Money and Monetary Policy
Interest Rates
Exchange Rates
Anthony Byett
Economist
fxmatters.co.nz
November 2006
Money and Banking
 Definition of money
 NZ banking system
 Money in NZ
Review
Introducing a stock into the flow model
 Money is a stock concept
– measured at a point in time
 Income is a flow concept
Refer Callander
2nd Ed p360
– per annum concept
Households
Goods & services
produced from
capital & labour
Firms
Forms of Money
 Utu, favour exchange
 Gold, greenstone, cigarettes
 Notes & coins
Refer:
* The Economist
22-Dec-01 pp85-87
 Transaction accounts
– access by cheque, EFT-POS, telephone
 Savings accounts
– NB some accessible by ATM, telephone
 Debit cards (as opposed to credit cards)
Functions of Money
Why hold money?
 Medium of exchange. In order to function it must
have the following properties:
- acceptable
- portable
- durable
- scarce
- divisible
 Store of value
 Unit of account
 Means of deferred payment
Refer Callander
2nd Ed p533
Money in NZ
How much?
 Recent figures put money = $171 billion
– I.e. Jun-06 “M3 money supply” reported by RB
– including $2.8 billion notes & coins
– remainder were bank deposits
 Had been $93b in Mar-99
– breakdown of this figure to come in following slides
Banking in NZ
Institutions
 Government
> collects taxes & borrows money
> buys goods & services, pays benefits
 Reserve Bank
> banker to Government & banks
> supervises registered banks
> implements monetary policy
> issues currency

DMO
> Government’s Treasury

Registered banks
> accept deposits/makes loans
> manage pooled investments
> process transactions

Other financial institutions
M3 Financial Institutions
Owners, assets ($b) and S&P credit ratings
1 ANZ National
ANZ, Aus
2 WestpacTrust*
Westpac, Aus
3 BNZ
NAB, Aus
4 ASB Bank
CBA, Aus
5 Hong Kong*
HK Shanghai
6 Deutsche Bank* DB, Germany
TSB
NZ trust
Others (3 banks/sub & 2 non-bank)
TOTAL (at Dec-05) 251
87
48
46
42
6
6
3
13
AAAAAAAAAAAABBB-
* Branches
Note: Kiwibank ($2.5b) is a bank but not within M3 survey (yet)
Source: www.rbnz.govt.nz and www.kpmg.co.nz
Balance Sheets of Banks
Assets
Liabilities
+ Loans
- Deposits
+ Reserves
- Capital
(or liquids)
NB: deposit is
– customer’s asset, and
– bank's liability (as owed customer)
Refer Callander
2nd Ed p535
NZ “M3” Balance Sheet
ASSETS (Mar-99 total=$143b)
$b
NZD claims (lending)
122
Non-NZD claims
5
NZ Government securities
7
Claims on RBNZ/notes & coins
1
Other assets
9
LIABILITIES
NZD funding (deposits)
100
Non-NZD funding
28
Capital
8
Other liabilities
7
Source: www.rbnz.govt.nz or RBNZ Financial Statistics
Definitions of money supply
LIABILITIES ($billion at Mar-99)
NZD funding (deposits)
100
Transaction accounts (net*)
12
Other call accounts (net)
27
Other deposits (net)
52
* the netting involves the deduction of inter-institutional deposits
and government deposits
Source: www.rbnz.govt.nz or RBNZ Financial Statistics
Monetary Aggregates
M1
M2
M3
 Move from narrow to broad definition of money
– as per The Economist, Financial Indicators
Definitions of Money Supply
LIABILITIES ($billion at Mar-99)
NZD funding (deposits)
100
$2 billion
notes & coins
held by public
Transaction accounts (net)
+12
14
= M1
Other call accounts (net)
+27
41
= M2
Other deposits (net)
+52
93
= M3
Source: www.rbnz.govt.nz or RBNZ Financial Statistics
Money Supply
Note that …….
 Unexercised overdrafts
– not part of money supply
 Debit cards and cheques
– not themselves money
 Credit cards
– accumulate debt to be settled with M1 money
Financial Assets and Liquidity
Money just one asset
Liquidity
the ease with which an asset can be converted
into an M1 asset (i.e. money ) without loss of
capital value
 Spectrum of liquidity (See Callander, p536)
Cash
Physical/human assets
NB liquidity may incur opportunity costs
Money Creation
 The creation process
– bank asset & liability growth
 Limits on natural growth
– Daily settlement
– Government does not
create money
– Government flows offset
 Money and inflation
 Money and growth
Where Does Money Come From?
