Pound Sterling has soared against the NZ Dollar after the success of Donald Trump increased global interest rate expectations, whilst the Reserve Bank of New Zealand (RBNZ) eased monetary policy.
The GBP to NZD exchange rate has risen a whopping 5.8% in the days since Donald Trump was declared the next president of the USA.
The exchange rate has surged from lows of 1.6684 achieved on the day before the US election to current highs of 1.7665, only three days later, on Friday November 11.
The rise was helped by New Zealand dollar weakness, after the Reserve Bank of New Zealand (RNBZ) cut base interest rates from 2.00% to 1.75% at their meeting on Thursday November 10.
The bank blamed weakness in the global economy for spurring the cut as it was driving the Kiwi too high, stifling exports.
The RBNZ statement noted:
“Weak global conditions and low interest rates relative to New Zealand are keeping upward pressure on the New Zealand dollar exchange rate.
“The exchange rate remains higher than is sustainable for balanced economic growth and, together with low global inflation, continues to generate negative inflation in the tradables sector.
“A decline in the exchange rate is needed.”
The End of the Era of Negative Interest Rates?
This may be the last time the New Zealand authorities have to cut rates, however, if we are to believe the commentary on Donald Trump’s generous fiscal stimulus plan, which is likely to raise interest rates, not just in the US, but also in the UK, and indeed around the world.
Trump has laid out an agenda which is likely to lead to a $1 trillion increase in stimulus in the US, through a combination of increased government infrastructure spending, an amnesty on corporates who repatriate billions they have stowed offshore for tax avoidance, and a cut in corporation tax to 15%.
This combination of policies, it has been argued, is likely to drive growth, drive wages higher, increase inflation and then increase interest rates.
The impact of this globally is likely to spell an end to the ‘negative interest rate’ environment, in which rates in many major countries such as Japan, the EU, US and UK had fallen below zero.
The hitherto dominant ‘negative interest rate’ theme led investors to gravitate to relatively high yielding invetsment in New Zealand, Australia and Canada, where yields start from 1.75%, 1.50% and 0.5% respectively.
This increased flows into those countries financial markets which led to their currencies appreciating.
Since Trump’s ascendancy, however, those flows are likely to dry up as investors won’t be funnelled into these 'commodity currencies' as they are know (NZD, AUD and CAD) to the same extent anymore.
Obviously underlying this change in view on global interest rates is the expectation that stimulus will in fact drive up inflation, an assumption not necessarily given, since corporations will not necessarily reinvest money they gain from tax cuts or amnesties.
Further stockpiling by multi-nationals may continue which will not support growth and result in continued subdued inflation.
Special Trade Deal with GB
The Pound has been dubbed the ‘Darling’ of the post Trump currency markets, since more than any other currency, even more than the dollar, the pound has risen following Trump’s win.
Part of this is due to the fact the pound was undervalued prior to the election and a ‘snap back’ to a fairer valuation has occurred.
But a large part of it is also due to Trump’s pre-election pledge to place the UK at the front of the queue for negotiating a new trade deal.
Conservative MP Michael Fabricant, said that he was hopeful about the prospects for a new free trade deal with the US, in light of the Trump victory.
“And let's not forget that Donald Trump, unlike Hillary Clinton, is very pro-British with extensive business interests in the UK,” said Fabricant, adding:
“Trump said he would put Britain first in line for any trade deal. And he means it,” he was quoted by Mail online as saying.
Yet whilst Trump might well want to negotiate a new free trade deal with the UK, it is something else altogether whether the UK would come out of the trade negotiations with a good deal.
As author of the ‘Art of the Deal’ Trump is likely to want to drive a hard bargain and see US – not UK – interested prioritised.
According to his spokesperson Dan Dimarco the interests of the US worker will be paramount in any trade negotiations:
"The system was gamed for whatever reasons to begin with, the gaming's got to be removed, and it's got to be balanced for the American worker, American business, the American economy and trade deals are going to be walked away from if they can't be renegotiated to the point where they are net-positive for our GDP and they are positive for our good-paying job growth.
"And it is something Donald Trump is not going to walk away from. He is committed to it,” said Dan Dimarco, Donald Trump’s spokesperson.
Dimarco added that the new president would be reviewing all existing trade deals, in an attempt to gain a better deal for Americans.
"Things have gotten so bad that we will leave Nafta [the North American Free Trade Agreement], WTO [the World Trade Organization] and the Korean Free Trade Agreement if we can't get a fair deal."
Caution should be exercised, however, in concluding that negotiations will favour the UK as Trump’s actual words in relation to placing the UK at the front of the queue could reveal an attempt at advantageous positioning,
Trump’s spokesperson’s actual statement was, “Britain would be at the front of the queue for any future trade deal once the UK has left the EU,” according to the report on bbc.co.uk.
Note how we have highlighted “once the UK has left..” in bold italics.
Is this a case of divide and conquer?
Once the U K has formally left the EU it will be in isolated and in a considerably weaker negotiating position than it previously was, having burnt bridges with the EU.
The US will be in a better position to dictate to the UK and other individual countries that have left the EU as it will hold the higher ground in negotiations.
It is no wonder Trump doesn’t want to negotiate with a powerful trade block like the EU as the same advantage would not apply.