Opinion: Fonterra auction result consistent with dairy price peak; Kiwi$ supported by 2010 optimism

By Danica Hampton After starting 2010 with a flourish, NZD/USD spent most of the night shuffling sideways within a 0.7320-0.7390 range. Over the past few days, growing optimism about the prospects for growth in 2010 has also helped underpin growth sensitive currencies like NZD. However, last night's mixed US data did little to help bolster global sentiment. While factory orders were surprisingly strong (rising 1.1% vs. 0.5% forecast), pending home sales were shockingly bad (falling 16.0% vs. -2.0% forecast). Global equities were also a bit mixed. The FTSE rose 0.36%, the DAX fell 0.27% and the S&P500 is currently flat. Elsewhere in the world, GBP was weighed down by election jitters as UK politicians focus on belt-tightening and plans to get UK government borrowing under control. Meantime, worries about CDS spreads in Europe and Fitch's downgrade of Iceland (down one notch to BB+) took a toll on EUR. Last night's online Fonterra auction also took a bit of the shine off NZD/USD. The average price of whole milk powder fell 7.1% to US$3,309. While the results are consistent with dairy prices peaking, it's worth noting average whole milk powder prices are still up about 80% from the lows seen in July (and up nearly 60% on this time last year). While NZD/USD was in a bit of a holding pattern overnight, we still think the fundamental backdrop still looks relatively supportive. Not only should the anticipated global recovery continue to support risk appetite and underpin commodity prices, but recent data suggests the NZ economy is on track to expand 2.5%, on an annual average basis, across calendar 2010 (which stacks up favourable against many of our trading partners). Our short-term valuation model (based on NZ-US interest rate spreads, commodity prices and risk appetite) suggests a current "fair value" range of 0.7250-0.7450 for NZD/USD. For today, in the absence of a melt-down in Asian equities, we suspect dips will be limited to the 0.7280-0.7290 region. Initial headwinds are expected ahead of 0.7370. The USD firmed a touch last night, but there was little in the way of direction coming from either economic data or global equities. EUR/USD slipped from above 1.4460 to below 1.4380. A misinterpreted global investment report triggered a wave of EUR selling, but it subsidised after the report was clarified (it actually painted an upbeat picture of CDS is Italy, Greece and Hungary). Eurozone CPI printed in line with expectations at 0.9%y/y in December. However, Fitch's downgrade of Iceland's credit rating by one notch to BB+ did little to help EUR sentiment. GBP/USD fell from above 1.6150 to below 1.6000. While the UK construction data was a bit sad (47.1 vs. 47.4 forecast), GBP was really weighed down by election jitters and concern about how Britain will get its government borrowing under control. UK company Cadbury was unimpressed by Kraft's sweetened take-over bid (Kraft has upped its cash offer after selling its North American pizza business to Nestlé). Last night's US data was a bit mixed. Factory orders surprised by rising 1.1%m/m in November, well above the 0.5% forecast. However, pending homes sales fell a whopping 16.0% in November, much worse than the 0.2% drop expected. November's sharp drop follows a 42% surged in activity from February "“ October, which was likely driven by the original deadline for the first-time homebuyer tax credit. With the tax credit now being extended to 30 April 2010, some pick-up in housing activity is likely in coming months. After starting the new year with a flourish, global equities markets were more or less flat last night. Asian markets posted solid gains, but European markets were mixed with the FTSE rising 0.36% and the DAX falling 0.27%. However, the mixed US data provided little in the way of direction for Wall Street. The S&P500 is currently flat. This week is full of data and events that might shape currency sentiment. The FOMC minutes are due tomorrow morning and the Fed's Hoeing speaks on Thursday. But investors are really waiting for Friday's US non-farm payrolls for a clearer steer of where the US economy is going. The Bank of England also meet this week (although no change is a near certainty). Eurozone retail sales and GDP are also released later in the week. Should the economic data continue to impress, we suspect optimism about the prospects for growth in 2010 will growth sensitive currencies outperform at the expense of the JPY and USD this week. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.