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Dollar pares loss on Fonterra auction price rise

Wednesday 7th April 2010

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The New Zealand dollar had an overnight rollercoaster ride, dipping to a near four-week low below US 70 cents at one point before roaring back above 70.50 cents as Fonterra announced a 21% increase in its online whole milk powder auction price.

This came after a day of mixed news from The Treasury’s monthly economic indicators update and the NZ Institute of Economic Research’s quarterly business opinion, followed the announcement by the Reserve Bank of Australia that it raised its overnight cash rate by 25 basis points to 4.25% that initially sent the kiwi dollar lower against both the Australian dollar and US dollar.

Short-term speculative accounts took the opportunity to add to ‘short’ NZ$/A$ positions, where investors bet the kiwi in the expectation they can buy it at a cheaper rate, sending the currency to fresh nine and a half year lows around 75.60 Australian cents.

Fonterra’s announcement that whole milk powder prices have more than doubled from a trough in July to US$3,969 a tonne gave the kiwi a real boost.

“The New Zealand dollar is very closely related to commodity prices,” said Mike Jones, strategist at Bank of New Zealand.

“If commodity prices are up, that means farmers and New Zealand receives a higher income, and feeds through to the economy. In commodity currencies such as New Zealand and Australia our dollars are closely tied to commodity price signals.”

The ongoing Greek economic crisis still seems nowhere near resolution, with media reports that its ministers aren’t happy with proposed fiscal cuts required as part of the joint European Union-International Monetary Fund aid package. The euro came under pressure as a result.

In a week that has little New Zealand or Australian economic data, most eyes will be on the US Federal Reserve, and how it intends to wind back its propping up of America’s economy by printing money. How quickly that occurs could be a key for what happens to the NZ dollar over the next few days, Jones said.

The kiwi rose to 70.63 US cents from an overnight 69.98 cents, while the trade-weighted index, TWI, rose to 65.71 from 65.16. Against the yen it rose to 66.26 from 65.71 yen yesterday, rose to 52.72 euro cents from 52.17 cents, and further strengthened against the pound to 46.27 pence from 46.19. Against the Australian dollar, the kiwi rose to 76.11 cents from 75.64 cents.

Last night’s sharp turnaround in the kiwi/greenback cross-rate puts the NZ dollar firmly back inside the familiar 0.7000 – 0.7180 range it has been tracking for the best part of a month.

Jones said that while the fragile Australian dollar cross can be expected to impart further drag on the kiwi/greenback in the short term, dips below 70 cents are expected to be short-lived while New Zealand’s economy and commodity prices continue to recover.

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