Sharp drop in dairy prices surprises currency markets; loss of commodity advantage sees NZD sold off

by Raiko Shareef

NZ Dollar

Crunch.

The NZD was kicked lower overnight on the back of yet another dairy price decline.

NZD/USD is the worst performing major currency, down 0.3% at 0.8430

Milk prices on Fonterra’s GlobalDairyTrade platform fell at the eighth consecutive auction, with the GDT Index dropping 4.2%. We’re mildly surprised by the sharp drop, and so was the market. NZD/USD lost a third of cent on the release.

These auctions are clearly garnering more international attention as a timelier indicator of NZ’s commodity price advantage. Certainly they are more helpful for currency traders than the woefully dated official terms of trade statistics.

Yesterday, Statistics NZ announced NZ’s terms of trade rose by 1.8% q/q over Q1, broadly in line with market expectations. With the absence of any surprise, the market got back to the task at hand – selling NZD.

Outperformance of the AUD and EUR overnight means that NZD fared poorly on those crosses. At the moment, the reluctance of NZD/AUD to break below 0.9100 is helping keep the kiwi’s head above water across the board. It remains right on the edge as this note goes to print. NZD/EUR had a look at the 100-day moving average at 0.6170 overnight.

For NZD/USD, there is support building at 0.8416, and we suspect exporter demand to become apparent just below 0.8400. On the topside, we see initial resistance at 0.8480.

Today, the ANZ commodity price index is picked to fall a further 2% in May, while building work for Q1 should bounce.

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Majors

Overall, it was a night of mild moves for major currencies. Surprisingly, EUR is stronger despite weaker inflation data. AUD edged higher against the USD as expectations for today’s growth figures were nudged upward.

Presaged by Monday night’s poor German inflation print, the weaker euro-zone aggregate came as little surprise. Headline inflation slowed to 0.5% y/y in May (against formal expectations of 0.6%), returning to the cycle low seen in March. This vindicates in advance the policy easing widely expected from the ECB on Thursday night.

But after initially dipping to an overnight low, the EUR/USD has somewhat perplexingly rebounded since then, up 0.2% at 1.3620. We see little reason for this move just yet. In all likelihood, the ECB will deliver a comprehensive policy package that reaffirms its commitment to keep monetary conditions easy for some time. Perhaps some investors are unconvinced the ECB will put its money where its mouth is. For us, it remains a little too early to ‘buy the fact’.

Some of EUR/USD’s gains were rightfully pared on solid US factory orders data. Orders rose by 0.7% in April, beating expectations by 0.2ppts, while March’s results were revised 0.4ppts higher. Despite this, the US Dollar Index failed to build on Monday night’s gains, slipping 0.1% on EUR outperformance.

Despite a busy data calendar, the AUD was fairly contained, and opens this morning at similar levels to yesterday around 0.9260. While Q1 retail sales came in slightly below expectations at +0.2% q/q, the bigger story was a massive +1.4% contribution of net exports to GDP (exp. +0.8%). This added upside risk to analyst picks for Q1 GDP today, and caused our NAB colleagues to nudge their expectations higher from +0.9% q/q to +1.0%.

Later in the day, the RBA policy statement added little to the discussion, with the Bank still seeing rates on hold for some time. The economic comments were broadly unchanged, but there was a touch more angst regarding the AUD. Specifically, the RBA pointed to the divergence between recent commodity price declines and the still-elevated AUD. Hardly a call to arms, and little to trouble the market.

Today, the AU GDP reading will hold attention during our day. Later, US ADP employment numbers will be (vainly) parsed for clues on Friday’s non-farm payrolls report

Other news: China final HSBC PMI for May lowered from 49.7 to 49.4, still better than April’s 48.1.

All its research is available here.