Forex Marketz Daily Forex News – Fully Markets Update
Awe… the poor Kiwi Dollar. It was once the high flyer of the Forex market this year. Everyone’s darling currency. Now it is getting ready to fall. All thanks to cows and milk.
Dairy prices, hit a high back in February and since then have tumbled almost 50 percent. Dairy products account for 26.5 percent of all exports from New Zealand. Since the Kiwi nation specializes in whole milk powder or WMP, not to be confused with WMD, there is a good chance the New Zealand Dollar (NZD) will face strong headwinds and selling pressure.
We thought the Kiwi was going to have a strong year thanks to expectations the Reserve Bank of New Zealand (RBNZ) would hike interest rates. Soft demand for commodities would also turn around. All of this would have supported the Kiwi. The NZD/USD started the year at $08221. It climbed to a high of over $0.88 in July. Since then it has fallen. In early trade this morning, we were at $0.7901.
Dairy prices will continue to face headwinds and will keep milk prices low for quite some time. The recent peak in the price of dairy products, along with the Eurozone’s end to its dairy quota , then you add lower feed costs to cause dairy export volume, globally, to rise 10 percent this year. This will cause prices to remain depressed.
New Zealand is likely to continue its domination in WMP exports to China. However, mainland inventories are high and lower prices will not support more demand.
Bottom line, here is our forecast for the NZD/USD, prices should hit a low between $0.75 and 0.78 by the end of 2014. By the end of next year, $0.68 or 0.69 is not out of the question.
All thanks to spilled milk.
It should be noted that WMP prices are at $2,505 per kilogram. It would have to rise to $3,500 before the end of the year just to meet analyst forecasts. This is not very likely to me met and even if we see an unexpected rise in dairy forecasts that does not mean you should rush out and buy the NZD. There is a very low rate of inflation in New Zealand with a good pace of economic growth. With the absence of inflation the Kiwi’s strength is the focus of the RBNZ. They feel the Kiwi is overvalued, at its current price, and they will act if they feel they must move it even lower. This means investors are correct to be jittery as this, alone, puts a cap on any correction higher.
Investors are asking questions regarding exit strategy from financial instruments that have, what are known as, small exit doors. This is something that describes NZD financial instruments to the tee. This reduces carry trade prospects and we are already seeing the volatility for carry trades decline in the NZD/USD.
The Kiwi’s ride higher has been derailed thanks to milk. A very special, and warm, thank you to cows worldwide.
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