New Zealand Dollar Tailwinds on Milk Price Forecast and Improved Trade Position

The New Zealand Dollar continues to outperform its rivals with the recent recovery rally getting fresh impetus from impressive economic developments in New Zealand over the duration of the mid-week session.

The antipodean currency has overturned a period of underperformance against its ten main rivals to be the third-best performing currency of the month-to-date.

It is the best-performing currency of the week thanks to a broadly supportive global financial environment combined with positive developments at home.

Fonterra - the New Zealand dairy cooperative - has lifted its final milk payout for this season by 15 cents to $6.15 a kilogram of milk solids and increased its forecast for the upcoming season to $6.50.

This is good news for the New Zealand economy as milk products constitute New Zealand’s primary export.

And greater export earning potential makes for a stronger currency.

Meanwhile, latest trade data from New Zealand meanwhile paint a picture of improvement as it is shown exports surged 9.8% year-on-year to the highest level since March 2015.

The annual trade deficit reduced to $3.5 billion in April from $3.7 billion in March thanks to the country posting a surplus of 578M.

This was largely on the back of higher dairy prices and analysts are saying these dynamics  should limit the downside in the New Zealand Dollar.

“Today’s milk price announcements by Fonterra were a further reminder that the commodity sector is now providing tailwinds to the economy, after cross-winds last year,” says Craig Ebert, an economist with BNZ in Aukland.

New Zealand Dollar Firming

Fonterra’s first milk price forecast for 2017/18 is $6.50.

There is no poll of economists for this but BNZ suggest this is within the bounds of expectations although perhaps toward the more positive end.

But possibly less than the RBNZ has factored in – given its medium term circa $3,000/T for whole-milk powder projections and general currency view.

This solid opening forecast of $6.50 suggests the co-op sees international dairy prices remaining quite firm through the season.

It shows a degree of confidence argues Ebert.

There are expected to be those who say the forecast is too optimistic and others who say it’s too conservative. What matters, ultimately, is where international dairy prices track over the coming 12-15 months.

BNZ say they forecast the price to be at $6 for the 2017/18 season with upside risks.

“But by the reaction of the NZ currency to this morning’s trade data, and Fonterra’s announcements, this good news was well anticipated, already largely priced in,” says Ebert.

The Pound to New Zealand Dollar exchange rate fell lower on the new and is quoted at 1.8444.

The New Zealand to US Dollar exchange rate is quoted at 0.7034.

“NZD has gone from zero to hero in the space of two trading days as increasingly bullish expectations for the upcoming Budget and Fonterra dairy payout forecasts come to the fore, prompting short covering from systematic accounts,” says Sue Trinh, Head of Asia FX Strategy at RBC Capital Markets.