Opinion: NZ$ strengthens on Fonterra auction, equity market turn-around

By Mike Jones The NZD has been the strongest performing currency over the past 24 hours. Having started the week around 0.7100, recovering risk appetite and another strong result from Fonterra's online milk price auction help push NZD/USD up to nearly 0.7300. Overnight, markets brushed aside lingering concerns over the Dubai debt situation. Dubai World announced more details about how it will restructure its estimated US$59b worth of debt, which helped allay concerns of a wider contagion to global markets. And while global manufacturing data was a little disappointing (PMIs in China, UK, and parts of Europe generally fell short of expectations), traders were more interested in October's surge in US pending home sales. Sales rose 3.7% (-1% expected) to the highest level in over 3 years. Equity markets around the globe continued to roar back from their Dubai-induced falls. The DAX and the FTSE surged 2.3% and 2.7% respectively, while the S&P500 is up around 1.4%. Our risk appetite index (which has a scale of 0-100%) increased to 53% from 48% at the start of week. Buoyant equity markets and recovering risk appetite spurred demand for "˜growth-sensitive' currencies like the NZD, at the expense of safe-haven currencies like USD and JPY. A strong night for commodity prices also added to demand for NZD, AUD and CAD. Not only did gold prices reach new highs above US$1200/ounce, but the results of Fonterra's latest online auction showed milk prices continuing to edge higher. Prices for whole milk powder lifted 3.6% m/m in December to be up 71% year on year. As expected, the RBA Board yesterday increased their cash rate 25bps to 3.75%. However, reading between the lines of the statement, it appears the RBA is now closer to pausing. As traders rushed to price in a slower pace of future RBA tightening, the AUD/USD slipped. The associated gains in NZD/AUD helped underpin the NZD over the past 24 hours. For today, we expect the global backdrop of solid risk appetite and generalised USD weakness to keep the NZD/USD supported on dips towards 0.7200. Initial headwinds are expected towards 0.7340. The USD weakened against most of the major currencies overnight. Dubai World announced it will restructure around US$26b of its estimated US$59b worth of debt. The UAE Vice President also spoke out suggesting market reaction to the Dubai situation has been overblown. These developments help eased fears about wider contagion from Dubai's proposed debt "stand still" and risk appetite recovered strongly. The VIX Index (a proxy for risk aversion) fell to nearly 22%, from as high as 26% late last week. Global data released overnight was a little mixed but, on balance, appeared to add to the positive sentiment. Manufacturing PMIs out of China, Europe and the UK were generally disappointing. The US ISM manufacturing survey also fell (to 53.6 vs. 55.0 expected). But markets tended to focus on a 3.7% surge in US October pending home sales, to the highest level in over 3 years. October construction spending also exceeded expectations by a small margin. The data reassured investors the US housing recovery is underway, helping send US stocks sharply higher. The S&P500 is currently up around 1.4%. Strong gains in equities and recovering risk appetite saw investors ditch safe-haven currencies like the USD and JPY overnight. In fact, USD/JPY soared to nearly 87.50 after the Bank of Japan (BoJ) called an emergency policy meeting. The upshot of the meeting was the introduction of a facility to lend an extra ¥10 trillion to banks at a fixed rate of 0.1%. "“ a form of quantitative easing. The facility appears to be directed towards both providing a boost to the Japanese economy as well as curbing strength in JPY. Nevertheless, USD/JPY reversed some of its gains following the announcement, with some expecting more direct action against the soaring JPY. Gold prices continued their rapid ascent overnight, reaching a record US$1200/ounce. This, combined with the weaker USD, spurred more broad-based gains in commodity prices. Oil prices rose around 1.6% and the broader CRB index is up 1%. Against this backdrop, "˜growth-sensitive' currencies such as CAD, AUD and NZD tended to outperform. USD/CAD fell to almost 1.04, no doubt helped by yesterday's news the Canadian economy has exited recession. Despite yesterday's RBA rate hike, gains in the AUD were more muted with the RBA statement indicative of a slower pace of future tightening. Looking ahead, we suspect near-term support on the USD index will emerge on dips towards the 15-month lows around 74.20. On the topside, firming risk appetite should limit bounces to the 74.80-75.00 region. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.