In what amounts to a peculiar economic spectacle, three historically stalwart currencies — those reliable barometers of prudent fiscal management — find themselves engaged in a synchronized descent that would give pause to even the most seasoned monetary theorist. The Swiss franc, Canadian dollar, and New Zealand dollar, each traditionally emblematic of sound money, are testing the parameters of conventional economic wisdom.
Consider first the Swiss situation, that redoubt of precision engineering and financial probity,where that nation’s vaunted manufacturing prowess — a heritage as precisely calibrated as its legendary timepieces — has encountered what one might call a temporal disruption. The purchasing managers’ index has lingered below the consequential threshold of 50 for six consecutive quarters, a development that would have scared the ghosts of Basel’s banking patriarchs. Should the Swissy depreciate beyond the recent 9% decline in a persistently bleak economy, it’s likley we will see some stimulus rate cutting moves that boost the currency relative to the US Dollar.
Hedge Funds are overly negative the Swissy, but there is room for one more new low as its economy is moving about as fast as its historic glaciers.
The Canadian narrative proves more compelling, even if they don’t become our 51st state as Trump avers. That vast northern democracy, whose economic fortunes have long been hitched to the locomotive of American prosperity, finds its manufacturing heartland — particularly in Ontario’s industrial corridor — withering under a pincer movement of American industrial resurgence and Mexican wage advantages. The “loonie,” as traders have whimsically dubbed it, traces a downward trajectory that was inevitable with the reluctant consumer pulling the service sector sentiment into contraction mode. Trump may have already accelerated the resignation of their Prime Minister and made the ultimatum that they tow the Trump line or risk losing the US as their oil and timber export destination.
There is room for one more leg lower in the Canadian Dollar, but Hedge Funds are nearing an extreme net short that warrants a rebound by the Spring.
New Zealand’s circumstances merit particular attention. That South Pacific nation, whose economic transformation from agricultural outpost to sophisticated service economy once drew admiring glances from development economists, now confronts a contraction in three of the past four quarters through 2024’s third act. The past six months have been the weakest six-month period since June 1991. The service sector, traditionally as reliable as the nation’s famous sheep flocks, demonstrates all the vigor of a rugby team fielding half its usual complement. The reduced pessimsim in December hints that a modest expansion phase aided by rate cuts could boost the economy and the NZ Dollar later this quarter. Aside from a boost in dairy exports, perhpas the weak currency is boosting tourism dollars.
New Zealanders rely more on their wool, dairy and tourism for prosperity historically, but manufacturing has been moribund for almost two years and counting, which should speed up the votes for more monetary easing.
Hedge Funds net short positions in the Kiwi are collapsing to historic oversold levels, while the currency nears its panic lows of 2022 and 2023.
Yet within this triumvirate of monetary decline lies what Edmund Burke might have recognized as the seeds of regeneration. These nations central banks, those temples of monetary orthodoxy, have begun what the cognoscenti term a “dovish pivot”.
The Swiss National Bank, guardian of a monetary tradition as old as the Confederation itself, has executed interest rate reductions. The Bank of Canada and Reserve Bank of New Zealand appear poised to follow this heterodox path, suggesting a convergence of monetary thinking.
For the contemplative investor the current circumstances present what might be termed a contrarian’s consolation. These currencies, now as unloved as a classical education requirement, may be approaching what market technicians antiseptically term “oversold conditions.” The present pessimism regarding these currencies, while not wholly unwarranted, carries within it the seeds of its own reversal. Devalued currencies boost exports and once rate cuts become more mature, domestic demand will rebound and support their currencies. Investors awaiting reversion should be rewarded in buying these currencies upon new lows before the end of March.