by Mike Jones
As expected, the NZD has been belted on the open this morning, as currency markets react to the weekend’s “dirty pipe’’ news.
The NZD/USD has opened around 1.2 cents lower than Friday’s (0.7840) close. An even heavier toll has been taken on NZD/AUD, with some positive Chinese data over the weekend buoying the AUD. The cross has opened around 0.8660, down from 0.8800 on Friday and the mid-week highs above 0.8900.
Markets’ shoot-first-and-ask-questions-later response looks entirely appropriate as investors factor in the risk of NZ’s milk powder exports taking a decent hit (China and Russia put bans in place over the weekend).
The NZD will remain under pressure until such time as confidence in NZ dairy can be restored. However, given the tendency for the exchange rate to overreact to these sorts of news events, we expect to see a bounce at some point.
Just when that comes will depend on the response from Fonterra, authorities and other interested parties. It is worth noting that the DCD-residue issue back in January receded relatively quickly. There is a chance that this does the same.
By the same token, any lingering major concern about the quality of NZ’s food production could have far reaching economic implications, given food’s large share of the nation’s exports. We are not changing our economic or interest rate forecasts at this point.
There is probably now more attention on Wednesday’s dairy auction. Prior to the weekend’s news we were expecting prices to hold up at elevated levels. While some decline is now possible, it is worth noting that auction prices did not budge following the DCD-residue issue back in January. If we do see a decline, bear in mind that it will need to be seen in the context of the very elevated starting point for dairy prices.
Dairy issues aside, there are plenty of other risk factors facing the NZD this week. Wednesday brings the latest suite of NZ labour market indicators. We anticipate a 0.2% gain in the HLFS employment series which, combined with a 67.7% participation rate, would see the unemployment rate move down a tick to 6.1%. Note that a result on our expectations would bolster the NZD given the consensus expects 6.3%.
Offshore, the coming week looks fairly quiet. However, it is all action in Australia, with a series of key data (including July employment), the Tuesday RBA meeting, Friday RBA Statement, and China’s July economic data dump all set to test the AUD’s mettle. Expect the NZD to take on a renewed AUD focus as a result.
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Majors
The USD was thumped on Friday. Nearly all of the greenback’s mid-week gains were wiped out in the wake of the disappointing July payrolls report.
Non-farm payrolls rose by 162k versus the official market median of 185k and a whisper number closer to 200k. Downward revisions to May and June (amounting to 26k) only amplified the negative surprise.
The US unemployment rate did fall to 7.4% (7.5% expected), but that was driven in part by a fall in the participation rate, and so wasn’t taken as particularly ‘good’ news.
The sharpest reaction to the data came in the US Treasuries market, with the 10-year yield off a full 14bps (to 2.60%) as confidence in Fed tapering sagged. The USD swiftly followed suit, with the GBP, CHF, and JPY the biggest beneficiaries (up 1.2%, 0.8%, and 0.6% against the USD respectively).
We still believe a tapering of Fed QE at the September meeting is more likely than not. However, it is certainly not a done deal and Friday’s labour market data have probably reduced the odds of such to no more than 70%.
Once again, we are back to data watching. This week doesn’t offer much to get excited about on this front.
The ISM non-manufacturing index is the only US data release of any note, although a series of Fed speakers (Fisher, Evans, Plosser, and Pinalto) may attract some interest for their individual economic/tapering views.
Rather than broad USD sentiment, we suspect idiosyncratic currency performance will drive currency markets this week. A huge week for Australian event risk may result in more downward pressure on the AUD. Meanwhile, the GBP is vulnerable to the BoE clarifying triggers for ‘forward guidance’ at this week’s UK inflation report (Wednesday).
The consensus (including us) does not expect any action from this week’s Bank of Japan meeting (decision Thursday), as Japanese data continues to paint a picture of slow recovery. As with previous meetings though, there is a chance the lack of BoJ action blows some wind into the JPY’s sails as USD/JPY struggles to regain a foothold above 100.00.
Other news:
*Australian PM Rudd announces election for September 7. *Chinese non-manufacturing PMI for July rises to 54.1 from 53.9 in June.
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