Manufacturing isn’t a Zero Sum Game

The traditional thinking is that FX strength somewhere means weakness somewhere else and the winners and losers will balance out. Like all things in economics, that may be true in the long run but it means more pain that prosperity in the short term. Ashraf issued a new Premium trade on USDJPY, with 2 essential charts capturing a multi-year rarity.

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Risk aversion returned with a vengeance Tuesday as US stocks fell 3%, oil dropped 10% and the yen surged. One factor was that the ISM manufacturing survey fell to the lowest since May 2013, missing the consensus estimate by 1.6 points. That probably doesn't come as a surprise because at the moment, US manufacturing is one of the 'losers' in the global FX war.

What isn't in the textbook is why Canada posted a contractionary PMI. The RBC survey fell to the lowest since April at 49.4 from 50.8 and the country entered a recession with a second-consecutive GDP report in contraction. That's despite a 25% decline in the loonie.

Another major US trading partner is Mexico but the latest PMI there was at the second lowest of the year. Yesterday, China's unofficial PMI from Caixin hit the lowest since the crisis.

What the models don't account for is the difficulty in switching suppliers, reorienting investment and plain reluctance to change. The US dollar rally (and effective yuan rally alongside it) have created a 'great reshuffling' of global production and at the same time the collapse in commodity prices has changed the mathematics of investment.

Eventually, low cost, well-located manufacturing centers with an abundance of labour like Mexico will win the spoils of the strong US dollar but not before months of pain.