NZ dollar drops to month low on dairy concern, US dollar strength

The New Zealand dollar dropped to a month low after the government yesterday revealed threats to contaminate infant formula with poison, raising concern the action may hurt sales of dairy products, the nation's largest export. US dollar strength also weighed on the local currency.

The kiwi touched 72.55 US cents and was trading at 72.62 cents at 8am in Wellington, from 72.99 cents at 5pm yesterday. The trade-weighted index fell to 76.67 from 76.90 yesterday.

The local currency declined after officials said police have been investigating threats to contaminate infant formula and related dairy products with the pest killing poison 1080. Compounding the weakness is the continuing strength in the US dollar, which has gained traction since an upbeat jobs report on Friday boosted expectations the Federal Reserve will raise interest rates in June. The dollar index, which measures the greenback against a basket of currencies, touched a fresh 11-year high.

"There's two things driving the kiwi, one is the threat to our dairy industry - we don't think the actual threat itself should have a lasting impact on the New Zealand dollar," said Sam Tuck, senior FX strategist at ANZ Bank New Zealand. "Everybody recognises it's hard to legislate against one-off ideological threats such as this, most of our trade partners will recognise that fact and it shouldn't be too much of an issue for them."

"There is going to be a sentiment impact and it just reminds external markets of the vulnerability of the New Zealand dollar," Tuck said. "This threat in isolation shouldn't cause too much of an impact but it does have a knock on effect in terms of confidence and gives our trade competitors an opportunity to push their point of differentiation."

The second impact on the kiwi is the strength of the US dollar against most other currencies, ahead of the Federal Reserve Open Market Committee meeting next week.

"There is a broad-based move towards the US dollar continuing after the bumper payrolls on Friday night," Tuck said. "Markets are moving towards the word 'patient' being removed next week by the FOMC and as well June being a realistic proposition for the Federal Reserve to begin their incredibly slow rate normalisation process."

ANZ expects the kiwi to trade between 72.50 US cents and 74.30 cents today.

In New Zealand today, the Treasury will publish the government's accounts for the seven months through January at 10am.

Elsewhere, traders will be eyeing the release of the latest Chinese data on retail sales, industrial production and fixed investment.

The New Zealand dollar slipped to 95.35 Australian cents from 95.44 cents yesterday ahead of a report on Australian consumer confidence. Australian Reserve Bank assistant governor economic Chris Kent is due to speak at a conference in Hobart today.

The kiwi advanced to 67.89 euro cents from 67.59 cents yesterday as European Central Bank bond buying drove German Bund yields to historical lows.

The local currency declined to 48.18 British pence from 48.38 pence yesterday and dropped to 87.92 yen from 88.90 yen.