Bad news for NZ: dairy prices tumble

When is 'weak inflation' shorthand for depression?

The price of milk plummeted by 8.9 percent the latest Global Dairy Price auction, meaning prices have fallen by 34 percent since February this year.

NZ dollar tumbles after weak dairy prices, benign inflation

The New Zealand dollar tumbled on speculation a slump in dairy prices and inflation data that's weaker than expected will give the Reserve Bank more room to pause in its interest rate tightening cycle.

NZ Herald,

15 July, 2014

The kiwi dropped to 86.98 US cents at 5pm in Wellington, from 87.69 cents at the start of the day and down from 88.07 cents late yesterday. The trade-weighted index fell to 81.04 from 81.86 yesterday.

The local currency's decline began after Federal Reserve chair Janet Yellen gave what was seen as a more upbeat account of the US economy and the kiwi remained low after the GDT Price Index, a measure of dairy prices, dropped 8.9 percent to the lowest level since December 2012 in the latest GlobalDairyTrade auction. It tumbled again after second-quarter consumer prices rose a less-than-expected 0.3 percent.

"The market has been pricing in a 90 percent chance of a rate hike next week," said Stuart Ive, senior dealer at OMF. "That is called into question when you combine the milk price falling off a cliff, house price inflation starting to pull back and a market caught somewhat left-sided by weaker CPI data."

He said the market is now pondering whether today's events constitute enough data for the Reserve Bank to pause "as early as next week, or at least in September," especially as it would help drive down a currency that governor Graeme Wheeler has called unsustainably high.

The kiwi traded at 64.14 euro cents from 64.64 cents late yesterday and fell to 50.76 British pence from 51.54 pence. It dropped to 88.49 yen from 89.45 yen and declined to 93.13 Australian cents from 93.73 cents yesterday.