NZD drops on dairy auction, and on updeat RBA tone. Dairy price drop surprises offshore investors

By Raiko Shareef

NZD is the worst performing major currency overnight, after a drop in dairy prices at auction.

The USD had a mixed evening, and is unchanged at an index level.

Dairy prices fell by 3.1% in the latest GlobalDairyTrade auction, including a 4.6% drop in whole milk powder prices. We’d anticipated some consolidation.

Now that dairy has recovered from its period of underperformance relative to other commodity prices, we expect near-term auction results to reflect movements in oil and grain prices.

Over the medium-term though, we still expect prices to recover, as the El Nino weather pattern bites into production.

NZD/USD was riding above 0.68 ahead of the auction, and quickly shed 50pts to 0.6750 afterward.

Offshore investors clearly had not anticipated prices to dip back, and will no doubt be considering whether this raises the prospect of RBNZ easing. It may do, but only at the margin. At the September MPS, whole milk powder prices were near $1500. The average winning price at this auction was $2694, a much faster recovery than the Bank had implied.

From the charts, that 0.6850 level in NZD/USD resisted a test earlier in the evening, and we see initial support at 0.6720. More importantly, NZD/AUD is back at its 200-day moving average at 0.9296. A close below that would suggest a trip down to key support at 0.9200.

Elsewhere, the RBA Minutes caused a bit more of a reaction than we would’ve anticipated. The Bank sounded a tad more upbeat on recent developments, citing a pick-up in non-mining investment, and flagging the possibility that unemployment may be slightly lower in the months ahead. This is consistent with our NAB colleagues’ view that the RBA has finished easing for this cycle, and is now on hold for an extended period. But the market had moved to price in cuts after Westpac’s decision to raise mortgage rates in Australia last week. Some of those bets have been unwound.

We see AUD outperforming NZD over the months ahead, especially if the RBA does not deliver the rate cut in November that many analysts are now calling.

The central bank speakers that were on the circuit last night generally avoided talking about monetary policy. The Fed’s Powell and Dudley spoke on the subject of Treasury market liquidity. BoE Governor Carney mostly covered regulatory issues in his appearance in front of lawmakers.

Perhaps the best thing that happened overnight was Carney flagging his imminent speech (due early tomorrow morning) as a “a bit of yawner”. It’s on the subject of a British exit from the EU.

That’s a good characterisation of the events schedule for the next 24 hours, too.

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Raiko Shareef is on the BNZ Research team. All its research is available here.