NZD/USD: Capped by 0.61 territories, US dollar back on the bid

NZD/USD is trading at 0.6077 having travelled between a low of 0.6032 and a high of 0.6119. The bird took flight as the US dollar sunk on dovish Federal Reserve rhetoric. The DXY was pressured to a low of 99.23 on the day with US Treasury bond yields that are slightly lower. The overall upbeat tones have continued to support the commodity complex as we move through the week. 

"Near-term price action looks strong and you can’t shy away from that, and although the market has clung to the idea that negative rates are off the table for now, they just make other types of easing more likely," analysts at ANZ Bank argued.

Last week saw three big developments, including the Reserve Bank of New Zealand. We saw the nation taking an enormous step towards normality by moving into Alert Level 2; the RBNZ at its Monetary Policy Statement scaled up QE to $60bn and left all other tools on the table. Last week’s Budget flagged significantly more bond issuance than we and the market were expecting.

"The RBNZ still has a lot of work to do, even if that’s in a support role for fiscal policy," analysts at ANZ explained. 

Meanwhile, Federal Reserves's Chairman Jerome Powell was testifying to the Senate Banking Committee and mostly spoke of ways in which to accommodate additional borrowers. "Anything that keeps people out of insolvency should be considered by Congress," he said. 

"The Fed is continuing to monitor the US mortgage market."

"The Fed can only address short-term funding needs of state and local governments."

"Layoffs by state and local governments will slow the US economic recovery."

Boston Federal Reserve Bank President Eric Rosengren also spoke on Tuesday and said, "Policymakers will do whatever they can to support the return to full employment and stable prices." Rosengren further acknowledged that the unemployment rate is likely to remain at double-digit levels by the end of the year.

Fonterra to announce its milk price forecast for the 2020-21 season

Looking ahead on the domestic front, Fonterra is due to announce its milk price forecast for the 2020-21 season, but forecasting in the current economic environment is not an easy task:

Forecasts released so far by banks and analysts range from $5.60 to $7/kg MS with our own forecast sitting near the lower end of the range at $5.75/kg MS.

No matter where the price lands it will be significantly lower than the 2019-20 season for which Fonterra expects to pay its suppliers a milk price between $7 and $7.60/kg.

NZ dairy products are currently commanding a premium in the global markets, but it seems unlikely these premiums will last too much longer.

Dairy prices have fallen 13% since the beginning of 2020. Last night’s GDT event did deliver a positive result with the GDT Price Index gaining 1% however these premiums are not expected to persist.

Whole milk powder was down 0.5% but a strong lift was seen in skim milk powder which gained 6.7%.

NZD/USD levels