Roger J Kerr says international FX markets have reduced their US dollar exposures as the post election 'Trump rally' unwinds

By Roger J Kerr

Whilst the Kiwi dollar has held its value against the USD above the 0.6800 support level over the past week, its overall performance has been relatively poor in the face of continued USD weakness on global forex markets.

Several factors appear to be holding the Kiwi back from making gains in a period when higher NZ export commodity prices and USD weakness would normally project the currency value upwards:-

• Hedge funds and offshore currency players are still wary about unpredictable Trump tweets on US trade protectionism following the Canadian timber tariff. The Kiwi dollar was sold down a month ago when dairy and aluminium imports were also mentioned in Trump dispatches. Any increase in import tariff protectionism is quite rightly viewed as negative for the NZ economy and thus negative for our dollar.
• Scaremongering reports from investment bankers Goldman Sachs about the probability of a major residential property market downturn in New Zealand may have deterred some Kiwi dollar buyers. Local commentators would see a 5% to 10% downward correction in property prices as probably needed and therefore healthy.
• Some reticence from offshore parties to buy the Kiwi ahead of our Government’s budget this Thursday. The not so well informed on the differences between the NZ and Australian economies are maybe categorising us in the same fiscal boat as the Aussies. They are so wrong, as Finance Minister Steven Joyce will confirm that budget surpluses provide him with choices around spending, taxes and debt. Striking the right balance for the Government’s role in the economy will be the strong message in the budget statement.
• Political risk has increased in New Zealand as the Labour/Greens coalition matches National in the opinion polls, leaving the veteran political king-maker Winston Peters in the box seat to negotiate the best deal for himself personally (not necessarily what is best for the economy). 

Political risk factors have also had a marked influence on the EUR/USD exchange rate over the last few weeks as the US dollar has depreciated from $1.0500 to $1.1200.

Initially it was the reduction in European political risk when Emmanuel Macron defeated Marine Le Pen in the French Presidential elections that lifted the Euro from $1.0500 to $1.0800.

However, it has been an increase in US political risk over this last week that has further weakened the USD to $1.1200.

The international FX markets have reduced USD positions as they see that President Trump is distracted by FBI/Russian interference investigations and is not focused on pushing the big economic policy initiatives he pledged to do last November.

In reality, the new President over his first six months in power has achieved very little.

The US dollar strengthened last November/December on the “Trump reflation rally” of expectations of regulatory reform, tax cuts and major infrastructure investment.

The pro-growth policies have yet to materialise and the financial markets have become impatient, thus the unwinding of the reflation rally.

The latest Trump shenanigans with firing the FBI chief have convinced the markets that politically Trump’s position is weaker and thus his ability to push through the pro-growth economic policy agenda is further delayed.

To be fair to the Donald, he did call for a weaker US dollar to help US businesses and he has unwittingly succeeded in delivering that.

However, on interest rate differentials and economic performance grounds between the US and Europe it is difficult to see the Euro maintaining its strength at $1.1200.

Mario Draghi at the ECB will remind the markets at his next monetary policy meeting on 8 June that their money printing and negative interest rates will be in place for some time yet, therefore likely to reverse Euro gains. 

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Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com