Kiwi Drifts to 8500 as Dairy Payout Disappoints

Market Drivers July 29, 2014

NZD Fontera announces payout kiwi drops towards 8500
UK Mortgage Approvals 67K vs. 63K
Nikkei 0.57% Europe 0.15%
Oil $101/bbl
Gold $1311/oz.

Europe and Asia:
GBP UK Mortgage Approvals 67K vs. 63K

North America:
USD Consumer Confidence 10:00

Second consecutive day of very quiet action in the currency market with most majors trading in 20 pip ranges through Asian and early European sessions as markets geared themselves for much busier economic event calendar towards the end of the week. The one exception to the general complacency was the kiwi which tumbled further after Fonterra, the world's largest exporter of dairy announced their payout numbers overnight.

Fonterra announced that it is paying out NZD 6/kg citing that dairy prices fell 34% in global auctions since February. Last year the company paid out NZD 8.40/kg so this years payout is a major reduction in revenue with some analysts estimating that it could reduce the country's GDP by 0.4%.

The news instantly sent the kiwi lower, although the pair has managed to hold above the key 8500 level so far. The very weak payout by Fonterra is likely to reinforce the view of kiwi bears that RBNZ hikes may have come to an end. Unless demand for New Zealand's dairy picks up markedly over the next few months, the RBNZ is likely to remain stationary for the foreseeable future as the toxic combination of high exchange rates and slowing global demand for the country's principal export product is likely to weigh on growth over the next few quarters.

The kiwi therefore remains vulnerable to further selloffs as traders adjust their interest rate expectations. For now the pair has found some support ahead of the 8500 level which buyers likely protecting some option related activity, but over the next several days NZD/USD could drift lower towards 8400 as speculators bail out of the trade.

Elsewhere, UK mortgage approvals revived popping up to 67K from 63K eyed as housing activity picked up but net lending to individuals dropped to 2.5B from 3.0B the month prior indicating that demand may be cooling. Cable jumped to 1.6990 in knee jerk response to the data but quickly retraced all the gains as traders had second thoughts about the weakening consumer credit number.

The pound remains in a corrective phase with 1.7000 now capping all the rallies, as market consensus continues to suggest that the BoE will not hike rates this year and may even wait to normalize policy until after next year UK elections scheduled for May.

In North America today, the calendar remains quiet with only Consumer Confidence readings on the docket and the narrow ranges could persist for another day before the action picks up markedly into the later part of the week. USD/JPY has been trading much better over the past few days supported by stabilized US yields and anticipation that US data will prove to be better than expected. If tomorrow's GDP readings and Friday US NFP confirm that view, USD/JPY could finally break out of its narrow consolidation range and head towards 103.00 as the week proceeds.

I will be gone until Tuesday August 5th - no daily reports until then.