Expectations of higher earnings from New Zealand's dairy exports are likely to continue to underpin the NZD/USD rate in the medium term.
The New Zealand Dollar has moved from a one-year low of the 0.6530s to the 0.6650s against the US dollar. Expectations of higher earnings from New Zealand's dairy exports are likely to continue to underpin the NZD/USD rate in the medium term, but a number of other factors could potentially weigh on it.
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| NZD/USD Daily Chart via TradingView |
Fonterra's Global Dairy Trade price index shows that milk prices have reached record highs since February 2014. Dairy products, on the other hand, are New Zealand's largest export commodity with a total value of NZD19 billion per year, accounting for about a third of NZ's total goods export trade.
More expensive milk prices will benefit the NZ trade balance, thus offering fundamental support for the Kiwi dollar. Better yet, some analysts expect the rise in milk prices to continue. Due to the high demand for milk in the era of the pandemic, we are dealing with the impact of restrictions on social activities on the livestock business.
"We have raised our forecast for farm milk prices for the season to 9.25 dollars kgMS," said Nick Tuffley, ASB Chief Economist, "Given the weak NZ conditions and the failure of overseas producers to offset weaker local production, we agree with the market view that the supply outlook for (products) milk) is likely to remain tight beyond the end of the season."
This projection then helped boost market optimism about the New Zealand dollar exchange rate. As Joseph Capurso of the Commonwealth Bank of Australia puts it, "Higher milk prices support our forecast for NZD to rise to 0.75 by year-end."
Nevertheless, there are still a number of major obstacles that overshadow the movement of the New Zealand dollar exchange rate going forward. The price of milk has been steadily rising for several months to now hit an eight-year record high, but the NZD/USD rate is just getting started. This happened due to the appreciation of the USD, as well as the NZ government's response to the pandemic which was consistently viewed as too cautious by market participants.
Markets are still struggling to gauge how the latest Omicron outbreak will impact the NZ economy. If the economic performance is not good, expectations of further interest rate hikes from the New Zealand central bank (RBNZ) will also be hit.
"The main uncertainty is how the labor market will be affected by Omicron," said Satish Ranchhod, Senior Economist at Westpac. "We are still in the early stages of the outbreak, and we cannot say for sure how severe the health impact will be."
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