Dollar buoyed by Fonterra plans to expand capacity, form Chinese partnership

The New Zealand dollar rose after Fonterra Co-operative Group [NZX: FCG] yesterday said it would maintain its milk price forecast, expand its local processing capacity and form a partnership to help sell its products in China, New Zealand's largest trading partner.

The kiwi gained to 83.75 US cents at 8am in Wellington, from 83.67 cents at 5pm yesterday. The trade-weighted index was at 78.98 from 79 yesterday.

The local currency has jumped half a US cent in the past 24 hours following the announcement from Fonterra, the world's largest dairy exporter. Dairy is New Zealand's largest commodity export and traders had been concerned the company could have lowered its $6 per kilogram of milk solids forecast for 2015 as increased supply weighs on prices.

"The kiwi was the star of the night as the announcement by dairy giant Fonterra that it's entering a joint venture to meet demand for infant formula in China was met with approval by the market," Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York, said in a note. The investment "suggests that Fonterra may be able to smooth out its delivery problems and also indicates that its stream of income from China - which is a significant contributor to the New Zealand economy - is likely to remain in place."

The kiwi may target 84 US cents, Schlossberg said.

The local currency's gain was assisted by a broadly weaker US dollar overnight, with the US dollar index declining from its highest level in more than a year.

The New Zealand dollar edged lower to 89.69 Australian cents from 89.77 cents yesterday ahead of Australian data on capital expenditure today. While data for the second quarter may be weaker reflecting a decline in mining investment, the currency affect could be muted as capex forecasts for the coming year may be revised higher, Kymberly Martin, senior market strategist at Bank of New Zealand, said in a note.

The kiwi slipped to 63.47 euro cents from 63.57 cents yesterday. The European Central Bank meets next week amid elevated expectations of additional stimulus following ECB President Mario Draghi's comments about the region's declining inflation in Jackson Hole last week. However, the ECB is unlikely to take new policy action next week unless August inflation figures due tomorrow show the euro zone sinking significantly towards deflation, Reuters reported, citing unnamed ECB sources.

"The barrier to QE is still very high," said one of the sources, all of whom requested anonymity, adding that discussion at the meeting was expected to centre on reinforcing existing policy measures of credit easing and liquidity provision, according to Reuters.

The local currency was little changed at 50.53 British pence from 50.55 pence yesterday, and at 87.01 yen from 87.02 yen.

(BusinessDesk)