Latest Global Dairy Trade auction results lead to upward revision of expectations for Fonterra payout to around $5.70 NZD

By Sam Coxhead*:

The last week has seen a continuation of the recent holding pattern in the wider financial markets.

Whilst equity markets managed to push higher, interest rate and foreign exchange markets remained locked in mostly familiar ranges.

The EU have just announced an agreement to extend funding to Greece for the next tranche of funds. Markedly increased spending cuts will be necessary, in the requirement to have a debt/GDP ratio of 120% by 2020, against the previous target of 144%.

This announcement caused a small flurry of demand for risk assets, but nothing dramatic or inspiring.

Negotiations on the US fiscal situation continue in earnest, without any obvious progress at this time. Assuming there will be a compromise by parties in the US, the downside to risk assets should be somewhat limited in the short term.

Balancing this are economic indicators that point towards lower than previously forecast level of global economic activity in 2013. So expect the directionless price action to continue into 2013, as the painfully slow emergence of economic growth plays out.

Major Announcements last week:

·  EU announce new Greek debt deal

·  US Existing Home Sales 4.79m vs 4.76m expected

·  BOJ leaves monetary policy unchanged

·  BOE announces current BOC Gov. Carney as new Governor starting mid 2013

·  Chinese HSBC Manufacturing PMI 50.4 (13mth highs)

·  French and German Manufactruing higher than expected

·  Canadian Retail Sales 0.0 vs +.5% expected

NZD/USD 

The NZDUSD pair remains in what has become very familiar territory. Much of last week saw moribund trade as the markets stagnated while waiting for news on the Greek debt deal, and progress on the fiscal negotiations in the US. The offshore session on Friday provided the action, when risk aversion was swept aside and the NZD saw strong demand. However, after touching the resistance at .8250 the momentum was lost. As yet, not even the Greek debt deal announcement has been enough to pressure this resistance level, but if demand lifts for the EURO, the NZD will likely have another swing up towards this resistance. With only NZ business confidence numbers of domestic focus this week, expect the lead to come from the US fiscal developments, and the GDP number on Thursday in the US.

NZD/AUD (AUD/NZD)

This pair has seen a very muted range over the last week, in the absence of any game changing economic data. This week will likely see a continuation of this directionless trade as the market readies itself for the respective central bank monetary policy announcements next week. Also in Australia next week we get the latest numbers on retail sales, building approvals, GDP and employment. By the end of next week the outlook should be much clearer for what is on the cards for this pair in the first quarter of 2013. Current levels look to offer reasonably fair value, and offer a good opportunity for the risk adverse ahead of next week.

NZD/GBP (GBP/NZD)

It was a mixed week for this pairing last week. The continuation of trade within the recent range was unsurprising and will likely push through into this week’s price action. The resurgent EURO has contributed to the GBP’s ability to temper periods of reasonably strong demand for NZ dollars. The final 3rd quarter GDP number in the UK later today provides a focus ahead of NZ business confidence on Thursday. Overall, we can expect further treading of water from the market ahead of the respective central bank decisions next week. It seems likely that the wider NZDGBP range of .5000 - .5200 (GBPNZD 1.230 - 2.000), will continue to provide boundaries for the price action for the remainder of the year at least.

 NZD/CAD

This pair continues to trade within what has become a familiar range over the last six weeks or so. This week is again a quiet one for economic news, with just NZ business confidence on Thursday ahead of the monthly GDP numbers in Canada on Friday. Next week provides some solid central bank focus with the BOC monetary policy announcement on Wednesday, coming ahead of the RBNZ on Thursday. Canadian manufacturing and employment numbers on Thursday and Friday respectively round out what should be an interesting first week of December.

NZD/EURO (EURO/NZD)

The EURO continues to exert its recent subtle pressure on the NZ dollar. Today’s somewhat positive announcement of the extension of the Greek funding package should provide a further boost to the EURO over the coming sessions. Spain will likely emerge under renewed focus in the coming weeks. Next Thursday will see both the ECB and RBNZ make monetary policy decisions, with both likely to be unchanged at this time. Given the complicated nature of the ECB operations, there announcement will be the primary focus.

 NZD/YEN

The NZ dollar saw further appreciation against the beleaguered YEN throughout the course of last week. However, after setting new highs on Monday, the YEN has seen some demand driven by profit taking from investors for the most part. With the polls continuing to point towards LDP party success on at the December 16th election, the overall trend towards a weaker YEN should remain in place. This will likely see intermittent periods of profit taking demand, but these should prove to be short lived. With little in the way of economic news this week or next in Japan, the election campaigning will continue to provide the focus. In New Zealand on Thursday the business confidence numbers will be closely watched, and next week the RBNZ monetary policy announcement is the primary domestic focus.

