- Macroeconomic assumptions
- The New Zealand dollar
- Exchange rate scenarios
- Figure 1: NZD/USD historical and future exchange rate assumptions
- Figure 2: NZD/UKP historical and future exchange rate assumptions
- Figure 3: NZD/AUD historical and future exchange rate assumptions
- Figure 4: NZD/yen historical and future exchange rate assumptions
- Figure 5: NZD/Euro historical and future exchange rate assumptions
Background and Assumptions
Macroeconomic assumptions
Because it is not possible to forecast exchange rates, the nominal exchange rates used in the outlook projections are essentially working assumptions. The macroeconomic assumptions used in the baseline projections have been provided by The Treasury, and are current as at 2 April 2004. The key assumptions are detailed in Annex 1.
The New Zealand dollar
Since the release of MAF's previous set of projections in SONZAF 2003 last December, the exchange rate outlook for the NZD has changed considerably. The projections used in SONZAF 2003 had assumed that the NZD/USD exchange rate would peak in the September quarter of 2003 at 0.580, hold at this level until the December quarter of 2004, and then gradually depreciate back to the equilibrium or `fair value' level. However, contrary to expectations the NZD did not peak in the September quarter, but continued to appreciate against the USD until February 2004, when it reached a daily high of over 0.700. In quarterly terms, the rise of the NZD peaked in the March quarter of 2004 at 0.675.
The NZD has since weakened from these levels and is assumed by The Treasury to gradually depreciate back towards equilibrium from late calendar year 2004. There are a number of factors that should support this assumed profile:
- Global growth is expected to continue to strengthen over 2004 as the US economy in particular rebounds strongly. In contrast, growth in the New Zealand economy is expected to slow over the coming year having outperformed many other nations over recent years.
- As a result of the differing outlooks for economic growth between the US and New Zealand, the profiles for interest rates between New Zealand and the world are also expected to differ substantially. Interest rates in the US are expected to start rising, reflecting the strengthening growth outlook and hence the risk of inflation, while interest rates in New Zealand are expected to remain around current levels.
- New Zealand's current account deficit is expected to head towards 6 percent of GDP over the coming years, reflecting the lagged impacts of the high exchange rate.
Despite having depreciated from its recent high levels, the NZD has continued to stay above the rates assumed in SONZAF 2003, and this is expected to continue over the remainder of the outlook period to 2007.
Exchange rate scenarios
Given that exchange rates will likely differ over time from those we have assumed in our baseline projections, in this Update we also present two alternative exchange rate scenarios - a high and a low scenario. These scenarios are used to project alternative prices and export values for the major agricultural and forestry industries, and gross agricultural revenue and expenditure for agriculture. For the scenarios all other variables are unchanged from their values in the baseline projections.
The exchange rates used for the two alternative scenarios have been derived from the quarterly exchange rate assumptions of The Treasury and seven other organisations: ANZ Banking Group, ASB Bank, Bank of New Zealand, Deutsche Bank, National Bank of New Zealand, Westpac, and the New Zealand Institute of Economic Research. We are grateful for their assistance.
Each of these organisations supplied quarterly exchange rate assumptions out to September 2007 for the value of NZD against five major currencies: the USD, the UKP, the AUD, the yen and the Euro. These assumptions were current as at 19 April 2004. To derive the two alternative scenarios for each of the five main currencies, the eight sets of quarterly exchange rate assumptions for each currency were ranked. The high scenario exchange rates were calculated from the average of the top four rates for any one quarter, while the low scenario exchange rates were defined as the average of the bottom four rates for any one quarter.
On 15 April the USD strengthened, and the NZD weakened against all currencies. Since then, exchange rate movements indicate a possible return to fair value much sooner than anticipated by economists from all eight organisations.
Figures 1 to 5 show the exchange rates used for the high and low scenarios for each currency, along with the baseline exchange rate assumptions, supplied by The Treasury. The rates used as the high and low scenarios for each currency are detailed in Appendix 1.
Figure 1: NZD/USD historical and future exchange rate assumptions
Figure 2: NZD/UKP historical and future exchange rate assumptions
Figure 3: NZD/AUD historical and future exchange rate assumptions
Figure 4: NZD/yen historical and future exchange rate assumptions
Figure 5: NZD/Euro historical and future exchange rate assumptions
Contact for Enquiries
Monitoring and Evaluation
PO Box 2526
Wellington
New Zealand
