Dollar heads for 2.4% weekly decline as milk price slump stokes rate cut calls

The New Zealand dollar is heading for a 2.4 percent drop against the greenback this week after a slump in milk powder prices this week fuelled calls for the Reserve Bank to cut interest rates more aggressively to prop up the country's biggest export sector.

The kiwi fell to 65.37 US cents at 5pm in Wellington from 71.29 cents on Friday in New York last week, and was up from 65.09 cents at 8am and 65.17 cents yesterday. The trade-weighted index is heading for a 2.7 percent weekly slide, and was at 69.39 at 5pm from 69.26 yesterday.

New Zealand's currency dropped more than 1 US cent yesterday after whole milk powder prices slumped at the GlobalDairyTrade auction, sparking fears about the impact it will have on the country's rural economy, and tepid inflation data showed the Reserve Bank has room to cut interest rates without pushing up consumer prices. NZX Milk Futures indicate dairy prices will fall further at their next auction in a fortnight, and traders are pricing in an outside chance the Reserve Bank will cut the official cash rate by half a percentage point next week.

The slump in milk prices "is a bit of a disaster - it's really going to back the Reserve Bank into a corner if they don't do enough the kiwi's not going to provide the buffer that is required," said Martin Rudings, senior dealer foreign exchange at OMF in Wellington. "The debate is whether it's a quarter-point (cut) or a half - if it's a half the kiwi's going down to 63 US cents."

Rudings favours a 50 basis point cut to the OCR next week, as it's ahead of market expectations and would help drag the currency lower.

New Zealand's two-year swap rate declined to 2.85 percent at 5pm in Wellington from 2.88 percent yesterday, and the 10-year swap rate was unchanged at 3.76 percent.

US inflation data on Friday in Washington will be watched to see whether if gives the Federal Reserve scope to start raising interest rates, but traders' attention will return to New Zealand on Monday for the Reserve Bank's policy review on Thursday.

The local currency fell to 88.14 Australian cents from 88.53 cents yesterday, and increased to 4.0601 Chinese yuan from 4.0466 yuan. It gained to 60.01 euro cents from 59.62 cents yesterday, and was little changed at 41.81 British pence from 41.71 pence. It advanced to 81.12 yen from 80.69 yen yesterday.

(BusinessDesk)