NZ dollar drops below 67 US cts as dairy declines

NZ dollar drops below 67 US cts as plunging milk price stokes rate cut calls

By Paul McBeth

July 2 (BusinessDesk) - The New Zealand dollar dropped below 67 US cents for the first time in almost five years after a plunging milk price stoked calls for the Reserve Bank to cut interest rates more aggressively than previously anticipated.

The kiwi fell as low as 66.95 US cents, trading at 67.01 cents at 5pm in Wellington from 67.41 cents at 8am and 67.95 cents yesterday. The trade-weighted index dropped to 70.10 from 70.99 yesterday.

Prices at the GlobalDairyTrade auction fell to a new six-year low, stoking concern Fonterra Cooperative Group will have to reduce its payout to farmers already facing stressed balance sheets. That's fed into a gloomier outlook on the economy, and ABS Bank today joined Deutsche Bank New Zealand in calling for the official cash rate to be lowered to 2.5 percent by the end of the year. Traders are pricing in 44 basis points of cuts to the official cash rate over the coming 12 months, according to the Overnight Index Swap curve.

"It's clear the milk price auction is not getting any better and with the elevated level of the forecast by Fonterra there's no doubt that's going to have to come down, and that's going to start hurting the economy," said Stuart Ive, senior dealer foreign exchange at OMF in Wellington. "Any rally against the US dollar for the time being will be looked at as a selling opportunity."

Traders will be looking to US non-farm payrolls figures for June scheduled for release on Thursday in Washington. The world's biggest economy is expected to have added 230,000 jobs, with any sign of strength in the US seen as building the case for the Federal Reserve to start raising interest rates from the near-zero rate policy that's been running since the global financial crisis.

OMF's Ive said the normalisation of interest rates in the US and the prospect of lower local rates means the kiwi will remain under pressure against the greenback, and he "wouldn't be surprised if the kiwi's in the low 60s by the end of the year."

New Zealand's two-year swap rate fell to a two-year low 3 percent at 5pm in Wellington from 3.09 percent yesterday, while the 10-year swap rate was unchanged at 3.93 percent.

Local data today showed New Zealand property values rose at their fastest annual pace in more than a year, while commodity prices fell to a three-year low on weakness in dairy, meat and aluminium prices.

The kiwi fell to 60.53 euro cents from 60.98 cents yesterday ahead of Greece's Sunday referendum on whether to accept a bail-out package from its European creditors. The Mediterranean nation fell into arrears with a 1.6 billion euro loan from the International Monetary Fund, and the weekend vote is seen as key in whether Greece will stay in the monetary union.

The local currency dropped to 4.1575 Chinese yuan at 5pm in Wellington from 4.2129 yuan yesterday, and declined to 87.60 Australian cents from 87.99 cents. It decreased to 42.91 British pence from 43.26 pence yesterday, and sank to 82.67 yen from 83.21 yen.

(BusinessDesk)

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