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NZ dollar drifts lower on sour milk auction, Fed views

Wednesday 8th March 2017

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The New Zealand dollar drifted lower on a trade-weighed index basis after a tumble in global dairy prices weighed on sentiment.

The trade-weighted index fell to 76.18 as at 5 pm versus 76.63 late yesterday. The kiwi dollar fell to 69.63 US cents from 70.06 cents.

In the overnight GlobalDairyTrade auction, the GDT price index slid 6.3 percent from the previous auction two weeks ago to US$3,512 and whole milk powder sank 12.4 percent to US$2,782 a tonne. Adding to the negative sentiment, fourth quarter manufacturing data was softer than expected which means there is some downside risk to the fourth quarter gross domestic product data, due next week, said Bank of New Zealand currency strategist Jason Wong.

"The New Zealand dollar is pretty much out of favor at the moment. The dairy price dynamic is having some impact," he said.

The market had expected a weak auction but NZX dairy futures fell even further after the results, which weighed on the kiwi, Wong said. The weak futures point to another fall at the next auction "and the market is reacting to that. There's a lot of supply coming on to the market," he said.  

Several economists pared back their forecasts for Fonterra Cooperative Group's milk payout to its farmer-shareholders for the current season after the auction given higher-than-expected supply.

Wong said there is little in the way of scheduled events that are likely to push the kiwi around the European or US trading session and the main event for markets will be Friday's U.S. non-farm payrolls report, which may solidify expectations the US Federal Reserve will lift interest rates next week.

The New Zealand dollar fell to 91.59 Australian cents from 92.14 cents. The kiwi continues to lose ground against the Aussie, which got a lift this week from upbeat comments by the Reserve Bank of Australia on the economy's outlook. 

The local currency fell to 57.02 British pence from 57.21 pence and slipped to 65.89 euro cents from 66.16 cents. It declined to 79.15 yen from 79.82 yen and fell to 4.8041 yuan from 4.8363 yuan.

The two-year swap rate slipped 1 basis point to 2.28 percent and 10-year swaps rose 1 basis point to 3.51 percent.

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