by Doug Steel
NZ Dollar
After consolidating earlier in the week above 0.8350, the NZD/USD has succumbed to a bout of post-Fed profit taking. The NZD/USD currently sits around 0.8280.
The decline makes the NZD the weakest performing G10 currency over the past 24 hours, amid a mildly firmer USD as the Fed tapering debate continues. NZD/AUD sits at 0.8810 and NZD/JPY at 81.70.
Late yesterday afternoon, Fonterra delivered another material upgrade to its milk payout forecast for the 2013/14 season. Fonterra’s milk price forecast now sits at a record $8.30 per kilogram of milksolids, up a full 50c from the $7.80 announced as recently as late-August.
This is very positive news and, at least regards the timing of the announcement, was a surprise. The latest increase comes on top of what was already a very positive outlook for dairy revenue over the coming year.
The 50c lift equates to around $900 million additional expected revenue. That is big dough in and of itself. But compared with the previous season (at least as it stands, with final results due this morning), industry wide dairy revenue will now be up by the thick end of $5 billion (including our forecast of a 6% lift in milk production). That is equivalent to about 2.3% of GDP.
The news caused a temporary pause in the NZD’s general retreat. More generally, the coming dairy revenue will provide significant support to the currency as it further underpins NZ’s superior growth differentials while adding juice to the near term external accounts improvement.
Today, we get another announcement from Fonterra. But given it is the final results for the 2012/13 season including profit, dividend and milk price, it is of less importance than yesterday’s forward looking statement. Still, any addition to the milk price forecast for 2012/13 season that stands at $5.80 per kilogram of milksolids would be welcomed.
Also on the agenda today is this morning’s overseas trade data and across the Tasman keep an eye out for the RBA’s Financial Stability Review. Regards the former, we expect a monthly deficit of $786m, which shouldn’t cause much market movement given it is not too different to the $700m deficit anticipated by the market. We expect support at 0.8240 in the NZD/USD to hold. We remain of a ‘buy dips’ view, with our 0.8350 year-end forecast intact.
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Majors
It’s been an uneventful past 24 hours in currency markets, continuing the lacklustre theme from the start of the week.
Stocks were mixed. European stocks reversed the prior day’s losses, lifting around 0.6%. Meanwhile, US stocks eased with the S&P500 currently down around 0.2%. Commodities slotted in with the mixed and choppy theme, even to the extent of various benchmark crude prices moving in opposite directions. WTI is down around 0.3%, while Brent is up 0.6%.
The smattering of economic data sat snuggly with the lacklustre theme. The German IFO for September did squeak higher to 107.7 from a revised 107.6, but mildly undershot expectations of 108.0. While the expectations component improved, the current assessment eased. The EUR/USD sits at about 1.3470 from 1.3490 yesterday.
US home prices were up 12.4% on a year ago, meeting expectations. US consumer confidence marginally undershot expectations of 79.9 in falling from a (upwardly revised) 81.7 to 79.7. One for the Fed doves to highlight in the tapering debate as higher interest rates is likely one factor behind the dip in confidence.
The USD is mildly firmer. The DXY index is currently sitting at 80.57, up around 0.2% from this time yesterday. We still believe the near-term favours the downside for the USD. The USD/JPY is virtually unchanged at 98.70.
Looking ahead, there is little on the data calendar near term to kick the market out of its current slumber. The rest of the week has only second tier data with the most notable being tonight’s US durable orders and Friday’s personal spending. It all looks like more treading water for markets ahead of next week’s heavy hitting data like US October non-farm payroll figures. In the meantime, markets will key off the words from a host of Fed speakers over coming days.
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