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30 October 1998

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

Change to the TWI

From 1 January 1999 the Trade Weighted Index (TWI) will:

  • Comprise the currencies of the US, Japan, Australia, United Kingdom and Euro countries. The Euro will be substituted for the Deutschemark in the current TWI basket.
  • Be 50:50 weighted on:

1) each currency-area's share of New Zealand's merchandise trade, normalised to total 100%; and
2) each currency-area's share of the 5-currency aggregate nominal GDP;

ie. weight currencyi = ½ [normalised trade weighti] + ½ [relative GDP weighti]

The reasoning behind these changes was elaborated on in a previous Reserve Bank Information Release dated 2 October 1998.

The new exchange rate will continue to be termed the TWI. GDP weights proxy for aspects of trade competitiveness and so a Trade-Weighted Index is still appropriate.

Transition

Given that the Euro will be a completely new currency, the following transitional arrangements will take place:

  • The Reserve Bank will calculate a value for the TWI on both the old (DM inclusive) and new (Euro inclusive) basis as at 1 January 1999.
  • The new TWI will be scaled to a value that corresponds with that for the old TWI (which has a 1979 base).
  • The new TWI will be released at 11 am on the first trading day of 1999 (5 January) via the usual electronic media.

Weights

The weights will be constructed as follows:

  • The weights will be calculated initially on the basis of 1997 calendar year trade and GDP data.
  • Weights will be updated annually once all of the relevant data are available.
  • Merchandise trade data will be sourced from Statistics New Zealand (as at present).
  • Nominal GDP data will be sourced from International Financial Statistics (IFS), published by the International Monetary Fund.
  • Annual GDP shares will be calculated on the basis of GDP measured in national currency units converted into US dollars (using year average USD cross rates from IFS).

Weights will be released via the usual electronic media.

Historical Series

As the Euro will not exist prior to 1 January 1999, the Reserve Bank will not release an historical series for the new TWI.

Further Research

As with any index, there is more to the concept of an `effective' exchange rate than can be captured by a simple TWI. Hence, the Reserve Bank will undertake to continue to investigate exchange rate issues, including alternative TWIs. Different TWIs emphasise the different facets of how exchange rates matter for the economy.

For further information contact
Mike Hannah
Corporate Affairs Manager
Telephone 04 471 3671, Email hannahmp@rbnz.govt.nz