Dollar may fall on weaker dairy pay-out, likely OCR cut

By Paul McBeth

Wednesday 28th January 2009

The New Zealand dollar may fall as Fonterra Cooperative Group, the world's biggest dairy exporter, prepares to cut its milk payout and investors await details of the central bank's anticipated interest rate cut tomorrow.

The average price of milk powder tumbled 9.3% in Fonterra's online auction to US$2,017 per metric ton this month, more than 50% lower than when the auctions began in July last year. Dairy products accounted for 22% of New Zealand's $42.5 billion of exports in the 12 months ended October 31. The Reuters Jeffries CRB index, a broad measure of the price of raw materials, fell 2.7% as demand for commodities eased.

"The dairy pay-out is linked to New Zealand's growth - it's similar to a fall in commodity prices" in that by taking money away from exporters, it reduces demand for the kiwi, said Danica Hampton, currency strategist at Bank of New Zealand. "People are expecting the pay-out to drop - anything below $5.20 would be a surprise."

The kiwi fell to 52.88 US cents from 52.99 cents yesterday and dropped to 46.96 yen from 47.57 yen. It rose to 79.87 Australian cents from 79.40 cents yesterday, and rallied to 40.15 euro cents from 39.95 cents.

Hampton said the currency may trade between 52 US cents and 53.5 cents today. It's "consolidating within a range" before the Reserve Bank reviews the official cash rate tomorrow, where Governor Alan Bollard is expected to slash the rate at least 100 basis points to 4%, she said.

Bollard embarked on the steepest series to the OCR since its inception in 1999, slashing 325 basis points since July, as he tries to revive the economy which fell into recession last year for the first time in nine years.

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