 Primitive Bankers
– acted as custodians
– issued receipts for gold deposits
Refer Callander
2nd Ed p535
– receipts used for transaction purposes
 Banking Evolved
– bankers made loans (for interest) by issuing more receipts
– assumed not all holders of deposits would want gold at the
same time
 reserves only needed to be a fraction of their deposits
(liabilities)
Initial Goldsmith’s Balance Sheet
Assets
$
Liabilities
$
Gold Reserves
100
Deposits
100
See Callander, Fig A.2, p538, Balance Sheet A
Goldsmith’s Balance Sheet
after Lending
Assets
$
Liabilities
$
Gold Reserves
100
Deposits
500
Loans
400
Reserves = 20% of deposits
Compare Callander, Fig A.2, p538, Balance Sheet B
Fractional Reserve Banking
 A banker holds only a fraction of the outstanding
deposits in reserve funds
 In New Zealand
– up to mid 1980’s a system of compulsory reserve ratios
operated (Reserve Ratio)
– ‘Prudential reserve ratios’ are used today
Banking pre-80s
Assets
$
Liabilities
Loans
Deposits
Reserves of Govt. Securities
Capital
 Regulated Reserve Ratios
– only replaced in the mid-1980s
$
Banking Today
Assets
$
Liabilities
Loans
Deposits
Liquids
Capital
 Self-imposed liquidity management
– includes government, bank & corporate securities
 Minimum capital ratios by regulation
$
Money Creation
more deposits >>> more lending
Assets
$
Liabilities
Loans
Deposits
Liquids
Capital
 Often associated with government spending
– Gov’t spends money that it does not have
 Banks will on-lend (or repay other funding)
$
Money Creation
more lending >>> more deposits
Assets
$
Liabilities
Loans
Deposits
Liquids
Capital
$
 More likely the cause today
– A bank lends money during day (which it may not have)
– Loan money is deposited in bank
– Loan becomes “self-funding”
Managing Money Growth in NZ
 Government issues debt to fund any revenue shortfall
(I.e. does not create money)
– Long-term: Government Stock issued monthly (approx.)
– Short-term: Treasury Bills issued weekly
 RBNZ also smoothes daily government flows
– through daily and now intra-day settlement
– through open market operations
The Settlement Process
 Settlement banks bank with the RBNZ
– non-settlement banks bank with settlement banks
 At end of day*, the net daily inter-bank flows are
known (* next morning actually)
– money owed to other banks paid with RBNZ balances
– i.e. settlement cash
– if bank has no “cash”
– tries to borrow from other bank
Refer Callander
2nd Ed p473
– can borrow from RBNZ @ 0.25% over cash target
– or +0.30% if rolling intra-day bank bill repo
Smoothing Settlement Cash
 RBNZ conduct daily “open market operations”
(OMO) to smooth flows
– largely to offset government flows
 Too much cash forecast
 RBNZ sells T-Bills for cash
 Not enough cash forecast
 RBNZ lends cash
– banks borrow cash using Bills and Bonds as security
– actually sell bills/bonds and forward purchase (repo)
Does Money Matter?
