Fonterra widely expected to increase its payout to farmers following recent surge in dairy prices

By Mike Jones


Less gloomy offshore risk sentiment saw the NZD uptrend resume overnight. The NZD/USD climbed from 0.8340 to almost 0.8380, helped by solid NZD/JPY and NZD/EUR demand.

Further evidence of recovery in US economic indicators, and a positive night in US equity markets (see Majors), helped restore investors risk appetite.

Indeed, our index of such (which has a scale of 0-100%), rose from 73.6% to around 75.9% overnight. As is typical in ‘risk on’-type trading, NZD/JPY led the NZD gains, creeping back above 79.00 and helping drag NZD/USD back above 0.8370.

We expect  the NZD/JPY to keep trending slowly higher this year as recovering global demand bolsters commodity prices and Japanese policy makers undertake ‘bold easing’. Our forecasts have NZD/JPY above 80 by mid-year and at 82.50 by year-end.

In Europe, the mood remains far from upbeat. Recent economic news, particularly out of Germany, has underwhelmed, Italian political uncertainty continues, and the Cyprus debacle has dulled the positive impact of Draghi’s ‘whatever it takes’ pledge and reawakened speculation of ECB rate cuts.

The NZD/EUR rose above 0.6500 last night for the first time since August. Further gains look likely.

This afternoon’s (1pm NZT) ANZ business survey will be the highlight of this week’s local data offering.

We were a tad surprised at the way the February edition strengthened. And so today’s (March) version is vulnerable to drought catching up with it. Still, there should be enough positives (construction, manufacturing) to keep the survey averages well afloat.

Potentially more important for the NZD could be the announcement of Fonterra’s interim results sometime around midday.

Fonterra may use the opportunity to update its payout forecast. We think there is room for an increase given the recent surge in dairy prices

Overall, we continue to hold a positive NZD bias for the week, with NZD/USD likely to push through 0.8400 at some point. Solid support is expected at 0.8310.


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A nervous calm spread through financial markets overnight as optimism over the US economic outlook offset European doom and gloom.

Global equity markets notched up small gains, risk aversion eased, commodity prices are higher, and low-yielding ‘safe-haven’ currencies like the USD, JPY, GBP and CHF have underperformed. A near 1% increase in oil prices helped the CAD outperform.

US data released overnight was a little mixed overall (see below), but investors were happy enough to play up the positives of a 5.7%m/m increase in durable goods orders (3.9% expected) and the biggest rise in S&P/Case Shiller home prices in 7 years (8.1%y/y).

As a result, the S&P500 managed to recoup all of the previous day’s losses, rising 0.7%. The VIX index of risk aversion eased back to 13%.

Meanwhile, back in Europe, investors are still reeling from recent suggestions that depositor’s money is now fair game in future crises. Dijsselbloem and other officials have spent the last 24 hours backpeddling on the ‘Cyprus is a template’ remarks, but the damage appears to be done.

In Italy, the political stalemate rumbles on. Bersani’s attempt to form a workable coalition now looks doomed to fail and the chances of another election are growing by the day.

The EUR/USD consolidated around its lows overnight in a 1.2830-1.2890 range. We would not be surprised to see 1.2750 tested in coming days as speculation of an ECB rate cut percolates.

There is considerable interest and tension regarding the reopening of the Cypriot banks on Thursday night (NZ time).

We didn’t get anything particularly new from new Bank of Japan Governor Kuroda yesterday. He repeated his ‘whatever it takes’ (to achieve the 2% inflation target) mantra and suggested the BoJ could buy longer-dated (up to 5-year) JGBs.

Nonetheless, the JPY has continued to weaken over the past 24 hours, although this is perhaps more a ‘risk on’ story than policy driven. USD/JPY moved up to 94.60 amid broad-based buying of JPY crosses.

Other News:

*US new home sales 411k vs. 420k expected.

*US consumer confidence slips back to 59.7 from 69.6 (67.5 expected) as higher gasoline prices take a toll.

*US Richmond Fed index underwhelms (at 3 vs. 6 expected).

Event Calendar:

27 March: NZ ANZ business survey; AU RBA Financial Stability Review; EU CPI; US pending home sales; US Fed’s Rosengren & Kocherlakota speak;

28 March: NZ building permits; AU credit; NZ credit; EU German unemployment;

29 March: Good Friday holiday; US Michigan consumer confidence.

All its research is available here.

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