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NZ dollar falls as Fonterra forecast disappoints market, argues for rate cut

Thursday 26th May 2016

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The New Zealand dollar fell after Fonterra Cooperative Group gave a lower-than-expected opening forecast for the 2017 milk payout, which it said partly reflected a strong currency, stoking expectations the Reserve Bank will cut interest rates sooner rather than later.

The kiwi fell to 67.16 US cents as at 5pm in Wellington, from  67.51 cents late yesterday. The trade-weighted index dropped to 72.32 from 72.83 yesterday.

Fonterra forecast a 2016/17 payout of $4.25 per kilogram of milk solids, below market estimates of $4.60-$4.80/kgMS, saying its estimate took account of a strong kiwi dollar, global over-supply, international inventory levels and the economic outlook for major dairy importers. The forecast suggests many suppliers to New Zealand's biggest export industry will face a third year of returns below their cost of production.

"It was a horrible result and we don't know whether Fonterra is just being ultra-conservative," said Tim Kelleher, head of institutional FX sales at ASB Bank. The low forecast means "there's a greater chance the Reserve Bank will have to act sooner rather than later to cut interest rates because the currency is too high."

In keeping the official cash rate unchanged at 2.25 percent on April 28, Reserve Bank governor Graeme Wheeler noted that while dairy prices had improved they were still below break-even level for most farmers, while the exchange rate "remains higher than appropriate given New Zealand’s low commodity export prices."

The bank, which has maintained an easing bias, releases its next monetary policy statement on June 9.

The kiwi climbed from its lows of the day after the release of the government's Budget 2016, which projected a small surplus for 2016 and biggest surpluses out to 2020. Kelleher said the biggest news for the market was an $8 billion reduction in the Debt Management Office's issuance programme through 2020, with $2 billion taken off each of the next four years.

"The bond market had a good day, especially the short end," Kelleher said.

The yield on the two-year government bonds dropped 9 basis points to 2.11 percent, the lowest in more than a week. The 10-year bond yield fell about 6 basis points to 2.65 percent. Swap rates also moved lower. The two-year swap rate fell 6 basis points to 2.24 percent and the 10-year swaps fell 4 basis points to 2.87 percent.

The kiwi fell to 45.65 British pence from 46.19 pence yesterday as the pound strengthened on results of a poll that showed 44 percent of Britons surveyed favoured remaining in the European Union, while only 38 percent wanted to leave, a process that has been dubbed Brexit. The poll comes ahead of Britain's EU membership referendum next month.

The New Zealand dollar tumbled to 93.10 Australian cents from 93.72 cents yesterday, following Fonterra's announcement. The kiwi fell to 60.04 euro cents from 60.54 cents and dropped to 73.69 yen from 74.25 yen. It fell to 4.4033 yuan from 4.4272 yuan.


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