This is an informative publication, sponsored by The Fiji Sun, Fiji Bureau of Statistics and HFC Bank. All views expressed or implied are purely of the Treasurer at the HFC Bank, Peter Fuata.

The Fiji Dollar (FJD) is a managed currency and it operates on a fixed (pegged) exchange rate regime.  It is fixed to a basket of currencies which are its major trading partners which includes the United States, Australia, New Zealand, Japan, Euro zone.

The relative weights of each currency in the currency basket is reviewed on an annual basis by the Reserve Bank and is confidential.

Pegged exchange rate regimes are generally thought to be associated with lower transaction costs, greater certainty, lower real exchange rate volatility, higher trade openness, disciplined macroeconomic policies and relatively low growth of monetary aggregates, a better inflation performance and stronger inflation anchors.

These regimes may also benefit from lower inflation and greater policy credibility if the country to which the peg is struck has low inflation.

Pegged arrangements provide a stable and low exchange rate risk during periods of general economic stability; providing certainty for foreign investors, tourism, consumers, businesses and financial transactions.

But like most things it also has a disadvantage which international experience suggests that pegged exchange rate regimes are susceptible to currency overvaluation or undervaluation and requirement of large amounts of foreign reserves as the country’s government or central bank is constantly buying or selling the domestic currency.

There was a much anticipated interest rate hike last week by United States Federal Reserve from 0.75% to 1.00%.

Off the back of the interest rate hike was an expected stronger US Dollar however we saw a weaker US Dollar in light of the interest rate hike.

The pressure is now on the Trump administration as concerns arise on how quickly they can implement pro-growth policies as US stocks are pushed lower and kindled safe-haven demand for Japanese Yen currency.

Graph 1 shows the average US Dollar has weakened from January 2017 by 1.32% to 0.4752. When compared to the same period last year, it has weakened by 3.89%.

Generally speaking, a weaker US Dollar results in a generally stronger New Zealand and Australian Dollar.

Graph 2 shows the average New Zealand Dollar has strengthened from January 2017 by 1.51% to 0.6182. When compared to the same period last year, it has strengthened by 3.29%.

We have two big New Zealand economic news this week, any deviation from these expectation would result in big movements of the New Zealand currency:

• The RBNZ Interest Rate Decision which stayed at 1.75%
• New Zealand Trade Balance for the month of February is expected to increase to $160m from -$285m

Graph 3 shows the average Australian Dollar has strengthened from January 2017 by 0.35% to 0.6516.

When compared to the same period last year, it has strengthened by 4.78%.

The weaker the currency, the better it is for our importers as they will be paying less Fijian Dollar for their imported goods.

However it will be at a disadvantage for exporters as they will be earning less Fijian Dollar on their exports.

This is holds true vice-versa for a stronger currency where importers will be worse off but exporters will be better off.