NZ dollar holds gains, shrugs off Fonterra payout downgrade

BUSINESSDESK: The New Zealand dollar held gains in local trading, shrugging off a downgrade in Fonterra's forecast payout to farmers after traders had prepared for deteriorating commodity prices.

The kiwi was little changed at 76.52 US cents from 76.47 cents at 8am, and was up from 75.89 cents yesterday.

The trade-weighted index climbed to 69.23 from 68.73 yesterday.

Fonterra cut 30 cents from its forecast 2011-12 forecast milk price to $6.05 a kilogram of milk solids and has issued an opening projected payment of $5.50/kgms in the 2013 season.

That comes as falling international commodity prices and a 41% slump in prices on Fonterra's online auctions had investors bracing for a downgrade.

The grimmer dairy outlook also coincides with the end of an 8.9% slump in the kiwi as fears over the eurozone's continued viability spooked investors' appetite for bigger returns.

"All the bad news has been priced in - even the dairy stuff today, you could argue given that people have been talking about it for the past month or so was and no reason for the kiwi to get beaten up," said Chris Tennent-Brown, FX economist at Commonwealth Bank of Australia in Sydney.

"As long as there's not much in the way of news and volatility dies off, the New Zealand dollar could retrench some of its recent decline."

Growing expectations for softer inflation have also helped sap demand for the kiwi, with the prospect of lower interest rates for longer.

Firms in a Reserve Bank survey pared back their one- and two-year-ahead inflation expectations, and are picking weak consumer price index readings in the next two quarters.

The survey implies an annual inflation rate 1.1% and 1.2% in the June and September quarters, just within the bottom end of the central bank's target band.

Traders are betting the Reserve Bank will cut 39 basis points from the OCR over the coming 12 months, according to the Overnight Index Swap curve.

Markets have shifted away from expecting a rate hike later this year amid fears Europe's sovereign debt crisis could destabilise the global economy further.

Finance Minister Bill English's fourth Budget on Thursday will be the major local news this week.

He is expected to unveil a path towards getting the government's books back into operating surplus in 2014-15, and has promised a second successive "zero" Budget.

The kiwi rose to 60.73 yen from 60.07 yen yesterday, and advanced to 77.28 Australian cents from 77.02 cents.

It gained to 59.82 euro cents from 59.37 cents yesterday, and climbed to 48.37 pence from 47.90 pence.