Increased Fonterra payout generates little reaction in NZ$; Euro sentiment helped by solid Spanish bond auction

By Mike Burrowes

NZD

Trading in the NZD/USD was volatile overnight, trading within a 0.7610 to 0.7670 range. During the early evening, investor sentiment was buoyed by solid demand at a Spanish debt auction and better Eurozone data. These gains were reversed early this morning as the focus come back on the European debt crisis and lack of a credible plan from the EU.

While not generating much reaction in the NZD, yesterday Fonterra lifted its payout for the current season by 20 cents to $6.90 to $7.00. Despite the obvious economic issues in some parts of the world, the international dairy market has been holding up. We knew this from the recent stability, even slight pick up, in dairy prices at the most recent global dairy trade auctions. Generally firm commodity prices, including dairy, is a strong support to the NZ economy at present. Indeed, the increased payout equates to an additional $300m in revenue.

Trading in the NZD/AUD was relatively subdued overnight, briefly falling through key support at the 0.7550 level before recovering to around 0.7570 currently. The only data due for release today across the Tasman is the Westpac consumer confidence survey.

The NZD made solid gains against both the EUR and GBP overnight, as markets re-focused on the problems facing Europe. NZD/EUR rose from 0.5790 to 0.5820 currently. The moves on NZD/GBP were more muted, moving from 0.4890 to 0.4910.

With no important data due for release locally, expect the NZD to take its cue from developments offshore. Initial support on NZD/USD is eyed at 0.7600 and resistance at 0.7670.

Majors

It has been a mixed evening in FX markets as the twists are turns in the European debt crisis continue. Overnight, markets continued to worry that the latest EU plan will be insufficient to stem the crisis. The USD and JPY have benefited from “safe haven” demand, while the European currencies lead the declines.

Despite the dour mood towards the EUR, equity markets were in better stead. The S&P500 index and UK FTSE 100 index gained 0.4% and 1.2% respectively, while the Euro Stoxx 50 index lost 0.4%. Our risk appetite index (scale 0 – 100%) recovered from 39.1% to 41.2%.

Early in the evening the EUR/USD managed to reach 1.3230. Sentiment towards the EUR was bolstered by a positive Spanish debt auction (see Fixed Interest report). In addition, the ZEW survey of German investor sentiment rose unexpectedly in December (-53.8 vs. -55.8 expected).

However, the EUR gains were short-lived and it ended up among the weakest performers against the USD overnight, plunging from 1.3200 to 1.3070 currently. This is the lowest level since the beginning of the year.  The negative mood towards the EUR was started by comments from German Chancellor Merkel early this morning. Merkel rejected raising the upper limit of the European Stability Mechanism, which is expected to be €500b.   Adding to the EUR declines, ratings agency Fitch noted it sees a “significant” economic downturn in European and expects the debt crisis to continue throughout next year.

The renewed concerns about Europe saw “safe haven” demand for USD and JPY. The move on the USD index occurred after the comments from Merkel. It rose 0.7% to 80.00. US equity markets and the USD managed to hold-up despite US retails sales for November coming in weaker-than-expected (0.2% vs. 0.6% expected). Helping to support equity markets, for now, are hopes the Fed will allude to further quantitative easing if the unemployment and growth situation do not improve. The FOMC rate decision is due at 8:15am NZT.

Despite the moves in the EUR, the risk sensitive NZD and AUD were better supported overnight as they followed US equity markets. The AUD/USD made solid gains during the evening, reaching an intra-day high around 1.0150. These gains have been reversed following the comments from Merkel early this morning, currently trading around 1.0070.

Looking to the day ahead, the focus will initially be on the FOMC rate decision at 8:15am NZT. Investors’ attention may be briefly pulled away from the debt crisis by the release of Eurozone industrial production tonight. In the US, there is only MBA mortgage applications and the import price index due for release.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.