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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: New Zealand Q2 employment is the next NZD event, markets will look to sell any strength it generates, and punish any weakness. British industrial production has lagged other indicators and may pressure GBP.

RATES: NZ rates are likely to open with a bias lower following US moves and on the back of lower dairy prices.

REVIEW

CURRENCY: USD remained bid, as the ISM non-manufacturing series surprised positively. The NZD is under-pressure from another weak dairy auction. GBP found support from stronger services.

GLOBAL MARKETS: Overnight continued positive US data drove the USD higher and another soft GDT dairy auction further weighed the NZD down.

Softer euro area services PMI data drove the first leg lower in EUR/USD, with the second down leg triggered by the better than expected US ISM non-manufacturing and factory orders. Cable was initially boosted by yet another above-expectations UK services PMI print, although this move later reversed on headlines that Moody's revised its outlook for the UK banking system to negative from stable. European sovereign bonds traded with a heavy tone, with yields higher across the board. UST yields initially rose by around 3bps across the mid-to-long end of the curve, with the move extending on the solid US data flow. However, they retraced the entire earlier move late in the session on geopolitical concerns with Russia and West over the Ukraine. There was a small improvement in core European equities markets, although Spanish and Italian stock markets suffered losses of 0.4% and 1.6%, respectively. US equities were weaker early on and losses were extended on the geopolitical concerns.

KEY THEMES AND VIEWS

CATCHING A FALLING KNIFE. Dairy prices continued their deep plunge lower overnight. The GlobalDairyTrade TWI registered an 8.4% drop, with whole and skim milk powder down 11.5% and 6.5% respectively. The absence of Chinese demand (China took 55-60% of NZ's milk powder exports at the peak earlier in the year) has been the main catalyst for the substantial fall in recent auctions. Recent reports suggest it could be 2-5 months before they re-enter the market, so softness looks set to continue.

Other recent notable developments have been weaker demand from the Middle East, geopolitical tension between Russia (second largest global importer) and the West, as well as higher exportable production from key Northern Hemisphere markets. The plunge lower in prices looks very similar to the events in early-2009 and mid-2012. Price levels reached overnight for WMP are now approaching the levels reached during this period and are below the cost curve for all major exporters (including NZ), so we are now starting to enter uncharted territory. Since 2006 dairy markets have been notoriously volatile, so let's just hope the bounce back is as aggressive. For dairy farmers, the added conundrum is the high NZD, with Fonterra's hedging policy probably having largely locked them in for the 2014/15 season around NZD0.83. At overnight prices we estimate the milk price would be $4.90/kg MS. This well below the recent forecast update of $6.00/kg MS. Luckily year-to-date pricing is in the low $6/kg MS, but farmers will be budgeting accordingly (i.e.

$5.50/kg MS). This is starting to enter the danger zone for many with rising interest rates and we expect the loppers will be taken to budgets and any discretionary spending. This will have wider flow on effects to the rest of NZ and especially many rural regions.

NZD/USD: Under pressure...

Further weakness from the GlobalDairyTrade auction should keep NZD under pressure today. Add to that strength from the US ISM non-manufacturing composite, and US June factory orders and it suggest that markets will sell NZD once the Q2 employment read has been digested. We favour selling any strength that the employment data generates.

Expected range: 0.8410- 0.8510

NZD/AUD: NZ Employment...

The RBA and Australian trade balance did little to dent the AUD yesterday. Weaker HSBC Services PMI from China has weighed equally on AUD/USD and NZD/USD. Any bounce from the NZ employment data will be short-lived.

Expected range: 0.9060 - 0.9130

NZD/EUR: Service decline...

Italian services surprised negatively and the Eurozone composite retreated two tenths, there was a positive surprise from Spanish services but the tone of the report was weaker than the advance release, pressuring EUR.

Expected range: 0.6270 - 0.6360

NZD/JPY: NZD declines...

NZD declines drove this cross lower, with USD/JPY remaining static.

Expected range: 86.30 - 87.20

NZD/GBP: Services re-accelerate...

Services PMI provided GBP with support, as it jumped 1.4pt to sit at 59.1. Slower growth from manufacturing has been forgotten and GBP should remain well supported ahead of the BoE decision tomorrow.

Expected range: 0.4980 - 0.5080

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