 Remember week 6 and GDP…
 The quantity equation
MV = PY
M= stock of money ($)
Refer:
* Sherwin, “Inflation”,
Economic Alert, Apr-99
P= price level ($)
V= velocity of circulation (times per year)
Y= volume of production (number of “things”)
 if velocity steady, money growth will match nominal
production growth
more money > more output and/or more inflation
The Output Gap
Linking money to AD/AS model
 More “money” leads
to greater aggregate
demand
 We cannot satisfy all
this demand with
new
products/services
Price
Level AD
AD1
AS
Inflation
 Feeds through to
higher prices
Real Output
Refer Callander
2nd Ed p420, Fig 20.6
Money and Inflation
Money and House Prices
HOUSE PRICES & HOUSEHOLD DEBT
30%
%
18
C ha nge M 3 le nding t o ho us e ho lds
( right )
20%
15
C ha nge N Z
ho us e pric e
( le f t )
10%
12
0%
9
Source:
QVNZ, RBNZ, ASB
-10%
M ar-94
6
M ar-97
M ar-00
M ar-03
M ar-06
Summary
 Money typically is bank deposits
 Can be created from thin air
 Growth constrained by capital requirements
– and source of funding
– And by government financing with debt
 Also volatility reduced by RBNZ cashflow smoothing
 Some loose connection between money and
inflation/growth exists
Monetary Policy
Monetary Policy Process
NZ monetary policy a three step process:
1. An inflation target is set by the Reserve Bank
Governor (Bollard) & Treasurer (Cullen)
2. An inflation forecast is formed by the RBNZ
3. The RBNZ adjusts short-term interest rates to
bring the forecast into line with the target
» via cash rate target
Inflation
 In theory, inflation a momentum
– the ongoing rise of prices, wages, money supply
 In practice, inflation is the change in CPI
– goods & services that households consume
– weighted according to proportion of spending
 Inflation high late 70s, low now
– vicious cycle: higher wages, prices & devaluations
– tried to contain with wage/price freeze early 80s
– eventually moved to independent Reserve Bank
– also tight gov’t control, competitive economy, floating exchange
rate
Inflation
RBNZ Act 1989 Part II
“The primary function of the Bank is to formulate and
implement monetary policy directed to the economic
objective of achieving and maintaining stability in the
general level of prices”
 Inflation target set for term of Governor’s office
 RBNZ actions to be consistent with policy target
 RBNZ to consult & advise Gov’t (and others)
 Governor-General can set another objective for 12
month periods
 Policy statements every 6 months
The Inflation Target
 Contract between RBNZ Governor and Treasurer
– Governor appointed to September 2007
 Stability agreed to as CPI inflation between 1-3% p.a. on
average over the medium term
 Exceptions allowed (if >0.25 was rule of thumb):
– terms of trade shock
– changes to indirect taxes
– natural disaster shock
– changes to government levies
(see Policy Targets Agreement, September 2002)
Consumer Price Index
As at June 2006
 Annual rate 4.0%
– Large contributions
from housing &
petrol
%
NZ CPI INFLATION
6
%
6
No ntradables
4
4
2
2
0
0
 But inflation?
– To what extent will
rises be ongoing?
 Tradable vs Nontradable Inflation
Tradables
-2
M ar-92
-2
M ar-95
M ar-98
M ar-01
M ar-04
The inflation forecast
 RBNZ forecasts inflation
 look at annual CPI forecast out 24 months
 in RBNZ model, inflation determined by:
– exchange rate movements
– international price of exports & imports
– unit labour costs
– output gap
– inflation expectations
 influential factors are TWI & unit labour costs
Implementation of Policy
 If forecast inflation does not match the target
– then some policy response is required
 Policy signalled via interest and exchange rate
forecasts
 Policy acts through short-term interest rates
 Policy is implemented through the official cash
rate target
– from 17 March 1999
RBNZ Transmission Path Diagram
Fig 27.3, p490
Current Monetary Policy
RBNZ Jun-06 Projections
 Forecast annual CPI of 3.9% p.a. (falling to 2.4%)
 Cash rate unchanged on the day (7¼%)
 Assumes growth slowing
– GDP Mar 04/05 +3.5% to 06/07 +1.1%
“Growth to remain low … headline CPI inflation above
3% well into 2007 … do not expect to tighten … no
scope for easing of the OCR this year”
Source: www.rbnz.govt.nz
No imminent change expected
ANTICIPATED 90-DAY BANK BILL
%
(as priced by futures)
7.6
7.4
7.2
7.0
6.8
A s a t 2 1- A ug
6.6
Source: ASB
6.4
To day
Dec-06
Jun-07
Dec-07
Monetary Theory and Practice
General
 Theory links money growth with inflation
 Correlation between money and nominal output
exists in long-run (Quantity equation again)
– in short-run, relationship is not evident
 Chronic and acute inflation has been associated
with money-financed government budget deficits
Monetary Theory and Practice
NZ experience
 NZ Government debt-finances
 Money growth plays small role
 Early 90s fall in inflation coincided with international
recession and fiscal tightening
 There exist long and uncertain lags between changes
to monetary conditions and inflation
 Large changes in interest rates are needed to change
exchange rates & inflation rates
– Low elasticity with respect to interest rates.
