An uncertain global picture and concerns around demand saw global dairy prices fall 5.9%

by Mike Jones

NZD

Zzzzzz. A sleepy offshore session kept the NZD/USD confined to a narrow 0.8015-0.8060 range overnight. It’s likely to be a similar story today. Not only is there a US holiday tonight, but investors are likely to remain on the sidelines ahead of important data/events later in the week.

Yesterday’s RBA meeting didn’t provide much excitement for markets. The cash rate was left unchanged at 3.5%, as expected by all and sundry. There was little in the way of forward guidance. Having cut by 75 bps over the past two months, the RBA seems content to sit back and see how the Australian economy evolves.

We expect additional RBA rate cuts, although there was certainly no smoking gun in yesterday’s statement to suggest another easing is a done deal. From this perspective, there is probably upside risk on the market’s expectation for a further 75bps worth of cuts. The prospect of part of this being unwound would provide support to the AUD through a higher interest rate differential.

A trimming of these rate cut expectations yesterday has seen the AUD/USD outperform over the past 24 hours. While the firmer AUD helped drag the NZD higher, a disappointing dairy price auction this morning did exactly the opposite.

Following encouraging signs from the previous two auctions, we felt this one could have gone either way. In the event, the uncertain global picture and concerns around demand saw prices fall 5.9%. Declines were widespread across the various products. It is still early days in the dairy season, but this bodes ill for payout calculations and may limit some of the recent NZD enthusiasm.

For today, keep an eye on Australian retail sales figures for May, due out at 1:30pm (NZT). Analysts are plumping for a +0.2%m/m gain. Outside of this, it’s likely to be another quiet session ahead of US employment data, and European policy meetings, later in the week.

Initial support on the NZD/USD is seen around 0.8010, with deeper support at the 200-day moving average (0.7950). Near-term resistance will be encountered at 0.8110.

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Majors

The major currencies were confined to narrow ranges overnight, in thin trade. Markets are largely treading water ahead of Thursday’s ECB/BoE policy meetings and Friday’s US jobs report.

Overall, risk appetite remained fairly buoyant, keeping the ‘safe-haven’ USD and JPY under pressure. Supportive in this regard, a solid set of US factory orders numbers (0.7%m/m vs. 0.1% expected) helped offset lingering worries about the US economy, underpinning solid gains in US stocks. The S&P500 is currently up 0.6%.

Alongside steady risk sentiment, headlines from the IMF also provided a few headwinds for the USD. The IMF said the USD appears “modestly over-valued” and the Fed “has room to ease further” if the outlook deteriorates.

We’re not sure what methodology the IMF is using, but the popular purchasing power parity method of long-run currency valuation suggests the USD is actually notably undervalued. This undervaluation is most marked against the AUD and NZD. According to our estimates, the AUD/USD and NZD/USD are overvalued by 32% and 22% respectively, on a long-run basis.

Friday’s US non-farm payrolls figures (NFP) will be important for the outlook for Fed policy. Another soft labour market report would make four in a row, giving store to the view the slowdown in hiring is not a warm winter effect and is instead a sign the US economy is not growing strongly enough to make material progress in the unemployment rate, consistent with the Fed’s dual mandate.

Fed chairman Bernanke has already made it clear this is one of, if not the central question the FOMC faces and so another sub-par NFP ought to boost QEIII expectations and weaken the USD.

One of the more eye-catching events from the overnight session was another strop higher in oil prices. WTI prices leapt almost 4.5% to US$87.50, underpinning a near 3% gain in the CRB commodity price index. The oil price gains follow the initiation of the EU embargo of Iranian oil yesterday and reports the US has moved military reinforcements into the Gulf.

Other news: EU PPIs -0.5%m/m vs. -0.3% expected. Chinese non-manufacturing PMI 56.7, previous 55.2.

Event Calendar:
4 July: US Independence Day holiday; SW Riksbank meeting; EU final services PMI; IT budget; UK services PMI; 5 July: ECB meeting; EU Draghi press conference; SP debt auction; UK BoE meeting; US ADP employment; US jobless claims; US non-manufacturing ISM; 5 July: NZ Crown Accounts; US non-farm payrolls; UK PPIs

All its research is available here.