rate is likely to be needed to achieve balanced growth in the economy.”  Bank of Canada officials meet next week.  Back in 2010 after three straight rate increases by them administered in June, July and September, policy tightening was paused in part because the C-dollar’s appreciation was depressing growth and inflation. 

Since the end of last year, the Canadian currency, also known as the loonie, and the Australian dollar, also called the Oz or Aussie dollar, have fallen against the greenback by 3.0% and 1.1%, whereas the New Zealand dollar has risen 1.8%.  The kiwi’s separate direction was triggered by the Reserve Bank’s December statement, which while protesting exchange rate strength, introduced a shift to a tightening bias that made a rate hike their appear not far away in contrast to the dim likelihood of such happening anywhere near as soon in Canada or Australia.

In comparisons with average levels during the four years to 2013, the kiwi is already stronger than the loonie or Oz.  New Zealand’s currency is presently trading 8.3% above the USD0.7702 mid-point of its high-low trading range in 2010-2013 and is 6.1% above its mean of USD 0.7859.  The loonie is 7.3% weaker than its range mid-point and 6.7% softer than its four-year mean.  The Aussie dollar is 8.0% below its range mid-point and 11.0% weaker than its mean of USD 0.9574.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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