Bumper dairy auction; market sentiment changes pushing NZD higher; Greek proposal to swap its debt into growth-linked bonds; RBA surprises with rate cut

By Raiko Shareef

NZ Dollar

NZD/USD broke above 0.74 earlier this morning, but has since cooled its heels. It sits 0.8% higher at 0.7370 on a broader USD sell-off as well as a bumper dairy auction (in that order of importance).

Fonterra’s Global Dairy Trade price index rose by 9.4% in last night’s auction, with a notable 19.2% surge in whole milk powder. While promising, price still have some way to go before they justify Fonterra’s $4.70kg/MS forecast for the 2014/15 season.

This did help NZD overnight, but the far bigger influence was a turn in market sentiment. On the crosses, NZD/AUD is 1.2% stronger at 0.9470.

After today’s unemployment report (which we expect to be strong), we hit the week’s main event for the local calendar: Governor Wheeler’s speech. Despite NZD’s recovery, we’d still prefer not to be short NZD/USD running into that speech.

We’re cooling on the idea of entering a short NZD/USD position in the near-term, even if we get back to 0.75. If anything, the extreme volatility in FX markets overnight has us preferring to remain on the sidelines.

Today, we pick a wide 0.7300 to 0.7450 range.

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Majors

A rather dramatic shift in sentiment overnight is reflected in currency and bond markets, if not so much in equities.

For ours, three factors have driven this move: (1) a touted viable solution to Greek debt negotiations; (2) a continued recovery in oil prices; and (3) ongoing US data disappointments. As a result, USD is off sharply. The broad Bloomberg Dollar Spot Index is 1.1% weaker for the day.

News of a Greek proposal to swap its debt into growth-linked bonds began to leak yesterday morning in our session. Even though there are questions marks about the viability of such a deal, the constructive tone taken by Greek leaders (relative to last Friday) supported risk assets. The Greek benchmark equity index closed 8.8% higher.

Oil prices continue to recover, with WTI crude up by 6.8% currently to $52.90, while Brent crude posted a more measured 5.4% gain. This remains a function of speculation that last week’s news portending lower US supply means that oil prices have found its base. We suspect too that hints of a Greek resolution might cause investors to bet on firmer demand for oil, should that help stabilise Europe’s growth prospects.

US factory orders were the latest in a series of data over the past month to disappoint. Those numbers follow last week’s poor durable goods orders and last month’s terrible retail sales report.

The upshot of all this is that the USD was pushed back against the whole suite of G10 currencies.  The EUR has been a key beneficiary, up 1.5% right now to 1.1510. At the bottom end, the AUD has recovered all of its post-RBA losses yesterday.

The RBA surprised the majority of analysts by cutting its policy rate by 25bps to 2.25%. The policy missive suggested that the Bank now sees growth running below trend for longer, and the unemployment rate worsening.

Despite the market having priced a 2/3 chance of a rate cut, the AUD dropped sharply from 0.7800 to 0.7650 in short order. But this morning, it recovered completely on the back of the broader USD moves. It understandably remains at the bottom of the G10 leader-board.

Over the past month, we have noted in these column inches our increasing unease over the USD’s streak higher since December. Last night’s snapback looks a tad overdone, and benefits from a strong technical element. Some of the USD weakness is likely to be pared into week’s end, ahead of the US unemployment report.

But we suspect this is a taste of a broader USD consolidation that could come. A poor US employment report (not our central expectation) might be a trigger. But the more likely venue is Fed Chair Yellen’s semi-annual testimony to Congress, due in the next couple of weeks. There, she will face questions from politicians about the risks to the US economy from global headwinds, as well as risk to Corporate America from the high USD.

Today, nothing on the international calendar looms particularly large. Service PMI data from China, Europe and the US are due. European retail sales and the US ADP employment report will be watched.

All its research is available here.