By Raiko Shareef
NZ Dollar
The USD edged lower across the board, driven by idiosyncratic factors that strengthened its peers. In Australia, the RBA debated whether it should cut in February or March. In New Zealand, dairy prices rose at their fastest rate since early 2013. In Europe, (complacent?) optimism that Greece will request a deal tomorrow, as well as strong German data, has the EUR higher.
The minutes from the RBA’s February meeting contained detail that was mostly already covered by events subsequent to that meeting. The Statement on Monetary Policy and Governor Stevens’ testimony to Parliament gave little reason to think the RBA was leaning toward a third rate cut (after the first in February, and the second priced in by May).
The only fresh piece of information was that the Board debated whether to cut rates in February or March. As our NAB colleague Peter Jolly points out, clearly the Australian economy was not in such a disastrous state that a rate cut could not be delayed. This will continue to eat away at investors looking for that third rate cut (which NAB does not expect). Along with continued firming in hard commodity prices, this will continue to provide support for AUD, which sits 0.6% higher this morning at 0.7820.
On the subject of commodities, the very strong jump in prices at last night’s dairy auction flicked NZD/USD above 0.7550. The headline gain played positively, as did the 13.7% rise in whole milk powder prices. Some of these gains will reflect the prospect of tighter supply, thanks to drought-like conditions in NZ. In that sense, the failure of NZD to materially benefit appears rational, given the net negative impact the mix of higher prices but lower production will have on the economy.
In Europe, the merry-go-round of market sentiment around Greece’s debt negotiations continues. In the latest development, a Reuters story citing an unnamed European official reports that Greece will ask for a six-month bailout extension tomorrow. The market appears utterly certain that some sort of deal will be struck, and that Greece will continue to be allowed to draw on ECB liquidity.
Risk markets do seem to be making hay of these reports, with equities and Treasury yields pushing higher, while the JPY lost ground. EUR has recovered by 0.4% from the lows it saw after talks broke down yesterday.
We are sceptical that any deal will represent much more than a face-saving exercise for both sides, and are also wary that markets might be getting ahead of themselves. One cannot imagine that Greece would be happy with any document that includes the words “bailout extension”.
Looking through the flurry of US data due this evening, tomorrow morning sees the minutes of the FOMC’s January meeting. The focus will be on any signs the Fed might veer away from a mid-2015 tightening, perhaps on the back of the “international developments” cited in the statement itself. The USD remains vulnerable to a decent correction, especially if a resolution on Greece occurs quickly and definitively.
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