The New Zealand dollar pared gains after Fonterra Cooperative Group, the nation's largest company, dashed expectations that it would increase its forecast payout to farmers today.
The kiwi touched a three week high of 83.34 US cents this morning and was trading at 83.28 cents at 8am in Wellington from 82.91 cents at 5pm yesterday. The local currency slipped as low as 82.89 cents and recently traded at 83.11 cents after Fonterra unexpectedly said it would keep its milk payout to farmers at $8.30 per kilogramme of milk solids for the current season.
Fonterra said it would normally have increased its payout but was keeping its forecast unchanged on concern margins would be squeezed as it is unable to raise the price of its manufactured products such as cheese. The unchanged payout forecast is still a record price, helping underpin the kiwi as a reviving local economy points to a rise in interest rates next year. Reserve Bank governor Graeme Wheeler is expected to confirm tomorrow that New Zealand will be the first developed country to raise rates next year, increasing the yield advantage of local assets.
"The currency sold off as there were a lot of market rumours expecting them to increase their forecast," said Sam Tuck, senior manager FX at ANZ New Zealand. "Whilst there is an initial negative reaction due to the fact that it has missed the rumours, I think the currency will probably maintain its overall strength and won't decline too much further because the good news is still there in the milk powder price."
After an initial knee-jerk reaction, traders will probably turn their focus back to the reviving local economy ahead of the RBNZ decision tomorrow, Tuck said.