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Kiwi pares gain on falling dairy prices

Wednesday 7th July 2010

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The New Zealand dollar fell after dairy prices tumbled 15% in Fonterra’s monthly online auction, paring gains against a US dollar weakened by tepid services data and fears the US recovery in faltering. 

The kiwi dollar fell about half a US cent after the average price of whole milk powder sank on Fonterra’s globalDairyTrade website, leaving the currency little changed in the session. The decline was expected as Northern Hemisphere farmers ramped up production in the face of strong pricing, which is still about two-thirds ahead of its trough in July last year.

The New Zealand currency pushed up to around 69.75 cents after weak US services data perpetuated the downbeat appraisal of the world’s biggest economy. The Dollar Index, a measure of the greenback against a basket of currencies, fell 0.2% to 84.12.  

The Fonterra auction result was “trampled in the crush of a weaker US dollar,” said Alex Sinton, senior dealer at ANZ New Zealand.

“We’re still within familiar trading ranges of 71.65 US cents and 65.60 cents with people looking at either end of that range to get their export and import cover – until that breaks or tests reasonably well, quite a few people will stay on the sidelines.” 

The kiwi was little changed at 69.29 US cents from 69.34 cents yesterday, and declined to 66.11 on the trade-weighted index of major partners’ currencies from 66.28. It slipped to 60.67 yen from 60.98 yen yesterday, and fell to 81.35 Australian cents from 81.71 cents. It edged down to 54.86 euro cents from 55.07 cents yesterday, and gained to 45.73 pence from 45.63 pence.  

Sinton said the currency may trade between 69.05 US cents and 69.85 cents today, with “some natural selling” at the top of the range.  

The Reserve Bank of Australia kept its target cash rate on hold at 4.5% yesterday and maintained its global growth forecasts, though Governor Glenn Stevens noted Chinese growth was slowing to more sustainable levels while uncertainty remained in Europe.  

The New Zealand Institute of Economic Research’s quarterly survey of business opinion showed a stalling local recovery in the second quarter of the year, and principal economist Shamubeel Eaqub urged the Reserve Bank of New Zealand to stop tightening monetary policy.  

Jane Turner, economist at ASB Bank, said while the three months through June may have been more downbeat than the first quarter, New Zealand’s economic fundamentals are still “quite strong” and the bank is still expecting Governor Alan Bollard to proceed with more rate hikes this year.

Investors are betting Bollard will hike the official cash rate by 116 basis points over the coming 12 months, according to Overnight Index Swap curve. That would still keep New Zealand’s benchmark interest rate below Australia’s.

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