Three Thoughts From London –  FX, Milk and Corruption

  1. The antipodeans are in focus today, with events possibly driving a wedge between AUD and NZD
  2. Malaysia’s anti-corruption agency released a report saying that the money that ended up in Prime Minister Razak’s bank accounts were not from the development bank 1MDB, so technically not illegal.
  3. A key figure from Brazil’s ruling party PT has been arrested (again).

1/ The antipodeans are in focus today, with events possibly driving a wedge between AUD and NZD. In Australia, the RBA left its target rate unchanged at 2.0%, reaffirming that monetary policy will remain accommodative. However, the Australian dollar rallied on the change in tone regarding currency, which is now seen as “adjusting to the significant declines in commodity prices,” dropping the phrase saying that a further drop was “both likely and necessary.” In a few hours (12:00 GMT), we get the results for the dairy action, which could prove market moving for NZD. Last auction brought the broad dairy index to multi year lows and some observers believe there is further downside. As noted in a previous Three Thoughts report, Fonterra – a 10,500-farmer strong cooperative that accounts for a third of world dairy exports – makes up 7% of the New Zealand’s GDP and 30% of its exports. This single item, dairy, is so important that RBNZ mentioned falling prices as one of the three key risk to the nation’s financial stability, noting that a quarter of farmers are now operating with a negative cash flow. Below is 10-year graph of main dairy auction index vs. the NZD.

2/ Malaysia’s anti-corruption agency released a report saying that the money that ended up in Prime Minister Razak’s bank accounts were not from the development bank 1MDB, so technically not illegal. But this is not the end of the story. The agency concluded that the roughly $675 bln were “donations,” but no more details were given. The point is that even if PM Razak has done nothing illegal, the way he handled the situation has not helped – to say the least. For example, 20 protestors were arrested last weekend, along with three anti-corruption commission officials. And on top of this, the PM began to lash out against foreigners, with a tone of rhetoric that reminds us of speeches by Turkey’s President Erdogan. For example, “I cannot allow white people, the foreigners, to determine our future. What is their right?” Add this to the decline in oil prices and it’s hard to see any upside for Malaysian assets.

3/ A key figure from Brazil’s ruling party PT has been arrested (again). Jose Dirceu, who was chief-of-staff under former President Lula, was singled out by prosecutors as being a major operator in the Petrobras corruption scandal. They also linked the current scandal to a former one, the Mensalao, which supposedly took place while he was in government. The risk here, of course, is the surfacing of a smoking gun that would link these developments to Lula, arguably the most powerful politician in the country and possible candidate for the next presidential race.