Interest Rates
 Many interest rates
– primary & secondary markets
– wholesale & retail (say <$1m)
 Short-term yields (or rates)
 set in money market
 where cash, bills and notes are traded
 Long-term yields (or rates)
 set in bond market
 where bonds, gov’t stock & notes are traded
90 Day Bank Bill
%
NZ 90-DAY BANK BILL
(at year end)
20
16
12
8
4
Source: ASB Bank
0
74
78
82
86
90
94
98
02
Retail Floating Rates
%
RETAIL FLOATING RATES
12
%
12
Source: ASB
10
10
H o us ing
8
8
6
6
T o p D e po s it
( 0 - 12 m o nt hs )
4
Jan-93
4
Jan-96
Jan-99
Jan-02
Jan-05
Retail Floating Rates
and Wholesale Rates
%
%
FLOATING RATES
12
12
Source: ASB
10
10
A S B H o us ing
8
6
8
9 0 - da y bill
4
Jan-93
6
TD
( 0 - 12 m t hs )
Jan-96
Jan-99
Jan-02
4
Jan-05
A 90-day bank bill
what is it?
 A “bank bill” in NZ now is typically a certificate
stating the bank will pay a fixed sum (the face value)
to the holder at a set date
– in essence, a tradeable bank deposit
– called a Negotiable Certificate of Deposit (NCD)
 More traditionally (and still traded today) a “bank bill”
was a Bank Accepted Bill (BAB)
– two parties set up a loan which a bank then endorses
– bank guarantees payment in case of default
A 90-day Bank Bill
some characteristics
 Returning to Negotiable Certificate of Deposit
– typically issued by banks for 30-180 days
– e.g. bank will pay holder $0.5m in 90-days
– holder can sell to another party if they wish
– banks initially receive market value
 Market value of bill determined by bill rate
– NB the rate is a discount rate
– Value = 500,000/(1+rate*90/365)
– e.g. rate=6.0% implies value =$492,710
Major Money Market Instruments
Name
Issuer
Treasury Bills
Government
Promissory Notes
Corporates
Bank Bills
Banks
Derivatives linked to Bank Bills:
– Futures, Forward Rate Agreements (FRAs)
– Options
– Interest rate swaps
Fixed Lending Rates
%
%
3 YEAR RATES
12
12
Source: ASB
11
11
A S B H o us ing
10
10
9
9
8
8
7
7
6
6
5
5
Jan-93
Jan-96
Jan-99
Jan-02
Jan-05
Major Market Instruments
 Securities promising the holder a defined cashflow
– Bill (short term)
– e.g. pay $100,000 to holder on 10-Aug-2005
– no coupon or interest rate
– Bond (long term)
– includes coupon rate as well
– e.g. pay $100,000 to holder on 15-5-2010 plus $3,000 on the
15th of each May & Oct
– can get zero coupon bonds
Major Bond Market Instruments
Name
Issuer
Government Stock
Government
Medium Term Note
Corporates/Banks
Bond
Corporates/Banks
Derivatives linked to Government Stock:
– futures (3yr only)
– options
Wholesale Yield Curve
10
9
8
31/12/97
31/12/99
7
6
5
<< Days >< Years >>
4
0
30
60
90 120 150 180 270
1
2
3
4
5
The Yield Curve
Differing theories
 Segmented markets
– different people operate in different markets
– rates loosely connected
 Expectations
– longer-term rates as series of expected short-term rates
 Liquidity or risk premium
– premium required to induce people to hold longer-term
investment
 Element of all in NZ, strong expectation influence
Interest Rates
Influences
 Inflation (
real rate)
 Monetary policy
 Offshore interest rates
 Exchange rate expectations
 Extent of borrowing
 Next:
– some graphical evidence
– some theory
Refer National
Bank, Sep 1996
NZ Inflation
%
%
NZ CPI INFLATION
20
20
15
15
10
10
5
5
Source: Stats NZ, ASB Bank
0
0
74
78
82
86
90
94
98
02
NZ Inflation & Interest Rates
NZ INFLATION & 90-DAY BANK BILL
%
20
%
20
Y e a r E nd
9 0 - da y
16
16
12
12
8
8
Y e a r E nd
CP I
4
4
Source: ASB Bank
0
74
78
82
0
86
90
94
98
02
OCR and Other Rates
%
NZ SHORT-TERM RATES
(July 1999 to August 2006)
10
9
10
A S B V a ria ble H o m e Lo a n
9
8
8
7
7
6
9 0 - da y ba nk bill
6
5
5
4
4
Jul-99
Jul-01
Jul-03
Jun-05
Offshore & Local Interest Rates
%
90-DAY BANK BILL YIELDS
%
(actual and futures pricing)
12
12
10
10
NZ
8
8
6
6
4
AUS
4
2
2
0
0
Jan-93
Jan-96
Jan-99
Jan-02
Jan-05
Jan-08
Long-term Interest Rates
%
10YR GOVERNMENT YIELDS
11
10
%
11
A US
10
9
9
8
8
NZ
7
7
6
6
5
5
4
4
3
3
Jan-93
Jan-96
Jan-99
Jan-02
Jan-05
Interest rates
Theories
 Interest rates as a price reflecting decisions about
flows
savings = investment
 Interest rates as a price reflecting decisions about
stocks (I.e. a portfolio decision)
demand for bonds = supply of bonds
 These decision processes may be independent!
