NZ dollar falls after prices decline at global dairy auction

The New Zealand dollar fell, after dairy product prices dropped 8.8 percent in the latest GlobalDairyTrade auction, on concern weaker prices for the country's largest commodity export could dent future economic growth.

The kiwi slid to 73.16 US cents at 8am in Wellington from 73.55 cents at 3am ahead of the auction result, and 73.79 cents at 5pm yesterday. The trade-weighted index declined to 77.35 from 78.09 yesterday.

The New Zealand dollar weakened after dairy product prices dropped in the latest auction amid expectations that the supply of milk powder will not be as constrained as previously thought, and weak demand after officials last week detailed threats to poison New Zealand infant formula. That caused the AgriHQ Seasonal Farmgate Milk Price for the 2014-15 season to drop to $4.60 per kilogram of milksolids, below Fonterra Cooperative Group's $4.70/kgMS forecast and prompted some analysts to question forecasts for a higher $6/kgMS payout in the upcoming 2015/16 season.

"Weakness in the GlobalDairyTrade auction drove New Zealand dollar weakness, and is likely to continue to weigh on New Zealand dollar," ANZ Bank New Zealand senior economist Mark Smith and senior FX strategist Sam Tuck said in a note. "A perfect storm of factors appear to be the culprit, including recent food safety issues, lacklustre demand from major export markets, and increased potential supply - both from competitor producers (one of the by-products of the lower euro) and with recent local rainfall likely to extend the domestic season.

"A sustained period of low dairy prices will impact on the terms of trade, degree of inflation pressure and the New Zealand dollar."

The kiwi will probably trade between 72 US cents and 74.20 cents today, ANZ said.

Locally, traders will be eyeing the release of current account data for the last quarter of 2014, scheduled for publication at 10:45am.

ANZ says markets are likely to be stable ahead of the Federal Reserve decision on interest rates, scheduled for release at 7am New Zealand time tomorrow. The Fed is widely expected to remove a reference to being "patient" from its statement, paving the way for future interest rate hikes.

The New Zealand dollar slipped to 95.92 Australian cents from 96.70 cents yesterday, declined to 69.02 euro cents from 69.85 cents, dropped to 49.58 British pence from 49.79 pence and fell to 88.79 yen from 89.54 yen.