Dairy prices down another 10% overnight; AUD adjusting to significant drop in commodity prices; US rate hike likely in September if data holds

By Raiko Shareef

The RBA’s reduced angst on the AUD has that currency far and away the best performer overnight.

NZD kept its cool despite another poor dairy auction. Later on, hawkish comments from the Fed’s Lockhart saw a significant and broad USD rally.

Credit to our NAB colleague Ray Attrill, who warned two weeks ago that RBA Governor Stevens’ circumspect language on the AUD at his annual Anika Foundation speech could presage a change enshrined in the next RBA policy statement.

As it happened, that was the most significant change in yesterday’s missive. The RBA replaced “further depreciation seems both likely and necessary” with “the Australian dollar is adjusting to the significant decline in key commodity prices”.

This allowed the AUD to post a near 2.0% gain on the day, but it has since fallen back somewhat.

Our short NZD/AUD trade, entered last week at 0.9158, was intended to take advantage of any possible change in language. The cross sits 1.8% weaker for the day at 0.8850. We remain short, targeting 0.8772.

NZD/USD was dragged up through 0.66 on the back of AUD’s meteoric rise. NZD was remarkably stable in the wake of another very dairy auction.

The GDT Index’s 9.3% drop included a 10.3% fall in the key wholemilk powder price. That product went at an average of US$1,590/MT.

The market was certainly braced for a negative result, given the sentiment in broader commodity markets. But we are surprised that NZD managed to hold its own.

The obvious explanation is that there is still appetite for a very short NZD market to lighten up its position.

In any case, it makes us a little nervous about our short NZD/USD position. If the market is so inoculated to bad news, then Fonterra would likely need to update its payout forecast to below $4.00/kgMS on Friday. Our forecast of $3.80 now has downside risk, as a result of today’s auction.

Late in the session, the WSJ published an interview with Atlanta Fed President Lockhart, which noted that “it would take a significant deterioration in the data to convince him not to move in September.”

Lockhart is both a centrist and a 2015 voter on the FOMC, making this assertion important. It changes the burden of proof – data no longer has to improve materially for the Fed to move in September. It simply has to avoid worsening.

Of late, it has been unusual for any sole Fed speaker (bar Chair Yellen) to engender a significant market reaction.

Today’s statement caught an unsuspecting market napping. The USD gained broadly, with EUR dropping 60pts in short order.

NZD/USD broke below sticky support at 0.6550. For Friday’s payrolls report, Lockhart’s statement lowers the employment change required to engender a USD negative reaction.

Today, NZ’s labour market report will be keeping an eye on. A swathe of services PMIs are due globally, and the ADP employment report will (as always), be watched, despite being a poor predictor of non-farm payrolls.

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Daily exchange rates

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