Interest rates
Savings & investment
 People require a positive return to save
– i.e. give up current consumption for future consumption
– savings are expected to rise should rates rise
 People willing to pay now to invest
– i.e. pay funding cost now in expectation of future return
– the higher the return, the higher the interest rate
– clouded by ‘return-insensitive investment’
– e.g. government investment
 Interest rate a balance of productivity & time preference
The equilibrium interest rate
Bringing together savings and investment
Interest
rate
Savings
Refer “How low
can they go?”
The Economist,
2-Dec-95
Investment
Amount of savings/investment
The equilibrium interest rate
A model of the current account deficit
Interest
rate
Savings
Rate set low
Investment
BOP deficit
Amount of savings/investment
Interest Rates
Demand & supply of bonds
 Motives for holding bonds
– spare cash not needed for transaction purposes
– as a store of wealth in general
 Bond supply
– Corporates issues to get cash for investment
– either into physical assets or financial assets
 Interest rate a balance of demand and supply for
bonds
Bond Supply Curve
Rate of
interest
SUPPLY (borrowers)
Bond Stock
Bond Demand Curve
DEMAND (lenders)
Rate of
interest
Bond Stock
The Equilibrium Interest Rate
Bringing together bond supply and money demand
Rate of
interest
DEMAND
r
SUPPLY
Bond Stock
The Equilibrium Interest Rate
Balancing portfolio decisions
 Bonds are just one financial asset
 Interest rates are also set in other markets
– e.g. money market
 In general, returns are established in many financial
markets
– e.g. share markets
 “interest rates” are the result of portfolio decisions
Summary
 Interest rates result from the interaction of many
decisions
– both about production/saving
– and about asset allocation
 In the short-run, RBNZ policy is the major
determinant of short-term rates
– longer-term, savings and investment issues will be more
influential
 Long-term rates are strongly influenced by offshore
rates
Banking References
 “The banking system in NZ”, Chris Moore, Economic Alert, May
1996
 “NZ banks ...”, David Tripe, Massey University, quarterly
 Chapter 9 in “Structure & dynamics of NZ industries”, Pickford &
Bollard, Dunmore Press, 1988
 Chapter in Overview of NZ Economy, NZDMO, see
www.treasury.govt.nz/nzefo
 “Liberalisation of the financial markets in NZ”, Arthur Grimes,
RBNZ Bulletin, December 1998
 “Developments in the banking industry”, RBNZ Bulletin, Each June
quarter
 “Consolidated table of KIS”, RBNZ Bulletin, June 1997
Banking Web Sites
 http:// www.rbnz.govt.nz/
 http:// www.asbbank.co.nz/
 http:// www.anz.co.nz/
 http:// www.bnz.co.nz/
 http:// www.westpac.co.nz/
 http:// www.nationalbank.co.nz/
 http://centre-banking-studies.massey.ac.nz/
 http://www.kpmg.co.nz/
 http://www.bis.org/
Monetary Policy References
 Various RBNZ publications
– see www.rbnz.govt.nz
 Critics of monetary policy
– “Prosperity denied”, Bob Jones, Canterbury University Press,
1996
– Chapter 7 in “The NZ experiment”, Jane Kelsey, Auckland
University Press, 1995
Interest Rate References
general
 “Interest rates and money markets
in Australia”, Tom Valentine, Financial
Training & Analysis Services, 1991
 “The Reuters guide to official
interest rates”, Ferris & Jones,
Probus Publishing, 1995
 “NZ’s money revolution”, Edna
Carew, Allen & Unwin, 1987
 Reserve Bank Bulletins incl. “An
overview of the money and bond
markets in NZ”, Sep & Dec 1995.
Some
more websites
bloomberg.com
yahoo.com
dismal.com
worldeconomist.com
thepaperboy.com
yardeni.com
imf.org
stats.govt.nz
treasury.govt.nz
Exchange rates
Currency newsletter
For those with an interest in
currency markets …
 What would you like to read in a
weekly currency newsletter?