AUD/USD

This pair spent most of last week in a contained range. The break higher for the AUD came on Friday as risk aversion evaporated and resistance at 1.0420 was cleanly broken. Following today’s Greek debt deal announcement the AUD has again attempted to make higher ground, but at this stage has not been able to break the 1.0520 level. US news should dominate the lead from now for this pair. The primary focus comes in the form of the preliminary GDP numbers on Thursday. Next week is very busy for news in both economies. In Australia the RBA monetary policy announcement, employment numbers and GDP will provide the top level focus. In the US, the excitement comes from the latest manufacturing, employment and consumer sentiment numbers. The US fiscal negotiations loom in the back ground, adding another layer to what is an already complicated next couple of weeks.

AUD/GBP (GBP/AUD)                            

This pair has again seen a very contained trading range over the last week. Expect this to continue in this week’s trade, with just the final Q3 UK GDP numbers to offer top level focus. Next week is a different story, with both central bank making announcements, and a host of top level economic data to digest. In the meantime, expect the current limited trading range to continue. Current levels offer reasonably fair value for this pair, with no obvious bias providing a good chance for the risk adverse to make transfers ahead of what may prove to be a more volatile next week.

AUD/EURO (EURO/AUD)

The AUD has seen pressure from the EURO throughout the course of the last week. Ironically, today’s announcement of the extension of Greek bailout funds has seen the AUD bounce from the crucial support level of .8050 (resistance 1.2420). Direction for the remainder of the week will likely come from the wider markets risk appetite in the absence of top tier economic data due in either economy. Next week sees a myriad of economic data to digest. In Australia we get retail sales, building approvals, GDP and employment. Add to this Thursday’s RBA monetary policy announcement (with possibility of a .25% cut to the cash rate) and there is plenty of room for AUD movement. The ECB also have a monetary policy announcement on Thursday, and this will be closely watched, albeit no change expected at this meeting.

AUD/YEN

The AUD continued to make good sized gains against the YEN last week. The prospect of “ultra” monetary policy stimulation is almost completely undermining demand for the YEN, which is an intended consequence. However, after setting recent highs on Monday, the pair has succumbed to a round of profit taking that has driven the AUD a little lower. This will likely happen from time to time ahead of the 16 Dec election, and beyond. It seems unlikely that the recent YEN weakness will dissipate at any stage in the short term. Next week sees all the focus in Australia with a raft of top level economic data and the prospect of a potential cut to the cash rate at the RBA’s monetary policy decision on Tuesday. For those looking to buy AUD with YEN, be quick with the opportunities that are provided by periodic profit taking move.

AUD/CAD

The AUD initially saw some overdue pressure from the Canadian dollar last week. Unfortunately, the pressure could not be sustained and the equity markets dragged the AUD back higher against the CAD to end the week. This has continued this week and the positive sentiment following the Greek bailout extension has given the AUD another temporary boost. Canadian monthly GDP on Friday provides the primary focus for the remainder of the week. Next week is action packed with both higher level economic data and central bank decisions in both economies. The likelihood of no change in either cash rate (small chance of a cut in Australia), will see the focus come on the economic data. Australian GDP and employment numbers will dominate in Australian, while in Canada the manufacturing and employment numbers will provide the focus.

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Market commentary:

The last week has seen a continuation of the recent holding pattern in the wider financial markets. Whilst equity markets managed to push higher, interest rate and foreign exchange markets remained locked in mostly familiar ranges. The EU have just announced an agreement to extend funding to Greece for the next tranche of funds. Markedly increased spending cuts will be necessary, in the requirement to have a debt/GDP ratio of 120% by 2020, against the previous target of 144%. This announcement caused a small flurry of demand for risk assets, but nothing dramatic or inspiring. Negotiations on the US fiscal situation continue in earnest, without any obvious progress at this time. Assuming there will be a compromise by parties in the US, the downside to risk assets should be somewhat limited in the short term. Balancing this are economic indicators that point towards lower than previously forecast level of global economic activity in 2013. So expect the directionless price action to continue into 2013, as the painfully slow emergence of economic growth plays out.

