Talk Money with Tony Field – November 4, 2015
Dairy prices fell overnight and so did the New Zealand dollar.
The GlobalDairyTrade (GDT) price index fell 7.4 percent to US$2569 per metric tonne (MT).
Whole milk power fell 8 percent to US$2453/MT. Skim Milk Powder prices also fell by 8 percent to US$2.018/MT.
The dairy analysts at AgriHQ have reduced their forecast for the milk price by 56 cents to $4.71 per kilogram of milk solids. This compares to Fonterra's current forecast of $4.60.
"The current outlook for the dairy markets means it is now unlikely Fonterra will be able to lift its farmgate milk price from its current forecast of $4.60 per kilogram of milk solids," says analyst Susan Kilsby.
Economists at Westpac say the decline in recent auctions means our milk price of $5.30/kg for this season is "now looking on the high side".
But they are reluctant to revise their forecast as New Zealand heads into a summer that will feature a potentially severe drought-causing El Nino weather pattern.
"Disruptions to New Zealand's milk supply can have a significant impact on world prices, though perhaps less so now than in the past, as the Northern Hemisphere has ramped up its productive capacity in recent years," Westpac says.
The auction result saw the New Zealand dollar fall around 0.8 percent in value against the US currency.
The Kiwi was trading at 66.75 US cents at 6am, compared to 67.39 cents at 5pm yesterday.
By 8:30am the Kiwi had rebounded slightly, trading at 66.98 cents.
The New Zealand dollar was even weaker overnight against the Australian currency.
It fell 1.3 percent to 93.09 Australian cents by 6am. That compares to 93.80 at 5pm yesterday and 94.27 cents yesterday morning.
The Kiwi fell sharply in the late afternoon after the Reserve Bank of Australia (RBA) kept its key interest rate on hold at 2 percent.
RBA governor Glenn Stevens kept the door open to another possible interest rate cut. But he also said that economic conditions were improving.
The Australian currency rallied because the RBA seemed more upbeat about the economy than the markets had expected.
The RBA is pointing to a range of factors. These include an improvement for non-mining businesses, increased consumer spending and better than expected employment numbers.
The British currency is also gaining ground.
The Kiwi was down 0.6 percent at 8:30am, trading at 43.45 Pence.
The pound rose after a new survey showed an improvement in activity in Britain's factories. The Markit/CIPS purchasing managers' index rose to 55.5 in October. That is its highest level in 16 months and was better than the ahead of the 51.3 reading that had been expected. Anything above 50 indicates expansion.
The markets believe this has increased the chances of a hike in British interest rates. The Bank of England will review rates this week.
A rate hike is not expected this week. But the expectation is that there will be an increase sooner rather than later if the economic green shoots continue to appear in the UK.
Westpac is sticking with its prediction that New Zealand's official cash rate (OCR) will fall below 2.5 percent
The OCR is currently 2.75 percent, but the Reserve Bank (RBNZ) has signalled a potential rate cut of 0.25 percent.
Westpac economist Dominick Stephens believes the RBNZ will eventually have to cut the OCR to 2 percent as it attempts to return inflation to its target level of 2 percent.
He says inflation will begin to pick up early next year, "but a range of factors will conspire to limit the increase and keep inflation well below 2 percent".
Those factors include weak wage and price increases, falling ACC levies and minimal tobacco excise tax increases.
"Boosting inflation from today's low rate to 2 percent on a sustained basis will be a daunting task for the RBNZ," he says.
"The RBNZ is firmly of the view that the OCR will have to fall to 2.5 percent, but no further. We are doubtful that will be sufficient - in our view, the OCR will eventually have to fall to 2.0 percent."
Westpac's OCR forecast is based on Auckland's housing market slowing by early next year. But Dominick Stephens says if house prices continue to rise rapidly the Bank will not cut rates.
"But that strategy would be valid only for so long. Over a longer timeframe, monetary policy must achieve the inflation target – a target that our longer-run forecasts suggest the RBNZ is in danger of persistently undershooting."
There is a lot of money in computer games.
US gaming company Activision Blizzard has bought the company that makes the game Candy Crush in a deal worth US$5.9 billion (NZ$8.8 billion).
Activision Blizzard makes games like Call of Duty.
It says the purchase of King Digital Entertainment will create a company with over half a billion combined monthly active users in 196 countries.
The deal will be a relief for shareholders in King Digital Entertainment.
Although Candy Crush has been a massive success it has not done so well with its other games.