Analysts at ANZ explained that commodity price direction and the health of the Chinese economy remain in sharp focus. Key Quotes: "Yesterday’s Chinese trade balance for February was worse than expected. However, Chinese New Year also occurred during this period and is likely to have had an impact on activity. Looking at year-to-date trade figures, recent restocking activity and current known inventory levels for some key sectors paints a slightly more positive forward looking picture. That said, any significant rally in commodity prices is expected to be capped for now. With cost-curve analysis showing many sector participants struggling at current price levels, a reduction in investment, a recalibration of business models and the supply response is likely to shape the 2016 outlook. However, the supply side does tend to take time to respond and depends heavily on the production lifecycle of different sectors. Supply reductions over time will help trigger an improvement in prices, but high global stocks and weaker demand growth than recent years are likely to cap these through to at least the latter half of 2016. As inventory levels normalise, the demand backdrop will need to improve to allow price gains to be sustained. Dairy prices certainly look like they are starting to ‘bounce along the bottom’. Near-term there seems potential for markets to improve further over the next couple of auctions, driven by declining seasonal volumes on GDT, buyers trying to lock-in low prices, general improvement in commodity prices recently (especially oil), China stimulus and normalisation in stream returns between WMP and SMP/milkfat (this played out at last auction and WMP has further to go). If this does play out, it would seem Fonterra might have gone a tad too far yesterday by downgrading its milk price to $3.90/kg MS and assuming no change in market pricing into the year-end. For more information, read our latest forex news.