NZ dollar little changed as dairy product prices bounce as expected

Wednesday 19th August 2015

The New Zealand dollar was little changed after dairy product prices jumped as expected at auction overnight, as the bounce had already been priced into the local currency.

The kiwi was at 65.84 US cents at 8am in Wellington, from 65.89 cents at 5pm yesterday. The trade-weighted index edged lower to 70.96 from 71.04 yesterday.

Dairy product prices jumped in the latest GlobalDairyTrade auction, rising for the first time in nearly six months after Fonterra Cooperative Group cut back the volume of whole milk powder on offer by a third. Whole milk powder, New Zealand's key export product, jumped 19.1 percent to US$1,856 a tonne.

"We are living in efficient markets and the NZX futures were telling you that this GDT auction was going to be a pretty decent bounce and markets have priced that in to kiwi over the beginning of this week," said ANZ Bank New Zealand senior FX strategist Sam Tuck. The kiwi "had already priced in that strength in the GDT and so when it came in as expected, the kiwi was pretty happy to stay at the levels that it was, it was relatively unmoved by the auction which is a sign that it came in pretty much where markets were expecting it."

ANZ says dairy prices have now reached the bottom and lifted its forecast for Fonterra's 2015/16 payout to farmers to between $3.75 to $4 per kilogram of milk solids, in line with Fonterra's forecast of $3.85/kgMS.

Still, that remains below the cost of production, with Dairy NZ estimating $5.70/kgMS is the industry average breakeven point for most farmers.

"Even though we think the prices have bottomed, in order to restore profitability for dairy farmers and that sector of the New Zealand economy, prices have to bounce quite a long way further," said the ANZ's Tuck. "We are still seeing it as a loss-making season, which means it shouldn't be overly good news for the New Zealand dollar."

Tuck says the kiwi is "fairly priced" at the moment and he expects it to "wash around within its existing range" of 65 US cents to 67 cents.

In New Zealand today, data is scheduled for release on business prices for the second quarter.

Traders are likely to be focused on Chinese equities during the Asian day, after the Shanghai Composite Index fell 6 percent yesterday, its steepest decline in three weeks. Tonight, attention will turn to US inflation data for July and the minutes of the last Federal Reserve meeting, which are expected to support the world's largest economy raising interest rates this year.

The New Zealand dollar advanced to 89.61 Australian cents from 89.48 cents yesterday, slipped to 42.03 British pence from 42.28 pence, gained to 59.68 euro cents from 59.59 cents and declined to 81.88 yen from 82.03 yen.

BusinessDesk.co.nz

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