New Zealand Dollar: Analysts Say It Would Take More Than a Milk Scare to Bring the Kiwi Dollar Down

The spotlight is on the New Zealand dollar as the country's largest dairy exporter was hit by a botulism scare which caused a slump in the Kiwi dollar earlier this week. As New Zealand's premier brand Fonterra was hit by import restrictions of products in China and other countries, the Kiwi dollar had a rare break from its strong momentum and plunged to its year low.

However, many economists believe that the New Zealand dollar slump will not last as long as the possibility of wider fallout from Fonterra's milk scare remains low. The dairy giant has previously announced that China's import ban does not cover all of Fonterra's products. The company expects the ban to be lifted soon after all issues are cleared.

The New Zealand dollar recovered from its 1.5 per cent decline in August 5 when news spread of Fonterra's milk formula contamination. New Zealand's dairy industry is a $9 billion export market. The country is the world's leading exporter of milk products.

The Kiwi dollar would have to fall significantly if it is to cause a similar rally since the middle of 2009, a time when the major central banks around the world began to simultaneously ease policy. Since March 2009, the New Zealand dollar has gained 60 per cent against the U.S. dollar and outperformed the currency favourites such as the Swedish crown, Colombian peso and the Australian dollar.

Despite countries like Russia, Vietnam and Thailand joining China in recalling milk imports from New Zealand, analysts do not expect a long-term effect on the Kiwi dollar.

Bank of New Zealand strategist Mike Jones said that New Zealand is at the top with a strong economy during a time when others are slowing down. The country's interest rates are rising instead of falling like in Australia where interest rate is down 2.5 per cent after the Reserve Bank of Australia announced rate cuts.

Mr. Jones said the fundamentals in New Zealand's economy are aligned. This is a good reason why the New Zealand dollar will continue to bounce back as it struggles with moments of weakness.

However, this is not exactly good news for New Zealand's exporters which have carried the burden of losing competitiveness in external markets as foreign investors move towards the high-yielding Kiwi dollar. A rare intervention that occurred in May 2013 by the central bank failed to slow down the rising Kiwi dollar since it is supported by an economy with robust growth of 2.5 to 3 per cent and increasing demand for its agricultural exports.

With New Zealand's inflation rate soaring into the top half of the Reserve Bank of New Zealand's target, financial markets are preparing for policy rates expected to rise in 2014 to attract more investors to invest in the Kiwi dollar.

Analysts said a sharp decline in dairy exports would weaken the New Zealand dollar and offer exporters of other products in the country a chance to grow.

The economy of New Zealand depends on exports for 30 per cent of annual production. Half of the exports are agricultural products. Dairy products account for one-fourth of New Zealand's annual export earnings worth $US36 billion. The country needs to maintain its export earnings and stop decline in its current account deficit.