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NZ dollar hits new 5-year high vs. Aust on Fonterra milk price hike, upbeat business confidence

Wednesday 31st July 2013

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The New Zealand dollar hit a new five-year high against its Australian counterpart as a higher forecast milk price by Fonterra Cooperative Group and jubilant local businesses show a growing contrast in the fortunes of the trans-Tasman economies.

The kiwi rose as high as 88.40 Australian cents, trading at 88.30 cents at 5pm from 87.96 cents yesterday. The currency was little changed at 79.77 US cents at 5pm in Wellington from 79.74 cents at 8am, down from 79.92 cents yesterday.

Fonterra raised its forecast payout to farmers for the 2014 season by 50 cents to $7.50 per kilogram of milksolids amid slow global supply and a weaker kiwi dollar, fuelling optimism for New Zealand's biggest export. Meantime, the ANZ Business Outlook showed firms' confidence at a 14-year high on the strength of optimism in the building sector.

That shows the growing divergence between the New Zealand and Australian economies, with interest rates expected to start rising on this side of the Tasman and another rate cut anticipated in for Australia. The yield on New Zealand's two-year government bond was 2.88 percent today, some 44 basis points above its Australian counterpart, even though New Zealand's official cash rate at 2.5 percent is lower than Australia's 2.75 percent.

"Most of the attention was on the relentless upward march of the kiwi/Aussie cross," said Mike Jones, currency strategist at Bank of New Zealand in Wellington. "Fonterra's upward revision to its milk price, and the upbeat ANZ Business Confidence survey only added fuel to the fire, and a test of 90 Australian cents now looks probable."

In a note today, Jones said the New Zealand/Australian dollar cross looks expensive on a fair value basis, but that a correction looks unlikely.

That comes as traders wait on the Federal Open Market Committee's review of US monetary policy after a two-day meeting in anticipation of any clues as to the Federal Reserve's plans to start unwinding its massive stimulatory programme. Chairman Ben Bernanke has said the Fed may pull back quantitative easing later this year and end the programme in mid-2014 as long as the economy continues to improve in line with the Fed's forecasts.

Before the Fed announcement, investors will be looking at US second-quarter gross domestic product figures, which will likely show annual growth slowed to 1 percent in the quarter, from 1.8 percent in the first quarter, according to Reuters polls.

The local currency slipped to 78.20 yen from 78.58 yen yesterday and edged down to 60.16 euro cents from 60.28 cents. It advanced to 52.40 British pence from 52.13 pence yesterday, and traded at 75.49 on the trade-weighted index from 75.55.

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