NZ dollar falls to five-week low as traders bet on weaker dairy prices

The New Zealand dollar fell to a five-and-a-half week low as traders bet milk product prices will fall at the upcoming GlobalDairyTrade auction, which would add pressure to the Reserve Bank to cut interest rates when it reviews policy next month.

The kiwi dropped to 64.58USc at 5pm in Wellington from 64.92USc at 8am and 65.27USc yesterday. The trade-weighted index declined to 70.64 from 71.27 yesterday.

The local currency extended its decline as pricing on the NZX milk futures market indicates dairy prices will fall at the GDT event on Tuesday in the US, eroding some of the recent gains in global prices for New Zealand's biggest commodity export. A slump in dairy prices and its impact on the nation's terms of trade spurred the central bank to cut rates earlier this year, and if they continue to decline that's expected to increase pressure on Reserve Bank governor Graeme Wheeler to respond, even though his review comes a week before the US Federal Reserve's, which is expected to kick off the start of a tightening cycle.

The dairy auction "will probably deliver a weak number and the kiwi will continue to be under pressure," said Stuart Ive, senior dealer foreign exchange at OMF in Wellington. "The danger is it disappoints and doesn't come in as weak as people think."

Mr Ive said there was some uncertainty over how far prices will fall at the auction, with futures pricing showing steeper declines for contracts with later delivery dates.

The Reserve Bank's survey of expectations showed two-year forecasts remained below the central bank's 2% target, and Westpac Banking Corp economists didn't think the results would concern the central bank.

New Zealand's two-year swap rate was unchanged at 2.73% at 5pm in Wellington, and the 10-year swap was also steady at 3.6%.

The local currency declined to 91.54Ac from 91.71Ac yesterday after minutes to the Reserve Bank of Australia's last policy meeting acknowledged a weaker currency was helping the Australian economy, with the board's biggest concern a slowdown in China and across Asia. The kiwi fell to 4.1166 Chinese yuan from 4.1623 yuan yesterday.

The local currency decreased to 60.57 euro cents from 60.85 cents yesterday, and fell to 42.54 British pence from 42.90 pence. It declined to 79.68 yen from 79.90 yen yesterday.

(BusinessDesk)