NZ dollar heads for 1% weekly gain on milk prices, Fed

NZ dollar heads for 1% weekly gain as dairy prices rise, Fed keeps rates on hold

By Jonathan Underhill

Sept. 18 (BusinessDesk) - The New Zealand dollar rose, and is heading for a 1 percent weekly gain, as increases in dairy prices at the third straight GlobalDairyTrade auction and a more dovish US Federal Reserve helped lift the currency from its recent lows.

The kiwi traded at 63.68 US cents as at 5pm in Wellington, from 63.36 cents before the Fed statement and from 63.61 cents late yesterday. It briefly spiked to as high as 64.44 cents after the statement. The trade-weighted index fell to 68.57 from 68.74 yesterday.

The Federal Open Market Committee kept the federal funds rate at between zero and 0.25 percent, saying "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," and lowered its projections for the benchmark rate. Meanwhile, the GDT average winning price jumped 16.5 percent at this week's dairy auction, the biggest increase in five years, and whole milk powder soared about 21 percent.

"The kiwi has come off its recent lows and is a fraction back in favour because of the mixed picture from the Fed, but also with milk prices coming off their very low levels," said Stuart Ive, senior dealer at OMF. The local currency may struggle to make further gains, given "diverging central bank views - New Zealand still in an easing cycle whilst we have the Federal Reserve still to raise rates."

The Fed did surprise some in the market by citing "recent global economic and financial developments may restrain economic activity somewhat" and put downward pressure on inflation in the near term, taken as a reference to slowing growth in China, where stocks have tumbled.

"The Fed statement and the comments that followed left everyone a little confused," Ive said. "At the end of the day there was strong positioning after the Fed."

Figures yesterday showed the economy expanded 0.4 percent in the second quarter, less than the Reserve Bank had forecast, after growth slowed to 0.2 percent in the first three months of the year. Governor Graeme Wheeler has indicated he has another 25 basis point cut to the official cash rate up his sleeve, which would return the rate to 2.5 percent.

The kiwi fell to 76.23 yen from 76.73 yen yesterday, and dropped to 55.79 euro cents from 56.31 cents. It fell to 40.87 British pence from 41.02 pence yesterday. The local currency was little changed at 88.46 Australian cents from 88.49 cents yesterday, and slipped to 4.0499 Chinese yuan from 4.0523 yuan.

The two-year swap rate was unchanged at 2.72 percent and 10-year swaps were unchanged at 3.6 percent.

(BusinessDesk)

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