Dollar may gain vs. Australian dollar as upbeat dairy trumps weaker iron ore outlook

The New Zealand dollar may gain against its Australian counterpart on speculation a rebound in global dairy prices has reduced the chance for another rate cut, while the weaker outlook for iron ore prices could add to the case for lower rates across the Tasman.

The kiwi rose to 91 Australian cents at 5pm in Wellington from 90.84 cents on Friday in New York. It gained to 63.99 US cents from 63.61 cents at 8.30am, and from 63.84 last week.

Local economists are putting a lower probability on the Reserve Bank cutting interest rates again after Fonterra Cooperative Group, the world's biggest dairy exporter, raised its forecast payout to farmers last week after a rebound in global dairy prices. That's in contrast to falling iron ore prices, driven by softening demand from Chinese manufacturers for Australia's biggest export, and prompting Australia & New Zealand Banking Group economists to call for two more rate cuts across the Tasman. That's seen the kiwi jump 2.7 percent against its Australian counterpart over the past week.

"The 55 percent increase in milk price (since mid-August) has taken the pressure off the RBNZ, and it could easily go on hold," said Martin Rudings, senior foreign exchange dealer at OMF in Wellington. "All downside momentum has gone from the kiwi/Aussie cross - if we get up through 91.50 (Australian cents) it could go up to 93 before it stops."

Traders will be watching commentary from US Federal Reserve officials through the week after Fed chair Janet Yellen last week said the majority of the Federal Open Market Committee, which sets the fed funds rate, favour a hike this year. The FOMC refrained from raising interest rates earlier this month, citing global market volatility, and the September non-farm payrolls report on Friday will be closely watched to see whether the US labour market warrants an increase in rates.

The local currency was little changed at 77.02 yen from 76.96 yen last week, and increased to 4.0769 Chinese yuan from 4.0690 yuan. It traded at 57.18 euro cents from 57.03 cents last week, and was little changed at 42.09 British pence form 42.05 pence. The trade-weighted index advanced to 69.79 from 69.13.

New Zealand's two-year swap rate slipped one basis point to 2.72 percent at 5pm in Wellington, while the 10-year swap was unchanged at 3.56 percent.

(BusinessDesk)