In the last 18 months since US President Donald Trump launched the trade war with China, the foreign exchange market's response has generally been that a shift to global tariffs and trade protectionism was more negative for export-dependent economies / currencies such as Australia and New Zealand.
As a result, the kiwi dollar has depreciated against the dollar as the dollar has been considered by the global financial markets to be one of the currencies in which safe havens for the temporary parking of funds consist of global trading disorder (along with the Japanese yen and the Swiss franc).
Over the last 18 months, the Kiwi Dollar's overall downward trend against the USD has been interrupted by two periods of recovery and strength of the NZD: ̵
- From the lows of 0.6450 in October 2018, the kiwi dollar rose To 0.6800 / 0.6900 in March 2019, reflecting stronger than expected GDP growth in New Zealand and rising commodity prices. The US Federal Reserve also stopped raising interest rates in January.
- The kiwi rose again from below 0.6500 to above 0.6750 in June as global economic risks eased after President Trump and Prime Minister Xi Jinping shook hands at the G20 Beijing summit in Osaka and paved the way for the end of the Trade wars seemed possible.
However, recent events surprised with a 0.50% drop in OCR by the RBNZ earlier this month and trade wars tightened last week with countermeasures between China and the US returning the kiwi to 0.6400.
Significant to the expected future direction of the NZ dollar is that, unlike any other time in the past 18 months, trading on the financial and investment markets is beginning to emerge, wars that directly harm the US economy.
The Dow Jones stock index fell 623 points last Friday, August 23, when Trump advised US companies to withdraw from US import duties in response to China's announcement from China.
Markets are no longer buying the US dollar in response to the escalating trade wars, but now see much greater risk for the recession of the US economy, the Fed rate cut and the US dollar weakening accordingly.
The EUR / USD exchange rate has risen by $ 1.1050 to $ 1.1150 following the Trump tweet storm that hit China and Fed chairman Jerome Powell last Friday. It is too early to say if this is a more lasting change in sentiment and confidence in the US dollar. However, it shows that Trump's trade wars are now driving the US economy down and destroying its false goal of a protectionist trade policy.
Another USD weakness to over $ 1.1200 against the euro this week should confirm that FX markets now regard the trade wars as USD negative. Therefore, the continued weakness of the NZ dollar in a weaker US Dollar environment versus the major currencies is by no means assured.
Federal Reserve now closer to further interest rate cuts
To the last US Federal At the meeting of the Reserve FOMC a few weeks ago, the committee appeared to have been split over whether rate cuts were warranted.
Following Jerome Powell's speech to world central bankers in Jackson Hole last Friday, there is no doubt that the Fed will see the world. As a result of the Trump trade wars, economic risks have increased and pose a far greater threat to the economy
Trump is trying to make Powell a scapegoat for the US economy, as he was too slow to cut interest rates, according to Trump.
Powell, in turn, clearly presents Trump's trade wars as the real reason for the slowdown in the US economy.
Mr. Powell also admitted that monetary policy poses a major new challenge in dealing with one of the trade wars caused global economic slump. It is now necessary that weaker data on industry, employment and consumer economies than expected should persuade the Fed to make a series of interest rate cuts.
Fortunately, the US Federal Reserve has raised its interest rates to over 2.00% over the past year (unlike other economies). You have the ammunition and firepower to ease monetary policy and hopefully slippage the US dollar. Economy into recession to prevent forex markets. Employment growth well below 200,000 a month will confirm that the decline in manufacturing (due to import tariffs) has spread to the services and retail sectors. Lower US stock markets before this date could be a sign of this slowdown in the US economy anyway.
An "armed" yuan may not be needed if the USD falls by itself
Weeks Chinese authorities deliberately weakened the yuan exchange rate against the USD as a retaliatory measure against Trump's tariffs.
A weaker yuan keeps Chinese exporters competitive in the US and negates the impact of tariffs on their financial performance.  US consumers pay the price for Trump's trade war.
The USD / CNY exchange rate has fallen 6% from 6.7000 to 7.0950 in the last six months.
The NZD and the AUD track the price CNY due to the close economic relationship, therefore, explains in part why the AUD has not been able to recover against the USD recently, despite much improved Australian economic data.
A weakening USD as a result of a much more aggressive development The Fed's interest rate cuts in the coming weeks / months should of course weaken the USD and relieve the Chinese of lowering their currency value.
However, in the light of recent events, a trade war resolution seems even farther away.
If Trump is convinced that his tariff position has shot him down, the yuan can return to 6.7000, driving the kiwi and Aussie dollars back up.
* Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. Since 1981 he writes comments on the NZ dollar.