Opinion: Higher milk powder prices provide buffer for dairy exporters against Kiwi$

By Danica Hampton It's been a choppy night for NZD/USD, but squint your eyes through the volatility and the currency has really just spent the past 24 hours consolidating between 0.7100-0.7250. The RBA hiked 25bps to 3.50% at yesterday's meeting. The move disappointed the cowboys looking for a more aggressive 50bps move and the accompanying statement didn't really give much away in terms of the outlook for Australian rates. Media articles released overnight (from noted RBA watchers like Mitchell and McCrann) suggest that any future interest rate hikes will be gradual. All in all, the RBA decision knocked the wind out of the AUD's sails and set the scene for both AUD/USD and NZD/USD to move lower overnight. Early in the night, weakness across European equities encouraged a bit of "˜safe-haven' demand for the USD. Not only did UBS report its fourth consecutive quarterly loss, but the European Commission warned that European banks may face a further €200-400b worth of write-downs. Against a generally firmer USD and lingering risk aversion, NZD/USD sank to around 0.7100. However, the NZD/USD weakness was short-lived. US equities clawed their way into positive territory and gold prices surged a massive 2.6% to above US$1085/oz, which helped underpin growth sensitive currencies like NZD. Last night's solid result from the online Fonterra dairy price auction may have also helped NZD sentiment. The average price for whole milk powder rose 13.7% to US$3,437. Milk powder prices have risen 87% over the past five months. Strong gains in dairy prices may be providing a bit of buffer against the high NZD for some NZ exporters and raise the likelihood of Fonterra being able to meet its 2009/10 payout forecast of NZ$5.10. For today, expect NZD/USD to continue taking its cues from global equities and risk appetite. Expect support around the 0.7100 region. Headwinds are expected on bounces towards 0.7270. The USD strengthened against all the major currencies last night, as lingering concerns about the global recovery saw the USD benefit from "˜safe-haven' demand. Equity markets remain on a fragile footing. UBS reported a fourth consecutive loss "“ thanks to heavy withdrawals in its wealth management business and higher-than-expected accounting charges. And the European Commission warned that European banks may face €200-400b worth of write-downs by the end of 2010. However, news suggesting the Berkshire Hathaway is planning to pay US$26b to buy out the Burlington railroad provided a little support late in the NY session. The FTSE fell 1.3%, the DAX dropped 1.4% and the S&P500 is currently flat. Against a generally firmer USD, EUR/USD skidded from above 1.4800 to below 1.4650. The European Commission made it clear the worst economic recession since World War II was over and revised its Eurozone growth forecasts to 0.7% in 2010 and 1.6% in 2011. But EUR sentiment was dented after the EU Commission estimated there could be €200-400b worth of write-downs yet to come from European banks. It was a whippy night for GBP. Initially, GBP/USD sank from 1.6400 to nearly 1.6260 following news that Britain's two largest retail banks, RBS and Lloyds, secured another £31b in aid from the government. However, the losses were quickly reversed and GBP/USD rebounded back above 1.6400. Halifax house prices rose 1.2%m/m in October (double the 0.6% forecast), bringing annual house prices to -4.7% (vs. -4.9% forecast). Commodity prices chalked up strong gains last night, helped by a huge surge in gold prices. Gold prices rose 2.6% overnight to US$1085/oz. News suggesting the Reserve Bank of India bought 200 tonnes of gold from the IMF seems to have bolstered gold prices. Investors now seem convinced the IMF's remaining 203 tonnes that are up for sale will be easily absorbed by the market. More generally, investors seem predisposed to trimming positions and risk exposures ahead of the key events later in the week. The Fed meet tonight (decision released 8:15am NZ time) and the ECB and Bank of England meet on Thursday. On the data front, the US non-manufacturing index is due tonight and US non-farm payrolls is due Friday. Looking ahead, we suspect lingering fears about the global outlook and elevated risk aversion will keep the USD well supported on dips. In the short-term, we expect the USD Index will find solid support around 76.00. This should limit bounces in EUR/USD to around 1.4800-1.4820 region for today. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.