NZD/USD: Dairy price index

February 3, 2016

Today, the Global Dairy Trade will publish price index for dairy products, reflecting weighted average of the change in price in percentage. For the economy of New Zealand, which is the largest exporter and supplier of the dairy products to the global market, dairy prices are of great importance. The decline in the world prices of the dairy products leads to the reduction in the trade balance and export proceeds to the national budget, which has a negative impact on GDP and exchange rate of the national currency.

New Zealand’s economy is also under pressure from slowdown of the Chinese economy. China is the largest trading partner of the Pacific region countries, including New Zealand.

The decline in purchasing power in China, as well as the reduction of the Chinese imports from New Zealand has a negative effect on the country’s economy.

Additional pressure on the pair NZD/USD is caused by the difference between the monetary policies of the central banks of the USA and New Zealand.

Current interest rate in New Zealand is one of the highest in the world (2.5%), although the head of RBNZ, Graeme Wheeler has repeatedly said that the decrease in the rate is highly possible.

At the same time, the US Fed is planning to raise the interest rate in the USA up to 3.25% before the end of 2018.

Next meetings of the US Fed and RBNZ will be held in March. According to CME Group, market expectations of the rise in the US interest rate in March are at the level of 21%. Yesterday, the vice-president of the US Fed Stanley Fischer said that in terms of the monetary policy tightening a lot will depend of the state of the American economy, which , as recently acknowledged by the Fed, is more closely connected to the global economy than previously thought.

If the US Fed suspends the rise of the interest rate in the USA, RBNZ will get more grounds to reduce the rate in New Zealand, which will eventually lead to the further decline in the pair NZD/USD in the medium-term.

Tonight, New Zealand labour market data for Q4 will be released. It is expected that unemployment rate will increase (the forecast of 6.1% versus 6.0 in Q3). If case of the negative data the pair NZD/USD will go down.

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