Roger J Kerr says a continuation down the isolationist trade path that the US are now travelling will prove to be the tragedy for the US economy and the legacy of the Trump regime

By Roger J Kerr*

The NZD/USD exchange rate has traded within a narrow 0.6730 to 0.6850 range over this past week. The Kiwi has been unable to fully recover back upwards; however, it still appears that all the speculators who wanted to short-sell the NZ currency have now done so and therefore further selling has been exhausted.

The Australian dollar has fared somewhat better against a stable US dollar on global FX markets, rebounding to above 0.7400 as commodity markets stabilise.

Because of the superior performance of the AUD against the USD, as compared to NZD/USD movements, the NZD/AUD cross-rate has edged lower 0.9100.

Just three months ago in April the NZD/AUD cross-rate was trading closer to 0.9500.

The re-rating of the NZD downwards vis-à-vis the AUD is of no great surprise, as for the first time in several years the outlook for the Australian economy looks better than New Zealand. In addition, our export commodity prices have started to pull back from record highs, whereas Australia’s metal and mining commodity prices have been bouncing along the bottom of their respective trading ranges and have greater propensity to increase than what ours do.

Foreign exchange markets always price-in today the likely future or forecast economic and market conditions, they rarely reflect the actual situation today.

The NZD/AUD cross-rate is not expected to move any lower than 0.9100 on this downtrend, as all the speculators in the NZD/USD market are over-extended on short-sold NZD positions already and are likely to be aggressive NZD buyers over coming weeks as the unwind those positions (refer last week’s commentary piece).

Therefore, local AUD exporters should be pushing hedging percentages upwards to near maximums of policy bands at 0.9100. Tuesday’s NZ inflation result for the June quarter stands likely to push the Kiwi dollar higher on its own accord if the increase is above 0.50%.

Over recent months it appears that global financial and investment markets have become largely immune to the unpredictable, inconsistent and wild statements from US President, Donald Trump on trade and other economic policies.

US equity markets have stopped reacting to the barrage of tweets, as have bond and currency markets.

The USD exchange rate to the Euro has remained in a tight band between $1.15 and $1.20 for several months now and seems unlikely to break higher or lower over coming months as the northern hemisphere markets move into summer holiday wind-down mode.

The escalating trade war between the US and its trading partners in China, the America’s and Europe has not dented the USD’s value to date.

However, the markets appear reluctant to buy the USD as well, as in the end, the protectionist tariffs being forced on to the US economy by Trump will be negative for US growth and jobs.

The US dollar weakened from $1.05 (against the Euro) when Trump came to power in late 2016 to $1.25 earlier this year due to US political risks and premature expectations that the Europeans would increase their interest rates. The recovery in the USD to its current $1.17 level has reflected increasing US interest rates from the Federal Reserve this year.

President Trump’s first two economic policy changes, namely corporate tax cuts and reductions in environmental regulations on business, proved to be very positive for the US economy.

These have been his triumphs so far, albeit the tax cuts certainly blow out the internal budget deficit next year and subsequent years.

However, his third economic policy initiative on trade protectionism is already causing adverse changes to US business investment as domestic manufacturing becomes uncompetitive (e.g. Harley Davidson and Tesla switching manufacturing to outside of the US).

The Trump administration seem to want to force the Chinese to make concessions and somehow miraculously right the trade imbalance between the two economies.

Globalisation of manufacturing of component parts and integrated supply chains are just too advanced today to sever the US off as an isolated and fully functioning part.

A continuation down the isolationist trade path that the US are now travelling will prove to be the tragedy for the US economy and the legacy of the Trump regime.

Being the real estate tycoon, he once was, Trump sees everything as a simple “deal” to be won against the opponent.

He promotes extreme opening positions in expectation of giving ground later to get what he wants.

Unfortunately, global manufacturing and import/export trade are much more complicated than buying hotels.

The financial and investment markets have concluded that Trumps rants are best ignored, however what they cannot ignore is the likely economic consequences of his protectionist trade policies.

Lower US economic growth with higher inflation (i.e. imported products increasing in price) equates to stagflation.

Couple that US economic scenario/direction with massive budget deficits and the conclusion is a very negative one for the US dollar’s value going forward.

Within the next few months the FX markets will have fully priced-in two more Federal Reserve interest rate hikes this year and up to three hikes next year.

After that, the positives for the USD will have run out. For these reasons it is difficult to see the NZD/USD exchange rate going lower due to a stronger USD. A more likely outcome in late 2018 and into 2019 is a weaker USD on global FX markets, propelling the NZD/USD rate well above 0.7000.    

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*Roger J Kerr is an independent treasury Management advisor. He has written commentaries on the NZ Dollar since 1981. 

