What a bloodbath for the Kiwi! In case you’re wondering what’s causing all this, here are three factors dragging the Kiwi lower these days.
1. Decline in dairy prices
It’s no secret that New Zealand relies heavily on its dairy industry when it comes to exports and overall economic activity. After all, dairy products account for almost a third of the country’s total exports, which then contribute 30% to its GDP. With that, changes in prices of milk and other dairy products have a significant impact on the country’s trade revenue and growth.
The latest dairy auction indicated that dairy prices are still on a sharp decline, as whole milk powder prices plunged by 11.5% to two-year lows. Looking further back, this marks a 46% drop in prices since February this year. This led to speculation that Fonterra, New Zealand’s largest dairy company, will once again lower its payouts to milk suppliers and farmers.
2. Bleak employment data
Adding salt to the Kiwi’s fresh wounds is the mixed jobs report, which printed a weaker than expected quarterly employment change of 0.4% yet showed a better than expected 5.6% jobless rate.
Components of the report revealed that the drop in the unemployment rate was mostly spurred by people exiting the labor force and giving up looking for full-time work, as the participation rate fell from 69.2% to 68.9% in the second quarter.
Analysts pointed out that hiring gains may be slowing down as the economy starts to respond to higher borrowing costs. After all, the RBNZ has hiked rates four months in a row in an effort to keep inflation contained.
3. No more RBNZ rate hikes?
Now that the RBNZ’s tightening moves are starting to take effect and the dairy sector appears to be hitting more than a few road bumps, there’s more reason to believe that the central bank might pause from its rate hikes until the end of the year. In their latest interest rate statement, RBNZ Governor Graeme Wheeler did mention that the central bank will take time to assess the impact of their latest policy changes before taking more action.
With that, traders might be less inclined to load up on their long Kiwi positions as the RBNZ benchmark rate might stay put for the foreseeable future. Profit-taking off long Kiwi trades might carry on if market watchers predict that it will take a much longer time before the RBNZ starts tightening again. Do you think the Kiwi is in for more losses in the coming months?