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Dairy prices rise sharply; RBA cuts rates to 2.25%; India loosens; US factory order fall; Greece fears bank runs; UST yields rise; oil up, gold down; NZ$1 = 72.9 USc, TWI = 76.1

Dairy prices rise sharply; RBA cuts rates to 2.25%; India loosens; US factory order fall; Greece fears bank runs; UST yields rise; oil up, gold down; NZ$1 = 72.9 USc, TWI = 76.1

Here's my summary of the key issues that affect New Zealand overnight with news of a sharp rise in dairy prices in the overnight auction.

With lower volumes offered, prices rose +9.4% overall in US dollar terms from the previous auction two weeks ago, but were up a spectacular +15.4% in NZ dollar terms due to the meaningful falls in the kiwi dollar over the past two weeks.

Leading the 'recovery' is whole milk powder prices. These were up +19.2% while skim milk powder was up +6.7% and butter up +6.1%. Cheese was down -11.1%.

These results took the average price back to where it was in August 2014, and still represents an overall price fall of more than -40% from where it was a year ago. But in 2015 prices are up +26%.

Late yesterday, the Reserve Bank of Australia surprised some in the market by cutting their cash rate target by -0.25% from 2.50% to 2.25%. This had the effect of driving down the Aussie dollar and the Kiwi with it, but we rose in the cross trade. Their cut may not be the last.

That news came as Australia posted a much lower trade deficit than expected and building approval data wasn't as bad as anticipated.

India lowered its reserve requirements overnight but kept rates unchanged.

In the US, new orders for factory goods fell for a fifth straight month in December, but a smaller-than-previously reported drop in business spending plans supported views of a rebound in the months ahead. Those market views helped the oil price rebound.

In Greece there are fears of bank runs. Depositors are doubting their banks will be supported by the ECB and are withdrawing funds, exacerbating the problems of local banks.

In New York, benchmark UST 10 year bond yields are up again today at 1.74%. That is two days in a row and it increases the chance we will see a reactive shift locally when New Zealand swap markets open.

The oil price rose again, this time more robustly, up to US$51/barrel and above US$50 for the first time in a month with Brent crude at US$56/barrel.

Gold is losing support and is down sharply to US$1,259/oz.

We start today with the New Zealand dollar at marginally lower levels. It is down to 72.9 USc, at 94.4 AUc which is a whole 1c above where it was at this time yesterday, and the TWI is now at 76.1.

If you want to catch up with all the changes yesterday we have an update here.

The easiest place to stay up with event risk is by following our Economic Calendar here »

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11 Comments

Yo-yo action on the NZ$ far in excess of reality.

Somebody is having fun.

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I wouldn't be surprised to learn that Fonterra's FX desk is frontrunning these announcements, they always seem to get an effective exchange rate far below the annual average.

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I second hand rumour is has any truth, they have to hedge and trade under special rules, every time they decide to transfer a cash transaction into NZ we're talking in excess of 20M a shot equivalent,  doing that is enough to actually shift the trade rates in a single transaction.  Also causes a bit of gap for the rest of us

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How much regulation is there / can there be of the fx market?

Fx traders get a free ride don't they?  Rigging the benchmark libor rates is one thing, but when has an fx trader ever been done for 'insider trading' such as front-running customers orders?

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FX isn't shares.  It's not some individual trying to get an advantage in the marketplace by ripping off the other shareholders.

In FX you're _supposed_ to do that due dilligence.  Big parties are supposed to buy in to the service broadcasters and have representatives "at the table" so than can manage currency risk (sovereign, bank and market).

Rigging the LIBOR isn't like insider trading, it's like deliberately and for corrupt purposes releasing completely fake Prospectus

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Exactly, so if a share trader has an inside line, trades on that, gets caught, they go to jail.  An fx trader on the other hand just makes a tidy profit.

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In New York, benchmark UST 10 year bond yields are up again today at 1.74%. That is two days in a row and it increases the chance we will see a reactive shift locally when New Zealand swap markets open.

 

I certainly hope so. NZ taxpayers need a break from paying extortionately high legacy coupons on outstanding government stock issues- the cost of buying and retiring these securities to faciltate cost effective new issuance runs into $billions above book cost - all part of the profits we eternally transfer to foreign funders of NZ's chronic debt dependence.

 

Coupon    Maturity Date    Yield    Face Value($M)  Mkt Value($M)
                
6.00          15-Apr-15          3.470    $7,660               $7,837
6.00          15-Dec-17         3.090    $11,969             $13,014
5.00          15-Mar-19         3.085    $11,813             $12,910
3.00          15-Apr-20          3.100    $5,940               $5,966
6.00          15-May-21         3.110    $11,864             $13,963
5.50          15-Apr-23          3.130    $9,245               $10,973
4.50          15-Apr-27          3.180    $3,300               $3,783

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Isn't that just a result of NZ government going begging for foreign funding, they show their cards, and demand is high.  NZ isn't a big customers so doesn't have the bulk or created dependance to command lower rates.   So we are "Kiwi Anybody  shopping around the retail banks for unsecured loans".  

As long as government wants to run the system to be funded from third party (ie foreign) borrowing, they are going to be in a position of power to command a premium.  and just like our own "Kiwi Anybody" folks on the street, they're likely to stay stuck in the poverty trap:
Quod est superius est sicut quod est inferius  and vice versa

Selling off the plant and equipment, or the market quota, or worse capital ownership is worse.  Only a few ways out of the hole.

 

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" the cost of buying and retiring these securities to faciltate cost effective new issuance"

 

How could retiring old and issuing new ever be cost effective?  What lender would sell existing securities back below market value? Or what lender would buy new issuance above market value?

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The reaction of the NZ$ seems overblown.

9.8% rise after a 50% fall from the high is really about a 5% recovery.

With dairy being maybe 20% of total exports and some of that owned and profitted overseas it seems that a 2.5% currency rise is ridiculous.

 

 

 

 

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Exactly, no difference to my super scheme, down 50% then up 50% and they keep saying they are great, yet my actual dollar returns are poor, i.e.and I am still down 25%.

All the explantions are mathemetically correct, but if you look at the big picture you need a 100% increase from the point where we had a 50% fall from the highest point to just breakeven.

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