Email:
anthony.byett@fxmatters.co.nz
See www.fxmatters.co.nz
Exchange rate determinants
Some generalisations
in the short-run, high
interest rates will lead
to a strong currency
in the medium term,
large current account
deficits will lead to
depreciations
in time, low inflation
rates will lead to an
appreciating currency
Exchange rate volatility
rates are more volatile
than fundamentals
fundamentals matter in
the long run
– but not in short run
herding as a response
to uncertainty
– Refer A Kirman, Bank
of England Bulletin,
Aug 95
Exchange rates
and interest rates
INTEREST RATE DIFFERENCE
& NZ DOLLAR
%
5
US D
0 .7 5
4
0 .6 5
U SD
p er N Z D
( r ig ht )
3
2
0 .5 5
1
N Z - U S 9 0 d ay ( lef t )
0 .4 5
0
Source: ASB Bank
-1
0 .3 5
93
95
96
98
00
02
Exchange rates
and inflation
US/NZ INFLATION & NZ DOLLAR
%
US D
110
1.4
US P ric e s pe r N Z P ric e s
( lhs )
90
1.2
1.0
70
Y e a r E nd N Z D
( rhs )
0 .8
50
30
0 .6
Source: ASB Bank
74
78
82
0 .4
86
90
94
98
02
Exchange rates
and the current account
%
CURRENT ACCOUNT & NZ DOLLAR
R ate
Current Account as a %of GDP, NZD/USD at year end
0
1.4
-4
1.2
B OP
( lhs )
-8
NZD
( rhs )
- 12
- 16
0 .9
0 .7
Source: ASB Bank
74
78
82
0 .4
86
90
94
98
02
NZ dollar
NZD/AUD & interest rate differential
c e nt s
NZD/AUD & 90-DAY RATES
%
95
3
90
2
85
1
80
0
N Z 9 0 - d ay
less
A U S 9 0 - d ay
75
-1
70
-2
NZD/ AUD
Source: ASB Bank
65
-3
91
93
95
97
99
01
03
NZ dollar
Large influence of AUD
US D
US D
NZD & AUD
0 .8 5
0 .7 5
US D pe r N Z D
0 .7 5
0 .6 5
US D pe r A UD
0 .6 5
0 .5 5
0 .5 5
0 .4 5
Source: ASB Bank
0 .4 5
93
95
96
0 .3 5
98
00
02
Other currencies
versus the US dollar
EXCHANGE RATE INDICES
(versus USD, relative to average 1993-2003 = 100)
14 0
NZD
12 0
JPY
AUD
10 0
80
60
EU R
Source: ASB Bank
93
95
97
99
01
03
US dollar
US DOLLAR & US BOP
Inde x
%G D P
15 0
B OP ( r ig ht )
14 0
0
13 0
12 0
-2
110
10 0
U SD
Ind ex
( lef t )
90
-4
Source: ASB Bank
80
-6
70
74
78
82
86
90
94
98
02
Australian dollar
Following commodity prices
USD
AUD/USD & COMMODITY PRICES, 1983 to 2002
INDEX
0.95
0.9
115
CBA Commodity Price Index, rhs
110
0.85
0.8
105
AUD/USD, lhs
0.75
100
0.7
95
0.65
90
0.6
0.55
0.5
85
80
0.45
75
Dec-83 Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Nov-01
Australian dollar
Or is it?
USD Index
1997=100
130
AUD & CBA AUSTRALIAN
COMMODITY PRICE INDEX
120
C B A A US
Inde x in US D
( lhs )
110
100
USD
0.99
Index NZD AND COMMONWEALTH BANK
1997=100
NZ COMMODITY PRICE INDEX
120
0.92
115
0.85
110
0.77
0.71
Index in USD
com pared w ith end
of w eek NZD/USD
exchange rate
NZD/USD
(right)
105
0.67
0.63
0.59
100
90
USD
0.55
0.70
95
80
0.62
USD Index
(left)
0.51
90
0.47
0.55
85
0.43
0.48
80
A UD / US D ( rhs )
70
So urces: CB A , Datastream
So urces: CB A , Datastream
60
94
95
96
97
98
99
00
01
02
03 04
0.39
94 95
96 97 98 99
00 01 02
03 04
Currency
Supply and demand
USD
Per
NZD
Refer Callander
2nd Ed p340
Supply
Demand
Amount of currency
Summary
 Exchange rates result from the interaction of
many decisions
– both about trading goods and services
– and about investing in assets
 In the short-run, interest rates are often the
key determinant
– longer-term, any trade imbalance will impact
 In NZ, the AUD is a large influence