Dollar regains ground after Fonterra cuts payout to dairy farmers less than expected

The New Zealand dollar gained back ground lost overnight after Fonterra Cooperative Group, the world's largest dairy exporter, reduced its payout to dairy farmers by less than some had expected.

The kiwi was trading at 85.62 US cents at 9am in Wellington, from 85.38 cents immediately before Fonterra's 8:37am announcement and 85.59 cents at 5pm yesterday. The trade-weighted index weakened to 79.72 from 79.87 yesterday.

Fonterra today pulled back its forecast for the coming season to $7 per kilogram of milk solids, better than the $6 payout expected by some. The company also cut its payout for the season winding down this month to $8.40 from a previous forecast of a record $8.65 as increased milk production dents prices. Soaring dairy prices underpinned New Zealand's strong terms of trade last year, and the local currency had fallen ahead of the Fonterra's announcement on concern a sharp decline in the payout could dent economic growth.

"Scaremongering earlier in the week may have depressed expectations into the $6 area and you get this knee jerk response accordingly," said Imre Speizer, senior market strategist at Westpac Banking Corp in Auckland. "It's about what most economists would have forecast. It is not a surprise. We are coming off a record high milk price but it is still a high number and it is still supportive for the economy and moreover Fonterra said they expect supply to rise even further so production is going to increase and production at a decent number is still positive for farm incomes."

Later today, traders will be focused on the ANZ business confidence survey for May, scheduled for release at 1pm. The Reserve Bank will be probably be eyeing the pricing intentions components of the survey for signs of inflation.

The New Zealand dollar was little changed at 92.41 Australian cents at 9am from 92.39 cents at 5pm yesterday ahead of a report on Australian first quarter construction activity today.

The kiwi was little changed at 87.26 yen from 87.28 yen yesterday, at 62.76 euro cents from 62.68 cents and advanced to 50.91 British pence from 50.77 pence yesterday.

(BusinessDesk)

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