Kiwi recovers as limited impact seen on dairy trade

The New Zealand dollar recovered some ground on confidence trade with China would not be as severely affected as first thought by a food contamination scare at Fonterra, the nation's largest company.

The kiwi rose to 78.05 US cents at 8am in Wellington from 77.71 cents at 5pm yesterday. The trade-weighted index advanced to 74.04 from 73.81 yesterday.

The local currency fell yesterday after revelations of contaminated products produced by Fonterra, the world's largest dairy exporter. Late yesterday, Fonterra said China had not imposed a blanket ban of its products, including whole and skim milk powder, but had temporarily suspended some whey products.

"The measured response by China has encouraged people that we could see a lesser impact than we first thought," says Sam Tuck, senior manager FX at ANZ New Zealand.

"At the open yesterday everybody thought the dispute might be protracted. (But) the majority of exports to China are probably unlikely to be affected, which makes a huge difference."

Still, this is the second food safety issue for Fonterra this year which raises longer-term questions, he says.

"We wouldn't really expect the New Zealand dollar to completely shrug off this issue, but it is a much lesser issue for the New Zealand dollar market and we would probably expect it to trade in line with global issues and Australian issues at the moment against the US dollar." 

All eyes will be on tonight's GlobalDairyTrade auction to see if there is any impact on milk powder prices, traders said.

The kiwi dropped to 87.38 Australian cents at 8am from 87.53 cents yesterday ahead of the Reserve Bank of Australia's review of its benchmark interest rates at 4.30pm local time today. The bank is expected to cut its rate a quarter point to 2.5 percent, aligning it with New Zealand's rate for the first time in more than four years.

Some traders are speculating governor Glenn Stevens may slash the rate by 50 basis points today after the weekend announcement that a general election would be held in September, stymieing any chance of a rate cut next month, says Mr Tuck, who expects just a quarter point reduction.

Ahead of the Reserve Bank decision in Australia today, traders will be awaiting reports on trade, house prices and job advertisements, all set for release at 1.30pm local time.

The local currency weakened to 76.68 yen from 76.76 yen and to 50.82 British pence from 50.88 pence. It edged up to 58.86 euro cents from 58.54 cents yesterday.

(BusinessDesk)