In this sense the exchange rate can be overvalued even if its strength can be explained by factors such the terms of trade.5 An important issue when it comes to determining the exchange rate in New Zealand has been the persistent gap between savings and investment.
Over the past 40 years New Zealand has demanded more capital for investment in housing, infrastructure and other assets than its domestic saving rate could finance. This has meant an on-going reliance on foreign saving and capital inflows. This saving shortfall has also put upward pressure on interest rates and the exchange rate.