21 December 1998

Revisions to the Reserve Bank of New Zealand Trade-Weighted Exchange Rate Index (TWI)

As previously advised, there will be a change to the TWI from the commencement of 1999 to take account of the introduction of the euro. The new TWI will:

Comprise the currencies of the US, Japan, Australia, the UK and the Euro countries.
Be 50:50 weighted according to:

1) each currency-area's share of New Zealand's merchandise trade (exports and imports), normalised to total 100%; and
2) each currency-area's share of their combined nominal GDP.

Weights

Starting currency weights for the new TWI are:

Country/currency area	Currency symbol	Weight

United States	USD	0.3066
Euro	EUR	0.2314
Japan	JPY	0.2026
Australia	AUD	0.1846
United Kingdom	GBP	0.0748

These weights have been calculated using 1997 calendar year merchandise trade and GDP data.
Merchandise trade data are sourced from Statistics New Zealand.
Where possible, nominal GDP data are sourced from International Financial Statistics (IFS), published by the International Monetary Fund.
Nominal GDP for Luxemburg is an OECD estimate.
GDP shares are calculated using GDP measured in respective local currency units, converted into US dollars (using year average USD cross rates from IFS).
Future weights will be updated annually on a calendar year basis once both trade and GDP data are available.

Transition

The Reserve Bank will release its first measure of the new TWI shortly after 11 am on 5 January 1999 (the first New Zealand trading day in the New Year), via the usual electronic media. Prior to this time, any reference by the Reserve Bank to the TWI will be on the old basis. Our measure of the MCI will use the new TWI from the time of its release.
The new TWI will be scaled to ensure that at 11 am on 5 January 1999 the new TWI and the old TWI will be identical. For full details of the transition, refer to the worked example (attached).

Currency	Weights		Hypothetical exchange rate - foreign currency units per NZD
	Old TWI	New TWI	5 January 1999
USD	0.2486	0.3066	0.5213
EUR		0.2314	0.5760
DMK	0.0594		0.8746*
JPY	0.2101	0.2026	61.8593
AUD	0.3857	0.1846	0.8441
GBP	0.0962	0.0748	0.3139
	1.0000	1.0000

* On 5 January the value of the DMK will be derived from its irrevocable fixed rate to the EUR.

The general formula for the TWI is:

TWI =

Scale factor

On the basis of the hypothetical exchange rates as at 11 am on 5 January 1999 the old TWI would be calculated as set out below. The base exchange rates in the old TWI are those for 30 June 1987.

Old TWI	=
	62.83**
	= 55.69

** The scale factor was set at 63.00 at 30 June 1987, when the currencies were last rebased, to convert the TWI calculated from base exchange rates as at that date back to a 1979 = 100 base. This was to maintain continuity in the series from 1979 when the TWI was first published. The change to the scale factor from 63.00 since June 1987 reflects subsequent re-weightings.

In the new TWI currencies will be based at their 5 January 1999 (11 am) exchange rates. Thus, the expression in the formula within { } will initially equal 1.0000. The new scale factor will be set equal to the old TWI calculated as at 5 January 1999 (11 am), so as to give a value for the new TWI identical to the old TWI at the point of transition. In this way, continuity with the previous TWI will be maintained.

New TWI	=
	X 55.69
	= 55.69

Thereafter, the new TWI will be determined according to movements in the values of the constituent currencies relative to their base values.