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NZ dollar pares gains after Fonterra keeps payout to farmers unchanged

Wednesday 11th December 2013

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The New Zealand dollar pared gains after Fonterra Cooperative Group, the nation's largest company, dashed expectations that it would increase its forecast payout to farmers today.

The kiwi touched a three week high of 83.34 US cents this morning and was trading at 83.28 cents at 8am in Wellington from 82.91 cents at 5pm yesterday. The local currency slipped as low as 82.89 cents and recently traded at 83.11 cents after Fonterra unexpectedly said it would keep its milk payout to farmers at $8.30 per kilogramme of milk solids for the current season.

Fonterra said it would normally have increased its payout but was keeping its forecast unchanged on concern margins would be squeezed as it is unable to raise the price of its manufactured products such as cheese. The unchanged payout forecast is still a record price, helping underpin the kiwi as a reviving local economy points to a rise in interest rates next year. Reserve Bank governor Graeme Wheeler is expected to confirm tomorrow that New Zealand will be the first developed country to raise rates next year, increasing the yield advantage of local assets.

"The currency sold off as there were a lot of market rumours expecting them to increase their forecast," said Sam Tuck, senior manager FX at ANZ New Zealand. "Whilst there is an initial negative reaction due to the fact that it has missed the rumours, I think the currency will probably maintain its overall strength and won't decline too much further because the good news is still there in the milk powder price."

After an initial knee-jerk reaction, traders will probably turn their focus back to the reviving local economy ahead of the RBNZ decision tomorrow, Tuck said.

"The market for the moment is focusing on the good domestic stuff behind the New Zealand dollar and this doesn't actually change that good domestic story, it just means that the company is being a bit more prudent," Tuck said.

Wheeler is expected to leave the official cash rate unchanged at 2.5 percent in his final review of the year tomorrow. By March the OCR is expected to be at 2.75 percent, rising to 3 percent in the June quarter and to 3.5 percent by the end of 2014, according to a Reuters survey.

By contrast, the Federal Reserve's target rate is in a range of zero to 0.25 percent. Traders are looking ahead to the Fed's Dec. 17-18 meeting as they await a decision on when it will pull back on its US$85 billion a month bond-buying programme which has weakened the greenback.

The majority of economists polled by Reuters on Monday, 33 of 63, expect the Fed to start trimming its bond buying programme in March. Stronger US employment data last week prompted some economists to bring forward their expectations. Some 29 of 63 economists think the taper will happen in either December or January. Nine say it will happen at the US central bank's Dec. 17-18, 19 say in January and one said either December or January.

The New Zealand dollar slipped to 90.89 Australian cents at 8am in Wellington from 91.06 cents at 5pm yesterday ahead of a Westpac consumer confidence survey today.

The kiwi advanced to 60.47 euro cents from 60.28 cents yesterday and gained to 50.61 British pence from 50.40 pence. The local currency weakened to 85.50 yen from 85.62 yen yesterday. The trade weighted index increased to 77.91 from 77.78 yesterday.

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