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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: NZD will be under pressure on cross due to dairy prices falls, with the ANZ Commodity Price Index a key release. US Fed Chair Yellen delivers an IMF lecture, and ADP/Factory orders will drive the USD leg of kiwi.

RATES: Local yields are expected to open unchanged to higher on the back of global moves.

REVIEW

CURRENCY: Despite the dairy falls, NZD has only lost to AUD in the past 24 hours with GBP a close third in the strength stakes. European currencies suffered after activity indicators were again revised lower.

GLOBAL MARKETS: Risk appetite rose overnight with equities rallying across the board and pushing to new highs in the US. US Treasury yields also pushed higher and peripheral bond spreads narrowed in Europe. The catalyst was momentum from yesterday's third consecutive monthly rise in the official China PMI to 51.0 in June. Combined with the rise in the HSBC's PMI this suggests China's growth momentum is picking up due to the recent pro-growth policies, including increasing infrastructure investment and an acceleration in fiscal spending. Overnight this momentum was supported by US data releases pointing to a continuation of healthy expansion in output. The June ISM was virtually unchanged from May at 55.3 vs 55.4. New orders rose to 58.9 vs 56.9, suggestive of strong growth ahead whilst the employment sub-component was unchanged at 52.8. The data are supportive of the view that the US economy is recovering sustainably at the moment and jobs indicators so far this month provide little reason to argue with the consensus that NFPs rose 215k in June. In contrast, euro area data releases continued to come in on the soft side overnight. There was fall in the German manufacturing PMI to 52.0 vs 52.4 - its lowest level since October last year - the euro area PMI eased fractionally to 51.8 vs 51.9. The data fit with the earlier releases this week of subdued inflation (+0.5% y/y) and soft growth in the monetary aggregates (May +1.0% y/y) and justify the ECB's decision to ease monetary policy in June. Unemployment remains unacceptably high at 11.6% also.

KEY THEMES AND VIEWS

DAIRYING DOWNGRADE. Overnight the GDT auction registered a disappointing 4.9% decline in TWI prices to US$3,595/t. Whole milk powder (WMP)

dropped 5.4% to US$3,459/t and skim milk powder was little changed

(-0.9%) at US$3,810/t. The decline came despite Fonterra reducing the volume of WMP to be auctioned over coming months, although there is the usual seasonal increase as the new season for 2014/15 begins. The decline in forecast near-term supply to be auctioned through GDT seemed to be in response to reportedly high inventory levels in China, who have taken 55% of NZ's total supply over the past 12 months (up from 38% the year before). It seems the drop in near-term supply and pick-up in latent demand from other markets hasn't been enough to stabilise the situation. Combined with the high level of the NZD this means Fonterra's opening milk price forecast of $7/kg ms is now under pressure and highly likely to be revised down at their next update. We need to do some more work to finalise our view but last night's auction is beginning to flag a milk price in the low-to-mid $6's/kg ms as opposed to the opening forecast of $7/kg ms. While cash flow remains strong from deferred milk payments from 2013/14, in a rising interest rate environment a drop into the low $6's/kg ms will reduce any discretionary spending fairly quickly.

NZD/USD: Dairy and a steady US...

As discussed above, further falls in the GlobalDairyTrade auction raise concerns over the income NZ.inc will receive from dairy this year.

Continued price falls are removing a leg of support from the NZD. While we still have the legs of: attractive and rising yields, broad based domestic strength, and a steady yet uninspiring offshore picture; the signal is clearly that NZD is near its peak. The US ISM continued the steady uninspiring message; declining marginally in June, but remaining at overall solid levels.

Expected range: 0.8740- 0.8830

NZD/AUD: Risks lower...

The RBA struck a more neutral tone at their July meeting sending AUD higher. With a RBNZ July increase fully priced, and dairy prices following iron ore prices lower, one would have to suggest risks are for this cross to move lower.

Expected range: 0.9200 - 0.9280

NZD/EUR: Further PMI weakness...

The Eurozone manufacturing PMI was revised lower from its flash read, with declines from Italy and Germany notable. Spain and France both increased which is some consolation for European policy makers.

Expected range: 0.6390 - 0.6440

NZD/JPY: Q2 Tankan Survey

The Tankan survey delivered a mixed message and Yen weakened again.

Expected range: 88.60 - 89.50

NZD/GBP: Sterling climbs...

Sterling charges on as the manufacturing PMI records its second highest result in the last 3 years. The details were strong and UK manufacturing looks healthy.

Expected range: 0.5080 - 0.5140

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