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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- USD falls further sparking a broad-based rally in commodity prices.

- Dairy prices rise, with GDT-TWI up 3.8%. The rise was led by whole milk powder 7.5%.

- RBA’ Stevens says China has tilted to a more supportive macro environment, is attempting a very big transition and uncertainty in relation to China is unavoidable.

OUTLOOK

UPCOMING TODAY: Locally there is no data of note today.

CURRENCY: UK retail sales is one of the main bits of global data as markets await tomorrow’sECB meeting. NZD and AUD should continue to find support from a solid ‘risk’ environment.

RATES: Payside interest was evident during the London session after the positive GDT result. Local short-end yields will likely open a touch higher.

REVIEW

CURRENCY: AUD and NZD were both lifted by the positive risk environment. The USD remained under pressure generally as housing data disappointed, with JPY the exception as markets moved away from safety.

GLOBAL MARKETS OVERVIEW: The USD remained under downward pressure overnight, not helped by weakness in US housing starts and permits for March. The USD weakness, alongside China showing some improvement, led to further broad-based gains for commodity prices, with the CRB index up 2%. The charge was led by the energy, grain, industrial and precious metals components. Commodity price gains also helped lift material and energy companies’ stock prices. The DAX lifted 2.3%, FTSE 100 0.8%, CAC 40 1.3% and Euro Stoxx 1.6%. However, some weaker earnings results for US companies weighed on the overall performance of US equity indices.

ANZ’S ASSESSMENT

GOOD MORNING SUNSHINE. Dairy farmers will awake to some good news this morning with the first consecutive rise in GDT auction prices since December 2015. However, other exporters are unlikely to be so happy with the NZD/USD pushing to 0.704. Overall the GDT-TWI increased 3.8% with gains across most products sold. Importantly, whole milk powder (WMP) prices increased 7.5% and later-delivery contract periods rose even further (+9-10%) to circa US$2,300/t. This will provide Fonterra some comfort that US$2,500/t for WMP by the end of the year is achievable. The continued strength of the NZD will be a concern, but it also needs to be remembered Fonterra will have a significant amount of hedging already done around the mid-0.60s for next season. While we remain cautious, we do think there is a higher chance that WMP will outperform the rest of the dairy complex over 2016/17. Three things we are watching are: New Zealand supply, oil prices and Chinese import demand. New Zealand supply is expected to be under further pressure in 2016/17 due to lower cow numbers and farm management/system changes. Oil prices are off their January lows and fundamental drivers (i.e. lower US supply) are pointing to further improvement over the second half of 2016. In China, supply appears to also be easing back as high production costs and falling milk prices squeeze returns to milk producers. Imported WMP is also very attractively priced compared with domestic Chinese product. We remain cautious on China as it is still somewhat a black box, but as we move past the seasonal peak in local supply, import demand is expected pick-up. The NZX futures curve has been anticipating a further lift and it now looks like the physical market (GDT auction) is starting to reflect similar sentiment. That said, there are still plenty of challenges for the rest of the dairy complex and this will somewhat cap the performance of WMP. After last night’s auction, WMP is now more fairly priced versus buyers using a skim milk powder/milkfat product mix - before it was the cheaper option. For SMP, European intervention is anticipated to be full by the middle of the year after its earlier announcement to double the volumes it takes to 218,000MT. This product will need to be re-sold at some point, which is anticipated to cap pricing for some time. Last night’s auction result continued to reflect this.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: housing starts fell 8.8% in March following an upwardly revised 6.9% gain in Feb. That helped to push the Atlanta Fed’s estimate for Q1 GDP down to 0.3% saar. The non-seasonally adjusted housing starts data, however, showed starts rising by 7.3% m/m, so the headline March weakness may be exaggerating last month’s softness in housing starts.

- Euro area: The European February current account surplus was EUR19bn, down from EUR27.8bn a year earlier. The 12-month cumulative surplus was EUR321.5bn, equivalent to 3.1% of GDP, which compared with 2.7% of GDP a year earlier. The rise in the cumulative surplus was largely a function of an increase in the goods surplus, which rose from EUR265.1bn to EUR319.9bn.

- The ECB’s bank lending survey showed credit conditions eased in the first quarter of this year, supported by the negative interest rate policy. Standards for corporate loans eased and demand rose. The survey noted: "With respect to the impact of the ECB’s expanded asset purchase programme, banks have mainly used the additional liquidity related to the APP during the last quarter of 2015 and first quarter of 2016 for lending.

- There was a rise in April’s German ZEW investor sentiment. The gain was led by perceptions future economic conditions will improve with an easing in global concerns. However, perceptions of current conditions in Germany deteriorated, suggesting growth could slow this year.

- Ahead of this week’s ECB meeting, the debate over what ECB president Draghi can do to weaken the EUR is growing. Outside of some verbal discomfort at the EUR’s strength and re-iteration that the ECB stands ready to take further action if necessary, it is difficult to see what he can do. Two of the main influences on ECB policy over the past 18 months seem to be receding as the oil price recovers and China shows increasing evidence that its growth downturn is moderating. It is difficult to therefore see how jawboning the euro can be successful outside of the very short-term and the risks of a further squeeze higher in EUR/USD are significant.

- Equities: Commodity price gains help lift material and energy companies’ stock prices. The DAX lifted 2.3%, FTSE 100 0.8%, CAC 40 1.3% and Euro Stoxx 1.6%. However, some weaker earnings results for US companies weighed on the overall performance of US equity indices. Technology stocks in particular underperformed, leading the NASDAQ down 0.4% at the time of writing.

- Bonds: Yields increased by 1-3bps across the core sovereign bond markets.

NZD/USD: BREAKING UP…

Kiwi broke the psychological 0.70 number amid a positive ‘risk’ session. The GDT auction lifted and kiwi continues to look like its heading for resistance near 0.72.

Expected range: 0.6980 - 0.7110

NZD/AUD: RELUCTANCE…

There has been little to drive this cross in the last 24 hours as the RBA minutes revealed nothing new. RBA Governor Stevens speech focused on larger issues than immediate policy decisions.

Expected range: 0.8970 - 0.9060

NZD/EUR: DIVERGENCE…

The kiwi rally continues to push this cross higher as EUR remains capped by its resistance ahead oftomorrow’s ECB meeting. The ZEW survey showed divergence with a lift in expectations, but decline in current conditions.

Expected range: 0.6120 - 0.6250

NZD/JPY: RISK ON

NZD continues to rally pushing this cross higher as markets also push JPY lower in the classic ‘risk on’.

Expected range: 76.00 - 78.00

NZD/GBP: RETAIL SALES…

GBP has been strengthening countering some of the NZD strength. Today fundamental data picks up with retail sales expected to ease modestly.

Expected range: 0.4860 - 0.4950

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