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Falling commodity prices biggest downside risk facing the NZD

Currencies
Falling commodity prices biggest downside risk facing the NZD

by Mike Jones

NZD

The NZD/USD remains firmly entrenched in the familiar 0.8150-0.8290 range. After spending yesterday afternoon dribbling lower, the NZD/USD bounced off 0.8150 support overnight to trade around 0.8230 currently.

Yesterday’s modest NZD selloff was more than reversed overnight. A bevy of good news on the global economy encouraged investors’ risk appetite, sending ‘growth-sensitive’ currencies like the NZD climbing again.

Our risk appetite index (which has a scale of 0-100%) leapt almost 5 percentage points to 59.1%.

Not only are fears over Spain’s fiscal health receding, but investors are hopeful the IMF’s bailout funds will be topped up this weekend. The IMF also bumped up its global growth forecasts overnight (see Majors).

Global equity markets posted gains of 1.5-2.9% overnight and the CRB commodity price index rose 1.3%.

Still, it wasn’t all good news for the NZD. A terrible-looking Fonterra milk price auction early this morning has seen the NZD underperform its ‘commodity-linked’ peers. Indeed, the NZD/AUD slipped back to around 0.7900 – smack in the middle of our short-term valuation model’s 0.7800-0.8000 ‘fair-value’ range.

Dairy prices slumped 9.9% at this morning’s auction, to the lowest level since September 2009. This is a genuine fall, not a function of currency valuation effects (the USD is little changed from the last auction).

Dairy prices are now down almost 35% from the March 2011 peak. This adds to the prospect that next seasons dairy payout will be materially lower than the current one. Fonterra will announce their first forecast for next season (June 2012 through May 2013) before the end of May.

We have been highlighting the fact falling prices for our commodity exports is the biggest downside risk currently  facing the NZD. While we may not see any immediate reaction, last night’s auction is certainly a fundamental negative for the currency.  

For today, ANZ consumer confidence (released 1:00pm) and Chinese property prices (1:30pm) are the only noteworthy items on the data calendar.

Expect more rangy NZD/USD trading inside 0.8150-0.8290 in the lead up to Thursday’s Spanish bond auction and the weekend’s IMF/G20 meetings.

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Majors

The ‘safe-haven’ USD and JPY underperformed overnight as easing European debt fears bolstered investors’ risk appetite. Global equity markets notched up sizeable gains, risk aversion indicators have fallen, and commodity prices are rising.

It feels like Groundhog Day. Once again, negative sentiment in Asia has been reversed through the London and New York trading sessions.

There was plenty of good news to encourage the optimists. Last night’s Spanish debt auction went smoothly.

German finance minister Schaeuble said he expects the G20 (meeting Friday) will boost IMF resources by US$400b, the German ZEW survey beat expectations (40.7 vs. 35.0 expected), and the IMF bumped up its global growth forecasts.

The 2012 growth forecast was lifted to 3.5% (from 3.3%) and the 2013 growth forecast increased to 4.1% (from 4.0%).

The EUR initially led the charge higher, helped by market chatter of buying related to Portuguese aid transfers. The EUR/USD climbed around ½ cent to 1.3150. But it wasn’t long before ‘growth-sensitive’ currencies joined the fray as equity markets and commodity prices took off. USD/CAD slid over 1% to below 0.9900, with a less dovish sounding Bank of Canada adding support (its cash rate was left on hold at 1%).

The GBP was underpinned by more evidence of sticky UK inflation (3.5%y/y vs. 3.4% expected). Along with some hawkish rhetoric from MPC member Posen, this was enough to launch GBP/USD from 1.5870 to around 1.5950.

Looking ahead, there is little on the calendar over the next 24 hours to trouble investors’ improved mood. As a result, we suspect the USD and JPY may continue to struggle in the short-term. Solid support on the USD index is eyed on dips towards 79.20.

Today’s Chinese property price data and Bank of England minutes will be worth a look, but tomorrow’s Spanish 10-year bond auction and the weekend’s IMF/G20 talks will be the real tests of investor sentiment. Here, we are a little wary of disappointment. A positive outcome would see IMF coffers of just under US$400b increased to US$1t. More likely is just under US$800b.

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