NZD/USD: a positive start to 2018 - Westpac

Analysts at Westpac explained that export commodity prices have started 2018 on a firm footing thanks in part to the buoyant global trade backdrop.

Key Quotes:

"The weaker NZ dollar over the course of 2017 has also boosted farm gate returns. Recent dairy auction outturns have led us to revise up our payout forecast to $6.50. Yet despite the solid start to the year, we remain wary of the impact slower Chinese growth may have on demand for NZ’s commodity exports over the course of 2018.

Most of New Zealand’s key commodity export prices have started 2018 in a buoyant mood. The horticulture sector is benefitting from strong global demand for specialist varieties of kiwifruit and apples, international beef prices have eased from their recent highs but remain at historically favourable levels on the back of robust consumer demand, and lamb prices are also firm as solid demand coincides with tight supplies in key exporting countries. Looking across the NZ commodity export spectrum, only wool prices stand out as bucking the trend, and remain weak.

In addition to firm international prices, the weaker NZ dollar over the course of 2017 has added the icing on the cake. On a trade-weighted basis, the NZ dollar fell around 4% over the course of 2017. This has provided some support to farm gate returns of all persuasions. However, since the start of 2018, this trend has reversed. The NZ dollar has pushed higher, mainly thanks to a weakening US dollar. We don’t expect this to persist as the year progresses. Instead, we continue to expect that the NZ dollar resumes its downward trend this year, as the US Federal Reserve hikes interest rates, while the RBNZ remains firmly on hold.

Locally, weather remains challenging for farmers up and down the country. Nationwide milk collections were down 3% on a year ago in December as the dry weather started to bite, and January collections are set to show a similar trend. Recent widespread rain has provided some relief to farmers, although official declarations of drought remain in place, with Rural Assistance Payments available to farmers in 6 regions (Taranaki, Manawatu-Whanganui, Wellington, West Coast, Southland, Otago). On balance, we expect milk collections this season to be broadly on par with 2016/17 season (although greater use of supplementary feed and poor pasture in some areas may have a bigger impact on fat content).

Fears of tighter international supplies, particularly for whole milk powder, helped dairy prices squeeze higher in the first few GlobalDairyTrade auctions of 2018. Overall prices rose 5.9% in last night’s auction, including a 7.6% gain for whole milk powder. Higher auction prices have led us to upgrade this season’s milk price forecast to $6.50/kg, slightly ahead of Fonterra’s estimate.

We continue to caution however, against extrapolating recent trends too far into 2018. Our view remains that growth amongst New Zealand’s key trading partners is likely to slow this year – led by China. Chinese policymakers are poised to follow through with moves to rebalance their economy, reduce the risks generated by rapid credit expansion, and put the economy on a more sustainable growth path. And while the consumer sector isn’t the focus for Chinese policymakers, they are unlikely to escape a period of slower growth completely unscathed. With China such an important market for almost all New Zealand commodity exporters, this could see New Zealand’s prices soften as 2018 progresses."