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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Today's Work Put in Place survey could be the support NZD/USD needs after a further sharp fall in GDT dairy prices overnight.

Australian GDP data is likely to have only a limited impact on AUD/USD given the data is largely historical in nature.

RATES: Local rates are expected to open higher following global moves.

REVIEW

CURRENCY: NZD/USD is lower again after an unexpected sharp fall in dairy prices at the Fonterra auction. EUR/USD looks fully priced for ECB policy easing on Thursday with little reaction to weaker Eurozone inflation data.

GLOBAL MARKETS: Eurozone inflation rose 0.5% y/y in May, matching the March low and consistent with expectations for ECB policy easing at this week's meeting. However, there was minimal reaction from the euro, similar to the weak German inflation release, with the euro actually rising through the overnight session. This suggests much is already

'priced-in' and the market is now watching for what additional credit easing measures the ECB may introduce. In the US, April factory orders were slightly better than expected at 0.7% m/m, while March data was revised up to 1.5% m/m. Orders have risen for three consecutive months and are consistent with a gradual recovery in output after the harsh winter. USTs experienced another sell-off today, with yields in the mid-to-longer part of the curve up around 5-6bps. Core European (UK, German, French) sovereign bond yields moved 3-4bps higher. European equities were weaker on easing expectations from the ECB, while US equities were largely unchanged on the better factory orders.

KEY THEMES AND VIEWS

SHARP FALL IN DAIRY PRICES OVERNIGHT. There was an unexpected sharp fall in whole milk powder prices (WMP) at Fonterra's GDT auction overnight.

In aggregate WMP prices declined 8.5% to US$3,590/t, with weakness evident across all contract periods, except July (+6.5%). The results for the other products were more mixed with skim milk powder (SMP) and cheddar prices rising, where as other milkfat products and casein prices declined. In aggregate this dragged the GDT-TWI back 4.2% to US$3,760/t.

The drop in WMP prices looks to be due to an overhang of imported product into China during the first 4 months of this year. In total China imported nearly 420,000 t of WMP during the first four months of 2014, which was a 70% increase on the same period in 2013. This unprecedented demand has been the main focus of NZ's with year-to-date shipments of WMP up by 13% and China accounting for a massive 57% of this. While China's import demand is expected to remain strong it's a matter of the degree of strength and at the moment it is clearly struggling to digest recent imports. Where to from here? Well to us prices seem to have now undershot. Outside of GDT, demand for WMP has reportedly been picking up, and many NZ and Australian dairy companies have limited stock available as the 2013/14 season finishes and SMP prices continue to hold-up. Additionally as China has lifted its market share of WMP this has reduced supply to many other markets. While Argentina and Europe have stepped up to fill the void, domestic prices in the likes of Europe are still well above the global price. So we expect some improvement over the coming months. At this stage our forecast of a milk price in the low to mid $7/kg ms range (lower end at this stage) remains unchanged. But continued weakness in WMP prices and NZD/USD strength over next several auctions would start to place downward pressure on this.

NZD/USD: Weak dairy prices send kiwi another step lower ...

Another negative news release - this time the 4.2% fall in dairy prices

- saw NZD/USD slip another 30 pips. Today's Q1 Work Put in Place report could provide some support to the kiwi, although interest in the USD could pick up should tonight's US ADP employment report surprise to the upside.

Expected range: 0.8380 - 0.8480

NZD/AUD: Australian Q1 GDP presents slight downside risk ...

Markets are priced for a solid Australian Q1 GDP print of +0.9% q/q, with the forecast range slightly skewed to the upside. However, due to the historical nature of the release, it is unlikely to present much volatility for the cross.

Expected range: 0.9060 - 0.9160

NZD/EUR: EUR treading water ahead of ECB on Thursday ...

The euro is stuck in a fairly tight trading range ahead of Thursday's all-important ECB policy decision. Little in the way of significant Eurozone data releases today (second print on Q1 GDP and the final PMI services) mean kiwi will be in the driver's seat for this cross.

Expected range: 0.6150 - 0.6220

NZD/JPY: Nikkei gains translate into yen pain ...

Another step higher in the Nikkei has given USD/JPY a modest lift higher, seeing NZD/JPY strengthen over the past day. Watch for today's Japanese Services PMI result to provide some additional interest in the cross.

Expected range: 86.10- 87.10

NZD/GBP: Market looks through softer UK data ...

A step lower in the UK PMI construction (albeit to still very high levels) failed to have any sustained impact on the pound. However, a decline in tomorrow's Services PMI index (which represents a larger proportion of the UK economy) could provide stimulus for a modest recovery in NZD/GBP.

Expected range: 0.5000 - 0.5060

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