The New Zealand dollar rose after lower volumes helped push up prices at Fonterra's GlobalDairyTrade auction overnight. The kiwi touched a fresh post-float high against the Australian dollar as investors favour the outlook for the local economy.
The kiwi increased to 77.92 US cents at 8am in Wellington, from 77.28 cents at 5pm yesterday. The local currency touched 96.22 Australian cents, its highest since the Aussie was floated in 1983, and was trading at 95.95 cents at 8am from 94.97 cents yesterday.
The New Zealand dollar outperformed its peers overnight after prices rose 3.6 per cent at the latest dairy auction as volumes fell, stoking optimism about a recovery ahead for New Zealand's largest commodity export after a 48 per cent fall in prices last year. The kiwi was also bolstered by reports China is speeding up work on 7 trillion yuan of infrastructure projects to revive slowing growth, boosting optimism about the outlook for New Zealand's largest trading partner.
Bank of New Zealand currency strategist Raiko Shareef said much of the New Zealand dollar's record-breaking run could be put down a lack of liquidity in typically quiet Christmas-New Year trading and that the real test would be next week, when markets are back in full swing.
"But I would not fully discount this move into higher territory," Shareef said. "Being at a fresh post-float high is probably justified given how negative sentiment is around Australia and given New Zealand is in a better economic situation than many of its peers," he said.
Shareef said the price action overnight put the differences between the two economies into sharp relief. The Australian dollar, with its high exposure to the energy sector, suffered, while the New Zealand dollar, with its exposure to improving dairy prices, strengthened.
However, Shareef said he remained sceptical about the likelihood of the Kiwi reaching parity with the Aussie.
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"China's news was enough to ignite the lift in the New Zealand dollar followed by falling offshore yields and a positive GDT overnight," ANZ Bank New Zealand Agri economist Con Williams said in a note.
Investors are favouring the New Zealand dollar over its Australian counterpart as the economic outlook appears more rosy on this side of the Tasman. New Zealand's Reserve Bank has indicated it intends to hike interest rates further, compared with Australia where economists are starting to price in interest rate cuts. That makes the kiwi more attractive to investors looking for yield with interest rates in New Zealand already 1 percentage point higher at 3.5 per cent.
- with Jamie Gray
"The positive New Zealand dollar story has been enough to deliver post-float highs on this cross, which may temper further extensions higher as local sellers look to take advantage of the overnight move," said ANZ's Williams.
Still, he said the recovery in milk powder prices in the latest dairy auction isn't strong enough to deliver Fonterra's $4.70 per kilogram of milk solids forecast for the 2014/15 season. Skim milk powder rose 2.8 per cent while whole milk powder rose 1.6 per cent. AgriHQ estimates that would translate to $4.30/kgMS.
Today, traders will be eyeing ANZ's latest Commodity Price Index, scheduled for release at 1pm, for a gauge of how other sectors are performing.
ANZ expects the kiwi to trade between 77.80 US cents and 78.30 cents today, while against the Aussie it will likely trade between 95.90 Australian cents and 96.40 cents.
The New Zealand dollar touched a 20-month high of 65.42 euro cents ahead of a report on Eurozone inflation tonight, which may signal the region is close to deflation, increasing pressure on the European Central Bank to step up stimulus measures. The kiwi was trading at 65.29 euro cents at 8am from 64.70 cents at 5pm yesterday.
The local currency touched a four-month high of 51.46 British pence, and was trading at 51.29 pence at 8am from 50.65 pence yesterday.
The kiwi edged up to 92.23 yen from 92.19 yen yesterday. The trade-weighted index advanced to 79.49 from 78.83 yesterday.