Declining commodity prices over 2014 should apply downward pressure to the NZD; RBA targets a 'period of stability'

by Raiko Shareef

NZ Dollar

The NZD followed the AUD in an overall drift lower yesterday, with few outright drivers.

The NZD/USD is 0.2% lower at 0.8646.

Certainly there seems to have been no knee-jerk reaction to what we saw as a significant result in Fonterra’s Global Dairy Trade auction overnight.

Prices fell by 8.9%, the fourth consecutive decline.

Note that the declines have become steeper at each of the past four auctions.

We thought a further decrease at this auction might’ve been too much to hope for, given that prices had fallen by 10% over the past three auctions. But this latest result gives us some comfort in our core view that declining commodity prices over 2014 should apply downward pressure to the NZD.

In that vein, today’s ANZ Commodity Price Index should also be eyed closely.

The fall in dairy prices will probably be offset by increases in meat and forestry products. But the higher NZD will keep the local currency index suppressed.

With NZD/USD drifting downward, we eye short-term support at 0.8600, which marks the bottom of the strong upward trend the currency saw through March. On the topside, initial resistance is eyed at 0.8710.

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Majors

It was a relatively subdued evening for currency markets, with fairly limited price action. No major currency moved by more than 0.4% against the USD.

That’s not to say the day did not have the potential to provoke big moves. But scheduled data simply printed fairly close to market expectations.

China’s official PMI for March came in at 50.3, an unexpected improvement on February’s 50.1, but by the slimmest of margins. Offsetting this was a downward revision to the HSBC version of the same indicator, which was downgraded from 48.1 to 48.0. Recall the initial ‘flash’ reading had disappointed earlier in March, jerking lower from 48.5 in February. The AUD tried to get excited at each of these events, but ended up retracing back to starting levels, exhibiting caution ahead of the RBA meeting.

The RBA maintained its key policy directive, which still says “the most prudent course is likely to be a period of stability in interest rates”. On balance, the tweaks to the statement seemed to imply a touch more hope that the woeful Australian labour market was bottoming out. Notably, the Bank said little to stand in the way of the AUD, simply noting that it remains high, and that while the depreciation from year ago will help the economy rebalance, this impact will be diminished somewhat by the recent appreciation. Despite the lack of aggressive rhetoric, the AUD is lower 0.2% against the USD this morning at 0.9240.

In Europe, the final readings for European PMIs printed close to the initial estimates. The overall euro-zone manufacturing PMI was bang on expectations at 53.0. In marginally positive news, both German and euro-zone printed slightly better than expected. As a result, EUR/USD is 0.2% stronger at 1.3790.

What was meant to be the evening’s highlight turned out to be something of a fizzler. The US ISM manufacturing index printed at 53.7, against 54.0 expected, but an improvement on February’s 53.2. Given that the bad weather impact continued well into March, the market marked this down as slightly positive for the USD, but not convincingly so. The commentary which accompanied the release suggested activity was picking up, with higher expectations of more to come as the weather clears.

The JPY weakened steadily throughout the day, with the 3% increase in the sales tax perhaps weighing on investors’ minds. In addition, the Tankan Large Manufacturing Index disappointed at +17 (against +19 expected).

The JPY is 0.3% weaker at 103.70, and is close to its weakest level against the USD since late January.

Today sees a much quieter data calendar, with just US factory orders and private ADP payrolls likely to be the highlight, ahead of the headline non-farm payrolls release on Friday night.

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