Fonterra auction comes in well below consensus; trifecta of events to impact NZD over next 24-hours

By Kymberly Martin

The USD index sits a little higher, while the GBP has underperformed. The NZD/USD dropped following the GDT auction overnight, but is still modestly higher than yesterday morning.

Markets remain in a relative lull ahead of the key risk events of the week, the BoJ and US FOMC meetings today. Equity and commodity markets mostly traded within fairly tight parameters. Our global risk appetite index remains steady above 50%.

The USD index experienced a bit of volatility last evening as the EUR gapped higher. However, the move in the EUR was not sustained. From a brief spike above 1.1210 the EUR/USD now trades at 1.1160. The GBP/USD has slipped further to trade at 1.2970. Near-term support will likely be encountered around 1.2870 ahead of the post-‘Brexit’ vote lows near 1.2800.

Ahead of the Bank of Japan’s meeting today the JPY has traded within a fairly orderly range. The market consensus appears to be for the Bank to announce some substantial additions to its easing programme. No doubt the BoJ will be hoping this will lead to a weaker Yen. But this is far from guaranteed if history is a guide. The greater prospect for JPY weakness might arise if the Fed were to offer a less dovish than expected tone in the early hours of tomorrow morning. Currently the USD/JPY trades at 101.80.

The NZD/USD pushed higher last evening, poking its nose toward 0.7360.

However the GDT auction in the early hours of this morning curtailed the move. The dairy auction showed a 1.7% further rise in average prices since the last event. However, this was some way below the unofficial consensus ahead of the auction that seemed to be looking for 5-10%+. The NZD/USD gapped lower before consolidating above 0.7300 in recent trading.

There is a trifecta of events to impact on the NZD over the coming 24-hours or so, and that’s not even counting the BoJ’s meeting. First, and foremost we have the US FOMC early tomorrow morning. Although we would be extremely surprised to see a hike this week, we suspect the Fed may try to more definitively set the market up for a December hike. However, this may be accompanied by a downgrading of the Fed’s longer-term projections for the Fed fund’s rate. The USD’s response may remain a trade-off between these short-term and longer-term signals of Fed activity.

Second, tomorrow morning (likely ahead of the RBNZ’s announcement) Fonterra will announce its full 2015/2016 results. More important for the market will be whether the co-op gives an update on its 2016/2017 forecast, currently at NZD4.75. We see material upside risk to this. Acknowledgement of this risk by Fonterra might boost the NZD into the meeting of the RBNZ.

We expect the RBNZ will want to frame its short statement to have as little impact on the market as possible. i.e. to meet the market’s expectation for no cut this week, but leave open the option for a cut in November. We will have to wait and see how successful it is in this endeavour. Critical will be whether the summary line from its August MPS remains unaltered i.e. “further easing will be required to ensure that future inflation settles near the middle of the target range”.

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