Australia

Last week was a quiet one for economic news in Australia. The latest Reserve Bank of Australia (RBA) monetary policy meeting minutes revealed little in the way of surprise, and the tone points towards further policy accommodation (lower interest rates), at some point, if “appropriate”. An easing to a cash rate of 3.00% has been factored in by the markets over the next few months. Of material impact for Australian dollar demand was the news that Chinese manufacturing numbers had reached 13 month highs and actually expanded in the month of October. This week is again light on Australian domestic focus with just private capital expenditure numbers on Thursday to provide a focus. Next week sees the RBA monetary policy decision on Tuesday as the central focus of a very busy week. Also of note, Monday sees the release of the retail sales data, building approval on Tuesday, 3rd quarter GDP Wednesday, employment numbers Thursday and the trade balance Friday.

New Zealand

Last week saw the latest Global Dairy Trade (GDT) auction results point towards a further stabilisation of dairy prices, which is encouraging for the New Zealand dairy sector. After registering a 3rd straight month of gains, there has been an upward revision of expectations to around $5.70 NZD per kilogram for the 2012/13 pay out. This week is again light on economic news with just the NBNZ/ANZ business confidence survey on Thursday to provide focus. Next week sees the RBNZ make its final monetary policy decision for the year. Expect no change at this meeting, albeit the interest rate market has priced in a small chance of an easing.

United States

The US housing market continued to produce positive signs last week. Sporadic demand in the stock markets added to some positive sentiment at times in the US. Interestingly, these positive moves come against a back drop of nervousness as the US government lurches towards the “fiscal cliff”. Certainly concerns are not at the level they were a couple of weeks ago, but material progress is required to maintain this sentiment. Also of interest last week were comments from US Federal Reserve Chair Bernanke, stating that the unemployment rate was still 2 - 2.5% away from long term averages and that it will take time to fall. He also added that negative effects of the pending “fiscal cliff” were already being felt, and an early resolution was the best case scenario. This week sees durable goods sales, consumer sentiment and preliminary 3rd quarter GDP results provide the interest.

Europe

Greece continues to dominate the near term focus in Europe. Whilst all the time Spanish officials will be working hard in the back ground to find the best solution for their funding issues in 2013. The EU finance ministers and officials from the IMF are currently meeting with the intention of finding an agreement on the next 44 billion of funding assistance for Greece. EU ministers seem to have refused IMF suggestions of a debt write off for Greece to lighten the debt load. This meeting is being very closely followed. Comments from ECB officials stated that the core ECB view on Spain remains that the country will require assistance in 2013. This week also sees a return to the focus of economic news. Inflation, retail sales and the unemployment numbers will all be closely watched.

United Kingdom

Last week was a quiet one for economic news in the UK. Dominating the focus was the release of the Bank of England’s monetary policy meeting minutes. These indicate the banks openness to further policy accommodation to ensure emergence from the current period of stagnant economic growth. Certainly progress in Europe will be of some comfort to the BOE, so regional sentiment can improve. This week sees the release of the final GDP numbers for the 3rd quarter and a further opportunity to insight from the BOE as Governor King speaks on financial stability on Thursday. Also of note is last night’s appointment of current Bank of Canada Governor Mark Carney to be the next Bank of England Governor starting in July 2013. Carney is a very well regarded central banker, and the Pound Sterling reacted positively to the somewhat surprising announcement.

Japan

The situation in Japan remains highly charged. The December 16th election looks to be a vote on how aggressive authorities should be with regards to economic stimulation. The polls still tip the LDP party as winners with their ultra-stimulation view. This plays out with a back drop of the Bank of Japan minutes that reveal internal debate surrounding the extent of their part to play in reviving the economy. The upshot of this continues to be weaker YEN demand in the short term. But given the large move, some kind of correction should not be ruled out at some stage. Economic data remains of secondary importance in the current environment, with retail sales on Thursday and inflation and industrial production Friday to be of passing interest.

Canada

It has an interesting week for the Canadian economy. Retail sales numbers for October were weaker than expected, and this continues a recent global theme. Inflationary pressure remain bubbling away with a .3% increase for the month. This legitimises the comments from various Bank of Canada officials with regards to increases in the cash rate overtime. This week’s focus comes solely from the monthly GDP number on Friday. The overnight announcement that Bank of Canada (BOC) Governor Carney is to join the BOE mid 2013 was a surprise. This is mildly unsettling for the BOC, who will have to initiate the recruitment process immediately.

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Sam Coxhead is a currency analyst with DirectFX You can contact him here >>