By James Harte

Dairy Prices Weighing on NZD

The New Zealand Dollar has come under fresh pressure across the board over the last week. One contributing factor has been the relative improvement in the outlook for the dairy supply which is expected to keep prices, and thus NZD, under pressure.

Instead of being a function of weaker demand, the weakness in the weakness in dairy prices is down to a relative improvement in the supply outlook in response to signs that EU production cuts are abating, alongside more favourable growing conditions in New Zealand. Specifically, the decline in full-season New Zealand milk solid collection no longer seems to be as severe. The modest pickup in production trends and rebalancing of the market is expected to continue to weigh on WMP prices over the remainder of the season. Continued declines in dairy prices will put persistent pressure on NZD, limiting the scope of any near term squeezes higher.

RBNZ Strike Cautious Tone

Although the longer-term view Is for the RBNZ to move into a hiking cycle, in the near term, their cautious view is unlikely to change. At their February meeting, the central bank shifted into a “neutral bias” noting positivity in the domestic economic outlook though their view on the external backdrop remains fairly downbeat despite a slew of better global data recently. Governor Wheeler commented, during a subsequent speech, that “the balance of risk in the global economy is on the downside” and considering the impact also noted that “there is an equal probability that the next OCR adjustment could be up or down”.

As the upcoming March 23^rd meeting is only an OCR review and won’t include the release of a monetary policy statement, it is unlikely that the economic forecasts and underlying economic assessments will be changed. Even though the NZD TWI has declined recently, the RBNZ is likely to continue to emphasise its message that the exchange rate is “higher than is sustainable” to achieve balanced growth and that further depreciation “is needed”.