Dollar drops on weak dairy outlook

Thursday 2nd July 2009

The New Zealand dollar fell as offshore investors begin to focus on the state of the dairy industry, the nation’s biggest exporter, after the price of milk powder extended its slide for a third month in Fonterra’s latest online auction.

The average price of milk powder dropped 3% to US$1,829, according to results on globaDairyTrade website, down from US$1,886 last month.

That comes after Fonterra Cooperative Group, the world’s largest dairy exporter, announced a 13% fall in the opening forecast payment to farmers for the 2010 season to $4.55 per kilogram of milk solids, amid a resilient kiwi dollar and the reintroduction of US dairy subsidies.

The focus on dairy may see the currency delink from following US equity markets, which gained yesterday as American manufacturing showed signs of picking up, traders said.

“Another decline in milk prices obviously was a negative for the kiwi,” said Khoon Goh, senior markets economist at ANZ National Bank. “If we see future dairy numbers come under downward pressure, it could press the currency lower.”

The kiwi dropped to 63.95 US cents from 64.33 cents yesterday, and slipped to 60.24 on the trade-weighted index, or TWI, a measure of the currency against five major trading partners, from 60.77. It dropped to 61.78 yen from 62.32 yen yesterday, and slid to 45.15 euro cents from 45.73 cents. It declined to 79.07 Australian cents from 79.79 cents yesterday.

Goh said the currency may trade between 63.80 US cents and 64.85 cents today. Any ongoing weakness in the dairy sector, which accounts for some 21% of the country’s annual $43.4 billion of exports, could be the catalyst to push it out of its current range, he said.

The ANZ National Bank’s commodity index comes out today, and if it shows further declines in the price of dairy products, the currency may fall further. Adding to the negative sentiment around the New Zealand dollar is the large amount of eurokiwi and uridashi redemptions this month, Goh said.

Australia, with “a high yield curve and better credit rating,” is very attractive to foreign investors interested in this part of the world, and could see an outflow of New Zealand dollar-denominations across the Tasman.

Some $4.6 billion worth of bonds mature this month, while total issuance is around $600 million. Over the past six months, investors have tended to roll over about 26% of maturing eurokiwi bonds and 40% of uridashis, according to Bank of New Zealand research.

Businesswire.co.nz

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