Dollar drops as weak dairy auction spurs speculation on rate hikes

The New Zealand dollar fell after weaker prices at the Fonterra Cooperative Group's online auction spurred speculation the Reserve Bank may not hike interest rates as aggressively as anticipated this year.

The kiwi dropped to 86.01 US cents at 5pm in Wellington from 86.47 cents at 8am and 86.72 cents yesterday. The trade-weighted index declined to 80.38 from 80.94 yesterday.

Dairy prices dropped 8.9 percent at today's GlobalDairyTrade auction to US$4,124 a tonne on a trade-weighted basis, the fourth straight decline and the lowest since August 2012. The decline takes the sheen from New Zealand's 40-year high terms of trade, which are seen as a factor underpinning accelerating economic growth this year, and any slowdown in the dairy sector may prompt the Reserve Bank to lift interest rates more slowly. Traders are betting the bank will add 118 basis points to the 2.75 percent official cash rate over the coming 12 months, according to the Overnight Index Swap curve.

"We expect four rate hikes this year - one is April, but now we've got some questions around July if the Fonterra prices continue to weaken," said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional in Auckland. The kiwi might be able to keep its uptrend "if it can get through 86.25 US cents, if not we could have a look lower."

New Zealand commodity prices fell for the first time in four months in March, led by falling prices for milk and cheese, according to ANZ Bank data today.

Traders are looking to US employment data this week, culminating in the government non-farm payrolls report on Friday to see whether it will affirm the Federal Reserve's planned withdrawal of quantitative easing and bias towards higher interest rates next year.

The local currency dropped to 93.07 Australian cents at 5pm in Wellington from 93.61 cents yesterday, and slipped to 89.31 yen from 89.54 yen. It fell to 62.31 euro cents from 62.95 cents, and declined to 51.71 British pence from 52.03 pence.

(BusinessDesk)