Dollar falls on back of dairy price moves

NIKO KLOETEN
Last updated 09:57 17/07/2014

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A hike in the official cash rate (OCR) to 3.5 per cent next week is still likely, but is no longer a "sure thing" after a drop in dairy prices, economists say.

The New Zealand dollar fell by 1 cent against the US dollar yesterday after a shock plunge in dairy prices. It failed to bounce back significantly overnight.

A currency analyst said the New Zealand dollar might have peaked against the greenback, but might still climb against the euro.

The dollar was trading at US87.1c about 9am today after dropping below US87c yesterday as a trio of negatives shaved more than 1c off the kiwi in 12 hours.

Dairy prices dropped 8.9 per cent at the latest Global Dairy Trade auction yesterday morning, while US Federal Reserve chairwoman Janet Yellen's positive comments about the US economy also pushed the kiwi down.

New Zealand's weaker-than-expected Consumer Price Index (CPI) data, which showed just 0.3 per cent CPI inflation in the June quarter, completed the trifecta.

Stuart Ive, a private client manager at OM Financial, said a drop in the volume of milk-powder sales and the price drop had taken markets by surprise.

"Markets were looking for a more moderate fall and for volumes to hold still," Ive said.

"It continues what looks like a commodity showing signs of oversupply."

The dairy price drop and CPI data have prompted economists to predict a pause in OCR hikes after next week's announcement, when the OCR is expected to be increased 25 basis points to 3.5 per cent.

Ive said the market was still pricing in a hike, but it had dropped from 90 per cent certain to "about 60-65 per cent".

The dollar fell against most major currencies, dropping below A93c against the Aussie dollar, below 51 pence against the British pound and below 89 yen.

Ive said the kiwi, which came within touching distance of its post-float high of US88.42c last week, had probably peaked against the US.

"That would have been a good time to sell."

However, the New Zealand dollar could rise against the euro, due to Europe's sluggish economy, he said.

It was trading at about 64.4 euro cents at 9am today.

"The data isn't very encouraging. Industrial production keeps falling, including in Germany, and there are fundamental reasons we might see a fall in the euro." 

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