Dollar falls to fresh five-year low after dairy prices drop at auction

The New Zealand dollar fell to a fresh five-year low after whole milk powder, the country's key commodity export, dropped more than expected in the GlobalDairyTrade auction overnight.

The kiwi touched 65.81 US cents, and was trading at 65.92 cents at 8am in Wellington, from 67.05 cents at 5pm yesterday. The trade-weighted index sank to 70.01 from 70.88 yesterday. (See graph below)

The New Zealand dollar dropped sharply after dairy product prices sank an average 10.7 percent to a six-year low in the GDT auction, with the key whole milk powder price dropping 13.1 percent to US$1,848 a tonne. Dairy prices have remained lower for longer amid higher global supplies in New Zealand, Europe and the US, weak demand in China and an import ban in Russia. The weaker prices come as New Zealand production is rising heading into the country's peak supply period in October, raising concern about the impact on the nation's economy.

"The GDT auction was again weak with few redeeming features," ANZ Bank New Zealand senior economist Sharon Zollner and senior FX strategist Sam Tuck said in a note. "We see downside risks opening up for (the) New Zealand dollar again."

ANZ lowered its forecast for Fonterra Cooperative Group's 2015/16 milk payout to farmers to a range of $3.75-$4.00 per kilogram of milk solids, from a previous expectation of $4.50/kgMS. That's below the dairy exporter's $5.25/kgMS forecast.

ANZ expects the kiwi to trade between 65.30 US cents and 66.80 cents today. The local currency's weakness overnight was exacerbated by a stronger US dollar as the Federal Reserve reiterated interest rates were set to rise in the world's largest economy this year, and by general weakness in commodity currencies after the Bank of Canada cut its benchmark interest rate.

In New Zealand today, the BNZ-BusinessNZ performance of manufacturing index is scheduled for release at 10:30am, followed by second quarter inflation data at 10:45am and the ANZ consumer confidence survey at 1pm.

The New Zealand dollar dropped to 89.31 Australian cents, from 89.72 cents yesterday, fell to 60.17 euro cents from 60.94 cents, declined to 42.13 British pence from 42.85 pence and weakened to 81.59 yen from 82.74 yen.

(BusinessDesk)