NZD Posts Major Gains after GDT Report Sustains Growth

The latest report coming from the Global Dairy Trade (GDT), the seventh auction of 2016/2017, posted another strong increase of 7.7% after the previous 12.7% growth reported at the previous auction, as whole milk powder mounted a subtle climb of 3.7% on the trail of its previous 12.9% growth. The latest auction release which shows a third consecutive healthy rise, adds more credibility to the evidence that a major reversal has been revealed in the economy and may weaken the pressure currently on the Reserve Bank of New Zealand (RBNZ) for an interest rate cut.

In light of the new found signs of a decline in global production which is currently under the influence of a persisting weakness in price as the 19 bloc Eurozone plans to embark on a 1.1 billion liters production within the next few months through a voluntary scheme to cut output. There is also a high level of anticipation for production declines in Australia and the UK, after the recent spates of price weakness have driven New Zealand production considerably low and has driven many farmers out of business. Anticipations for higher demand in Latin America and the signs of strengthening demand in China, will likely pin down prices in the near future.

Fronterra Co-operative group earlier raised its payout estimates to NZ$4.75/kg towards the end of August for the 2016/17 season from its previous estimate of NZ$4.25/kg, the possibility that it will be increased further later in the season is not yet out of the picture. Prices still maintain levels below break-even at these levels, but the optimism for the likelihood of a long-term reversal has been significantly lifted due to the shift in the supply/demand balance.

Before the release many analysts believed that a positive report for the auction would be a major factor for a sustained rise in the currency. Imre Speizer, a senior market strategist at Westpac Banking Corp, said “the kiwi dollar has been testing highs of 73.50 US cents and tonight's dairy auction may be the catalyst to push the currency above that level”.

The kiwi traded at 95.92 Australian cents, down from 96.47 cents late yesterday, having slumped against its trans-Tasman counterpart ahead of the Reserve Bank of Australia's review of interest rates. Governor Glenn Stevens kept the cash rate unchanged at 1.5 percent as expected and there was little reaction in the currency market to the statement, where he reiterated that the stance of monetary policy was "consistent with sustainable growth in the economy and achieving the inflation target over time".

The RBNZ may harbor some discomfort over low inflation, but a steady recovery in dairy prices would surely dampen pressure for the bank to consider a further cut in rates and tend to support the currency, especially as there are important concerns surrounding overheating in the housing sector.

NZD/USD continued to rise following the data with the currency also gaining strong support from a much weaker than expected US ISM non-manufacturing report, which triggered heavy dollar losses. NZD/USD had already risen to 0.7380 from 0.7340 after the US data and extended gains to above 0.7400 following the GDT data, the strongest level for 15 months.