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19 Comments

" his third economic policy initiative on trade protectionism" His?! Trump wants exactly the opposite of protectionism - free trade - truly free trade. It's 'everyone else' that has far higher and more inclusive Protectionism than the USA - and they, via Trump are sick of it!
Yes. there's the 'But they export dollars and import goods ' argument, but part of that discussion is 'those days are over'. They died with the demise of the USSR. It's a brand new World, and Trump is stirring up the complacent and entrenched. What comes of it is unlikely to be 'bad'.

bw,

I think you are wrong in your analysis. If you go back several hundred years,the policy on trade held by all the European states;Portugal,Spain,France,Holland and Gt. Britain was mercantilism. That is,the belief that all trade was based on there being a winner and a loser. Only gradually,did the successful nations come to realise that trade could benefit both parties and so the trading world we now have came into being. Trump wants to drag the world back to mercantilism and i think that would be a huge mistake.
Now,i am certainly not arguing that the current position is perfect;it is far from it,but Trump's solution is not the answer. This is a man,who never reads policy papers,for whom policy has to be condensed to just a single page-preferably with his name on it-just to hold his attention.

Mid term elections. If the GOP retains its house majorities Trump will press on, even greater pace undoubtedly. If not then even greater chaos. The American electorate though seems to be getting the hang of it, ie America First! And Trump is well on the way to convincing his electorate and the rest of the world, that America does not need the rest of the world as much as they need America.

97 Million for a Golf Course that does not make money. Duh.

Now...that is playing a round with money. Deep hole,,,,,,,at one stroke.

Did ya see the Police out in force to protect the "Leader of the Free World" from those who object to his stunts and his "Land Banking", surrounding their own little plot....so he can Lord it over 'Scotland's little Home Owners' who contribute their taxes and rates to pay for his 'Safety"

Did ya know who pays his way around in Air Force One...and the Beast.....puts up with all his costly waste of said............"Free World" orders....and his look at me...binge spending. (Yet is afraid of a simple.."Drone")

USA Voters get what they Paid for.....UK Voters on Brexit will get ...what they paid for........A complete waste of time, effort and money...

Even Prince Charles and William left the Queen to Kow-tow to the "Leader of the Free World" so a "Lawd of all he surveys" could up stage Mummy...alone.....but at what cost??.

The UK must be desperate for his Royalties.......

Personally I would say ....'Pay yer own way'.....stop wasting 'mine'.

A poor lonely old rate payer/taxpayer.

Remember a Trump does not beat a Queen...in my neck of the woods......but might upstage her in Yours....for a second.

Tiresome, what's wrong with you?

Funny - Trump card always beats the Queen in the games I play.

Fake news Roger. Trump is not an isolationist. Can't believe you guys keep saying this. It's disingenuous.
It's time for China and Europe to pull their own weight, trade fairly and stop claiming they are charity cases.

Ill drink to that (Lee Marvin, Cat Ballou).

Great part of a great movie, might be wrong but don’t think, despite all his red faced repeated hints, the Kid ever got his drink. Thanks for the memory!

Ther was that wondeful last scene when they raced into the distance dragging him on a sledge.
I saw that movie three times in two days when it first appeared.
Nothing to do with todays dicussions of course.
Trump is the product of our times, like Churchill and Hitler...

Agree totally with your comments Roger.
Not sure whaT putting up trade tariffs/barriers not only with China and EU but also with Canada and Mexico which are all significant markets, as well as restricting immigration and building walls are not a move towards isolationism then what is.
The reality is that his tariffs are inteded to protect inefficient US producers and consequently higher prices for US consumers.
With increasing growth in the continuing emerging markets of China and India both with considerable populations then it is only a matter of time that these economies will surpass that of the USA. The next decade or two was likely to have seen these eclipse the US but Trump's current policies are more likely to ensure this - and sooner rather than later.

All countries restrict immigration. Is that isolationism? No.

Up until now the US has had very little success with getting its trading partners to drop tariffs and stop overly protecting their own industries. They also endlessly drag their feet with defence responsibilities.Germany actively weakens its own security while expecting the US to protect them.

Whatever the US have been doing up until now hasn't worked. Time to try something different.

I agree Zac, the USA has been going down hill pretty fast since the 1960's when they were "Truly Great". They had a massive automotive industry. The problem I noticed even in the 70's is that they simply didn't make comparable quality stuff compared with Japan. I don't think they can turn it around unless they shut their boarders to trade. You have to remember they have a massive population and could try and create a closed economy and just force people to buy higher priced, lower quality products in some market sectors and improve employment. Like you said whatever they have been doing for the last 50 years has seen them going backwards so its an attempt to do things differently.

Carlos67,

Even by Zachary's standards,this is just shoddy. The golden years for the US economy were roughly,the 3 decades after WW2. The standard of living of most citizens rose steadily,labour generally earned a decent wage,home ownership rates were high and unions had a significant role in society. banks were plain vanilla institutions,Fannie Mae and Freddie mac were public institutions and the inevitable inequalities in socirty were within acceptable boundaries. The japanese manufacturing miracle was in its infancy.
The rot started with deregulation and US society has been on a downward slide ever since.

New President of Mexico want to build a wall on Mexico,s southern border to stop illegal immigration!!!

N

ZS,

Stalin was contemptuous of 'fellow travellers' in the West,calling them useful idiots. in your unfathomable support of trump and the alt-right,I would miss out the word useful.

Funny, looks like the NZD is in a downtrend to me. I'm sure I read somewhere that trends tend to continue more often than not. My grasp of probability maths is not good, but isn't it likelier that we are half way down?

one of the two Rogers is wrong!! which one?? Could they be both right! fundumentaly its up in due course correct Roger. tech its trending strongly down correct Roger!! Will go with the tech trend lines which are As Roger W says down.