NZ dollar follows stocks, commodities lower as BoE warns of Brexit risks

Wednesday 6th July 2016

The New Zealand dollar followed global stock markets and commodity prices lower as the Bank of England highlighted the European Union exit as a key risk to the economy, sapping investors' appetite for risk-sensitive assets.

The kiwi fell to 71.40 US cents at 8am in Wellington from 71.97 cents yesterday. The trade-weighted index declined to 76.54 from 76.86 yesterday.

The Bank of England's financial stability report warned the Brexit vote created a "challenging" outlook for the UK's economy and that some near-term risks have "begun to crystallise". Separately, two UK real estate fund suspended redemptions due to the recent tumoil in financial markets. That pushed down stock markets on both sides of the Atlantic and the Thompson Reuters/CoreCommodity CRB Index, a broad measure of commodity prices, dropped 2.4 percent. Currencies sensitive to commodity price movements such as the kiwi and Australian dollar fell.

"Financial markets appear to have taken a more realistic view around the complexity and uncertainty characterising the global political background and associated impact on already lacklustre economic growth," ANZ Bank New Zealand agri-economist Con Williams said in a note. "With global growth concerns and USD/JPY strength back to the fore there could be some more downside for the NZD in short-term."

A decline in whole milk powder prices at the GlobalDairyTrade auction also weighed on the kiwi dollar, with short-term deliveries attracting buyers and less demand for later supply.

ANZ's Williams said dairy prices "remain precariously placed" and that Fonterra Cooperative Group's opening forecast farmgate payout of $4.25 per kilogram of milk solids looks optimistic.

"If recent auction prices were to persist then the milk price will see no improvement from the season that has just finished," Williams said. Fonterra expects to pay $3.90/kgMS for the 2015/16 season.

The Bank of England's warning and the suspended redemptions from the real estate funds pushed down the British pound, with the kiwi gaining to 54.78 pence from 54.32 pence yesterday.

The kiwi was little changed at 95.75 Australian cents from 96.81 cents after the Reserve Bank of Australia yesterday kept the target cash rate at 1.75 percent.

The local currency fell to 72.61 yen from 73.44 yen yesterday as Japan's currency benefited from investors chased so-called 'safe haven' assets, and declined to 4.7674 Chinese yuan from 4.7981 yuan. It declined to 64.49 euro cents from 64.67 cents.

BusinessDesk.co.nz

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