Currencies move on thin trading and by ignoring some data. Milk payout forecasts may get upgraded. Fireworks from Current Account unlikely

By Raiko Shareef

The USD is stronger against most majors this morning, keying off peppy consumer spending numbers.

Risk appetite improved, with US equities up strongly. NZD benefitted from another jump in dairy prices.

The Empire State manufacturing report remained at its worst levels since the GFC for a second consecutive month. While US manufacturing is experiencing a soft patch, in part thanks to a stronger USD, this survey is far more pessimistic than other, more widely-followed measures.  

Nevertheless, the willingness of investors to completely ignore that weakness in favour of a robust retail sales report is interesting. We’d suggest viewing the resultant price action (higher USD, higher yields, higher stocks) with a grain of salt. Trading conditions remain thin.

Developed market equities rose overnight, with the S&P 500 posting a healthy 1.5% gain. That comes in spite of another chunky decline in the Shanghai Composite, which only just managed to close above the 3000 level. We suspect another few sessions of Chinese equity declines might deflate the ‘risk-on’ tinge that developed markets seem to have taken on.

In our neck of the woods, central banks failed to deliver any surprises yesterday. The RBA Board Minutes for September noted some discussion of the downside risks posed by China. The BoJ stood pat, though conceded some softening in economy. It gave no indication of imminent further easing, but we remain wary of a move in late October.

NZD had initially followed its G10 peers lower against the USD, but more than reversed its losses after the 16.5% gain in the GlobalDairyTrade Index. That was significantly stronger than the 5% – 10% gain we’d pencilled in. We’ll be taking a look at our $3.80/kgMS milk payout forecast for the 2015/16 season, with a view to upgrade that, as dairy prices have rebounded faster than we anticipated. We’d expect other analysts to also be revisiting their forecasts. Upward revisions might provide NZD some support through today’s session.

Stop-loss buying looks to have exacerbated NZD’s climb this morning, and it is currently bumping up against resistance at 0.6370. We’d expect better selling interest to emerge ahead of 0.6410.

Today, we’d watch the current account numbers, though they are unlikely to spark fireworks. The RBA’s Guy Debelle is set to speak, and always has something interesting thing to say. The US CPI report tonight will be noted, too, even if it is not the Fed’s preferred inflation measure.

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Raiko Shareef is on the BNZ Research team. All its research is available here.