guest commentary

Falling Dairy Prices Increase Downside Risk for Kiwi

Monday, 12 January 2009 20:42:35 GMT  |  Rhonda Staskow, Currency Analyst for Action Economics

The Kiwi is known as a commodity currency and is often linked to the Australian dollar and the Canadian dollar performance where price action is heavily influenced by the fluctuations in gold and base metal prices, with traders often tracking the CRB index as a factor to consider in AUD and CAD trades.

The Kiwi is known as a commodity currency and is often linked to the Australian dollar and the Canadian dollar performance where price action is heavily influenced by the fluctuations in gold and base metal prices, with traders often tracking the CRB index as a factor to consider in AUD and CAD trades. While the Kiwi is a commodity-based currency, New Zealand is not a major exporter of metals, or of iron ore and coking coal, two other resources that have an impact on commodity currencies. For New Zealand, the key export is dairy prices with 27%of New Zealand national exports from dairy in the year to May, and with the largest dairy company in the world, Fonterra, based in New Zealand. Kiwi traders should turn to the performance of dairy prices as a key catalyst for the performance of the New Zealand currency and the recent sharp decline in dairy prices bodes poorly for the New Zealand currency.

The Kiwi has managed to form a steady uptrend over the last month from December lows of 0.5204 to highs above 0.6000 in December and the first week of January. However, despite the gains, dairy prices have continued to decline, which suggests that recent gains may be providing better levels to sell Kiwi, with risk for a move lower in Kiwi to 0.5200 or 0.5000 on falling dairy prices and the likely impact on New Zealand's export performance and as a result, the impact on the domestic economy.

ANZ bank in New Zealand releases a monthly commodity index, with the latest index for December, showing a 7.4% decline for the month, the fifth successive monthly decline and a 27% fall over the last year. ANZ , in the wake of last week's sharp decline in the commodity price data,  has issued a new forecast that the Reserve Bank of New Zealand is likely to cut rates by 75bp to 4.25% on January 29th, from a prior forecast for a 50 bp rate cut. The expectations of lower rates will only add to the NZD pressure. JP Morgan this week forecast five more quarters of recession for New Zealand, with falling dairy prices one factor behind the negative outlook. 

Recent developments that point to lower dairy prices including the decline in the latest Fonterra milk powder auction which dropped over 9% in price from the December auction, and expectations that Fonterra will announce a decline in the payout to New Zealand farmers later this month. Anecdotal reports shows that global dairy prices continue to decline not only in New Zealand, but in California and the United Kingdom where farmers' incomes are being slashed and with widespread global expectations that prices are set for further declines due to the sharp contraction in global demand.

Traders wanting to monitor current cheese prices as a gauge of dairy demand can track futures prices for cheese blocks and cheese barrels on the CME. Dairy reports on the current market price movements can be found at the World Dairy Diary and Dairy Line.

The initial downside target for the Kiwi is 0.5660 over the next couple of weeks with the December lows around 0.5200 the longer term downside target over the next couple of months on the back of recent falls in dairy prices.

 

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