Kiwi tipped to sink after Fonterra scare

It's not going to go away in a hurry. Tim Kelleher, head of institutional FX sales New Zealand at ASB BankThe New Zealand dollar may decline this week as some traders deem its recent rise above 80 US cents as overdone and potential damage to exports from a food contamination scare at dairy giant Fonterra Co-operative Group weighs on sentiment.

The local currency may trade at between 75.50 US cents and 80.60 cents this week, according to a BusinessDesk survey of 10 traders and strategists.

Five expect the currency to fall this week, two expect a gain, while three say it will remain neutral. Still, one of those expecting a gain said he was unsure about the effect of Fonterra.

The kiwi was trading yesterday afternoon at 77.41 US cents, from 77.30 cents at 8am in Wellington.

New Zealand's dollar plunged yesterday morning after Fonterra, the nation's largest exporter, said on Saturday it had found bacteria which can cause botulism in some of its dairy products, prompting China and Russia to ban products.

Also weighing on the kiwi, some traders said its recent gains on expectations of future interest rate rises was overdone.

"I've been quite bearish on it in the last couple of weeks," said Tim Kelleher, head of institutional FX sales New Zealand at ASB Bank. "The market is probably a little bit too bulled up on how high New Zealand interest rates are going to go immediately. The risk is that once we start to sell off, we will see some momentum in it."

Concern over Fonterra's exports and the reputational damage to New Zealand's "clean green" image would continue to weigh on the kiwi, he said. "It's not going to go away in a hurry," Kelleher said. "It's not going to blow away in a couple of days."

There was likely to be more attention on tomorrow's dairy auction, said Mike Jones, currency strategist at Bank of New Zealand. Prices had been expected to hold up at elevated levels but it was possible they would now decline, he said.

Fonterra said none of the products sold on the GlobalDairyTrade platform were affected by the contamination scare.

Also tomorrow, the statistics department publishes the latest labour market indicators. Salary and ordinary time wages probably rose 0.5 per cent in the second quarter from a 0.4 per cent gain in the first quarter, while the unemployment rate may have increased to 6.3 per cent from 6.2 per cent and the participation rate edged up to 67.9 per cent from 67.8 per cent, according to Reuters polls.

So far, there has been minimal evidence of rising wage pressures. However, the Canterbury construction sector is the hot-spot, driven by rebuilding following the earthquakes. BusinessDesk

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