Vexing Volatility, Unusual Uncertainty, Polarising Protectionism… Is It The Beginning Of The End?

• If we had spent the last 3 months deep in the Himalayan mountains, protecting endangered tigers, we would come out oblivious to market moves. If we were given the headlines only… we would have said the NZD should be in the low 50s (not 60s). Why? Well, a global trade war of such magnitude should hammer a (Kiwi) commodity currency. But it hasn’t.
• A soft USD, highly unusual in such an uncertain world, has many talking about a new world order, and the end of the USD as a reserve currency.
• Whilst the strength in the Kiwi (and Aussie) is surprising given the risks to global trade, we have NOT seen a material move out of USDs. We must acknowledge it may be the beginning of the end. Although the end is unlikely in our lifetimes. We have so much to discuss. It’s fascinating and frightening.

We’re facing into many headwinds. But we’re steadfast in our forecast for the Kiwi. We’re sticking with our call for 60c by year end. Yes, given our brave calls of the past and because the Kiwi is basically oscillating around 60c today, it sounds boring. But boring it is not. We expect to see a typically wide trading range around 60c. If downside risks dominate, we could see the Kiwi dip back below 57c. A move less likely with USD weakness. And then there are the upside risks… low in likelihood, but could see the Kiwi pop into the 62-63c range. So, there’s something for importers and exporters… and both will get their chance to play.

Our forecast for 2026 sees a move in the Kiwi up towards 63c, as the global economy recovers (we hope) with further rate cuts delivered. That’s our central scenario. Upside risks could see 65-67c (our 2027 forecast brought into 2026). But many are suggesting we’re entering a very different world. And it’s the beginning of the USD’s end. That’s hard to trade.

In this new world, searching for safer safe havens, we have seen a rebellious weakening in the USD. But the moves lack conviction. The USD DXY has traded as low as 97.90(ish), taking out the lows of 2023 and ‘24. Is that worrying? Not really. We were much lower over 2020-21, even lower in 2018, and much lower between 2005 and 2014 (averaging close to 80 in the DXY with lows as deep as 70). So, 97 isn’t low. We are not seeing a dumping of dollars. What we are seeing is a mild diversification out of dollars and into assets like gold, currencies like the Euro, and more speculative assets that have the potential to disrupt, namely cryptocurrencies. And it must be said: Trump wants a weaker dollar. MACA: Make America Cheap Again.

The dollar is still the global reserve. If it was the end of USD dominance, we would see a much more meaningful flight out of US Treasuries. The bond market vigilantes have made much noise, but little movement. The US 10-year yield is stable around 4.4%, a level consistent with the economic environment plus a little term premium. The yield would have to be 100bps higher, around 5.4%, to get us worried, and convinced in de-dollarisation. And such a move out of dollars would see a far more aggressive flight into gold. US$3,365 per ounce sounds high, and it is historically. But if you truly want out of fiat currencies, it should be higher. Although Bitcoin has had a fair run, cryptos would also get more (consistent) interest without USDs.

The lack of conviction in the flight to safety trade may also reflect the fact that markets simply care less. Despite (depressing) headlines and daunting dealing room discussions (“are we on the brink of WWIII?”), financial markets are quizzically calm. There was more panic in the fallout of President Trump’s Liberation Day back in April. The VIX – ‘fear index – shot up above 50 for only the fourth time in history. In today’s abnormal times, its back running at ‘normal’ levels.

Getting out of US dollars is harder than you think. The Euro has been an obvious (next largest, next best) option. But we must remind readers that it was only 12-14 years ago when we had the European debt crisis… remember Grexit? Serious strategists at the time were predicting the end of the EU altogether… a view many still think is inevitable without fiscal union. So, the EU has problems. Clearly the Swiss francs and Japanese yen hold dear to the hearts of panicked investors. But they too have issues around the strength of their currencies at times… remember the Swiss dropping its peg in 2015? Now that’s volatility. Yes, Francs always make sense, but to a point. So where else do you go? The British pound is an option… but they received a double notch downgrade in 2016 after Brexit. BRICS? Sure… but they’ve fallen around 30% in the last five years. And we only like the “I” and “C” in BRICS. So do you explore Asia? Yes, but slowly. We think the Chinese Yuan and Indian Rupee will have a much larger role to play in global finance… eventually. But they want weaker currencies.

It’s hard when every country wants a weaker currency to help their exports. We can’t all fall together. Because currency is a relative price… one goes down, the other up… and you need to find another safe home.

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