NZ dollar drops after Fonterra cuts payout forecast more than expected

Tuesday 29th July 2014

The New Zealand dollar fell to the lowest level in almost seven weeks after Fonterra Cooperative Group cut its forecast 2015 milk payout more than some economists had expected, suggesting a bigger impact on the New Zealand economy.

The kiwi fell to 85.17 US cents from 85.46 cents at 8am and from 85.31 cents late yesterday. The trade-weighted index declined to 79.52 from 79.66 yesterday.

Fonterra, the world's largest exporter of dairy products and New Zealand's biggest company, lowered its forecast Farmgate Milk Price for the 2014/2015 season to $6 per kilogram of milk solids from an earlier estimate of $7/kgMS. Prices of dairy products fell to the lowest level since December 2012 in the latest GlobalDairyTrade auction. Market consensus had been for the forecast to be reduced to $6.25-$6.50/kgMS.

The announcement, which came after Fonterra's board meeting, was widely expected, given that prices of dairy products have tumbled this year and reached the lowest level since December 2012 in the latest GlobalDairyTrade auction. Reserve Bank governor Graeme Wheeler cited weaker prices for dairy and logs when he signalled a pause in interest rate hikes after lifting the official cash rate to 3.5 percent last week.

The forecast "was a moderate downside surprise," said Imre Speizer, senior market strategist at Westpac Banking Corp, who correctly forecast the size of the reduction. "Farmers get less income, therefore they will spend less - that's a hit to the economy."

Speizer doubted it would have much impact of the Reserve Bank's tightening cycle because while less money to farmers weighs on the economy, it also helps weaken the kiwi dollar, which in turn drives up imported inflation. Still, there was scope for a pick-up in short-term interest rates. He said the kiwi may extend its decline in the European session.

The New Zealand dollar fell to 90.63 Australian cents from 90.85 cents yesterday, and fell to 63.41 euro cents from 63.53 cents. It declined to 50.18 British pence from 50.24 cents and traded at 86.82 yen from 86.85 yen.

BusinessDesk.co.nz

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