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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The market will be waiting for the FOMC minutes. Should tapering not be mentioned US dollars could be sold.

RATES: Few kiwi trades reported in London overnight. Kiwi yields are likely to open unchanged to slightly lower following global moves.

REVIEW

CURRENCY: Twin pressures on NZD yesterday. The RBA minutes were interpreted as less dovish pressuring NZD/AUD. Then, LVR restrictions were tighter than expected. EUR traded optimistically overnight hitting a 6 month high, with GBP losing ground to EUR and yen strengthening.

GLOBAL MARKETS: Equity markets continued to lose ground, with the major euro area bourses falling by as much as 1.8% in Spain versus more modest declines of 0.2% in the UK and 0.8% in Germany. In contrast, US equities were 0.3-0.8% higher at the time of writing. Bond markets have retraced yesterday’s move, with UST yields 1-6bps lower across the curve (strongest movement seen in the belly of the curve). Core European sovereign bond yields were 4-7bps lower in the 10-year space (comparable peripheral yields rose 1-5bps). Commodity markets were mixed. Gold and crude prices advanced modestly, but grains prices were softer.

KEY THEMES AND VIEWS

boomer of dairy season slowly been locked in. Tight supply for key products seems to be trumping any reputational damage from the dairy industry’s recent product quality issues. Overnight the GlobalDairyTrade TWI registered a 2.3% increase, erasing the decline seen at the auction after Fonterra’s product recall in early August. The increase was driven by a 2.7% lift for Wholemilk powder (WMP) and 7.1% increase for Anhydrous milk fat (AMF). These were the two products where forecast supply to be sold on GDT over the next 12 months had dropped dramatically. NZ is also the major global supplier for these products with many buyers reliant on purchasing these products through GDT. Over the next 12 months Fonterra now plans to sell 438,500 tonnes of WMP. This is a 9 percent reduction from Fonterra's forecast two weeks ago, with offerings now 21 percent down on last year. AMF volumes have also been pared back to 78,254 tonnes, with forecast offerings for the coming months affected the most. The reduction in product to be offered via GDT implies strong forward sales behind the scenes and an empty cupboard from the drought at the end of the 2012-13 season. It is not a future supply issue as most are starting to revise their NZ milk supply forecasts higher for 2013-14. While calving is just drawing to a close and milk production is starting to ramp up, the winter has generally been extremely mild and this has boosted grass covers as we head into the spring. While not a lot of extra cows have been added compared with the start of last year, excellent pasture cover, cows in good condition, a high milk price will see more grain feed and an extended period off milking for many cows due to the drought is expected to boost yields. As each auction passes at these extremely high price levels they continue to point toward a milk price well above $7.50 per kg (actually heading toward the mid $8 mark). That said, a supply response from competitors is on the horizon, with this emphasised by a slight weakening in Skimmilk powder prices overnight (-0.7%). This will be a key watch in coming months to determine where the farm-gate price ends up.

NZD/USD: FOMC minutes...

The macro prudential measures enacted yesterday were more restrictive than expected pressuring NZD. However, overnight NZD seems relatively stable and tonight’s FOMC minutes will set direction. Should tapering not be discussed markets could sell USD further supporting NZD/USD.

Expected range: 0.7950 - 0.8080

NZD/AUD: RBA minutes…

The RBA minutes surprised after all with a less dovish message. The RBA still has an easing bias, but the RBA discussed to possibility of communications designed to "close off the possibility of reducing rates further". This reduces the prospect of a near term follow up to the August cut. This pressured NZD/AUD and reinforced the 0.8880-0.8920 resistance.

Expected range: 0.8750 - 0.8840

NZD/EUR: EUR optimism…

The euro traded to a 6 month high against the USD overnight. With NZD under pressure yesterday we have traded 100 pips lower on this cross.

Expected range: 0.5925 - 0.6000

NZD/JPY: Yen stronger…

Both legs of this cross were moving last night with yen broadly despite BOJ governor Kuroda pledging again to do "whatever it takes to beat deflation"

Expected range: 77.00 - 78.50

NZD/GBP: Data fatigue?

GBP lost ground against the EUR last night despite the UK council of mortgage lenders reporting gross lending in July increased by 29%. This indicates GBP strength may take a temporary pause as data fatigue increases.

Expected range: 0.5020 - 0.5150

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