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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Another relatively quiet day is expected as markets await US Q2 GDP and the FOMC on Wednesday night. We expect NZD/USD to remain under pressure, but profit taking to provide support near to 0.85.

RATES: NZ rates are likely to open a touch higher in line with global moves.

REVIEW

CURRENCY: Tight ranges across the board, as both NZD/USD and EUR/USD consolidate at the bottom of their recent trading ranges. US data continued its broadly optimistic tone with housing remaining a notable exception.

GLOBAL MARKETS: Our London team reported a quiet overnight session as markets await the week's key events in the US on Wednesday night - Q2 GDP and the FOMC. Overnight the major currencies traded within tight ranges given the dearth of fundamental drivers. Core European sovereign bond markets were similarly quiet, although there was a more defined rally on peripheral European markets. There was a modest sell-off in USTs, most notably in the mid-part of the curve. Equity markets lost a little ground early on, but were recovering toward the close in the US.

KEY THEMES AND VIEWS

HOW LOW WILL WE GO? That is the key question on dairy farmer's lips ahead of Fonterra's update. The update is supposed to be about the dividend outlook for the 2014/15 and Fonterra's execution of its strategy refresh "turning the wheel". However, with a 15% drop in international dairy prices since the opening milk price forecast was announced at the end of May the dividend outlook is being overshadowed by where the 2014/15 milk price will be adjusted to. Most seem to have settled around the low $6/kg MS mark, but with year-to-date pricing around the mid $6/kg MS and the last GDT auction below the mid-$5/kg MS mark there is a wide range of possibilities. The common question this is now prompting is at what milk price does financial stress in the sector start to increase. There is no simple answer to this with a wide range of businesses and leverage within the sector. But with rising interest rates (a large proportion still on short-terms), we reckon a material increase in financial stress would be triggered by a milk price around the mid-$5/kg MS mark. That said, this would only start to show up in the 2015/16 season if there were another low milk price and opening advance. The offset this season is that a lower milk price is being signalled early enough in the season for some belt tightening to occur.

High deferred payments from 2013/14 will also ensure there is plenty of cash in bank balances heading into a leaner year. Many believe the breakeven is higher than this, but this seems to ignore the fact that the 2012/13 milk price was just $5.84/kg MS and we had one of the worst droughts in some time. The bright spot out of the announcement will be a better dividend outlook; with a lower milk price ensuring better margins for Fonterra's other businesses. We will also be looking for signs Fonterra is executing its strategy well, as these are the small deposits today that will lead to future growth potential in outer years.

US CHUGGING ALONG: There were a number of secondary US data releases overnight that continued to point to solid momentum. The Dallas Fed Manufacturing Activity survey followed the lead of the other regional PMI releases this month, printing to the upside of market expectations.

The Markit services flash PMI was also strong, remaining unchanged at 61.0 and combined with last week's manufacturing PMI result of 56.3, sees the composite series remain elevated at 60.9. These results bode well for Friday's closely watched ISM report (market exp: 56, last: 55.3).

NZD/USD: USD focus...

The Markit Services PMI remained steady at 61, against expectations for a dip to 59.8. 61 is a very strong level of activity and a good sign for Q3. The Dallas Fed manufacturing activity survey continued the theme of solid gains in regional surveys, increasing to 12.7 from 11.4. Pending home sales declined 1.1% in June, against expectations of an increase.

Markets are watching for a Fonterra milk price update today, should it be below $6/kg MS it would be NZD negative.

Expected range: 0.8510- 0.8580

NZD/AUD: Consolidation...

This cross remains in consolidation mode, although price action does still suggest downside potential. Support between 0.9060 and 0.9080 is being tested. Should it give way we can expect a test of the 0.90 level.

Expected range: 0.9040 - 0.9120

NZD/EUR: Unchanged...

Both NZD/USD and EUR/USD consolidated near their recent lows overnight.

Both look to remain under pressure, leaving this cross relatively stable.

Expected range: 0.6340 - 0.6400

NZD/JPY: Still a NZD/USD proxy...

Japanese releases - the jobless rate and retail trade figures, are unlikely to drive this cross, with NZD fortunes still driving this cross.

Expected range: 86.60 - 87.50

NZD/GBP: IMF review...

The IMF annual review of the UK economy found policy settings to be appropriate unless housing market risks persist. Tonight, mortgage approvals and net consumer credit will update us to the risks in the housing market.

Expected range: 0.5000 - 0.5060

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