The New Zealand dollar surged to a fresh 10-month high above US70c yesterday as dairy prices rose further than expected.
The kiwi went to US70.55c, up from US70.20c just before the sale, before falling back to US70.06c as at 5pm.
The surprisingly strong gain in whole milk powder prices at the latest GlobalDairyTrade (GDT) auction gave an already appreciating Kiwi dollar an added kick.
It has been a similar story for several other commodities-based currencies - the Australian and Canadian dollars, and the Norwegian kroner - which have all gained on the coat tails of firming commodity prices over the last few weeks.
Whole milk powder - the main influence on Fonterra's farmgate milk price - hit US$2156 at the latest GlobalDairyTrade auction - well short of where prices need to be to put farmers back in the black but a big improvement on the last sale.
Traders also drew confidence from the pricing of longer-dated whole milk powder shipments, which saw the September contract rising by 10 per cent to $2300 a tonne.
According to DairyNZ, a recovery in whole milk powder prices to US$2400 a tonne, and a decline in the NZ dollar to US64c would allow its estimated break even price of $5.25/kg of milksolids to be met. The current Fonterra forecast sits at $3.90 a kg.
In world markets, crude oil hit US$43.44 a barrel and iron ore rose by 4.1 per cent to US$60 a tonne. Precious metals also fared strongly, with silver hitting a 10-month high.
"All commodities are rising," said Nigel Brunel, director financial markets at OMF.
"Iron ore is up massively, silver is rising, and oil is rising - it's like commodities have turned," he said.
The gain in GDT prices was despite ongoing problems of overproduction, particularly from key European Union dairy producers.
"There is milk everywhere, but it [the rally] seems to fit with that whole commodities story," he said.
Brunel said whole milk powder futures remain at a premium to GDT prices, suggesting there is more to come in the latest rally.
The 3.8 per cent gain in the GDT price in the index was the first consecutive rise since last December, but continued strength of the New Zealand dollar would be a concern, ANZ said.
ANZ senior foreign exchange strategist Sam Tuck said the kiwi had been running higher over the last few weeks. "Optimism over commodities over the last few days has ensured that commodities-linked currencies have been ... in demand," he said.
ASB Bank said the GDT result was consistent with a recovery, "albeit one that has a long way to run".
The bank expects to see the milk price forecast start the 2016/17 season near $5.00 a kg, before lifting to $6 a kg by the season's end.
"Dairy prices have taken a small step towards recovery. And while seasonal factors are in play, the developing trends are consistent with our view of what we expect to see over the new season," the bank said.
"As the global production cycle continues ... and with global demand improving, particularly from China, we expect global dairy prices to lift over the new season," ASB said.