New Zealand bonds gain as Fonterra forecast disappoints market

The New Zealand government bonds closed higher on Thursday after Fonterra Cooperative Group gave a softer than expected opening forecast for the 2017 milk payout, which it said partly reflected a strong currency, stoking expectations the Reserve Bank of New Zealand (RBNZ) will cut interest rates sooner rather than later. In the earlier Asian session, the yield on the two-year government bonds dropped 9 basis points to 2.11 percent, the lowest in more than a week. The 10-year bond yield fell about 6 basis points to 2.65 percent.

The Global dairy giant Fonterra announced an opening forecast farmgate milk price of $4.25 per kilogram of milk solids(kgMS) for the 2016/17 season, below market estimates of $4.60-$4.80/kgMS and long term fundamentals for global dairy remain positive with demand expected to increase by 2-3 percent a year. Said New Zealand dollar is relatively high and is currently impacting milk prices and our forecasts and added that there is no change to the current 2015/16 season forecast farmgate milk price, which is being held at $3.90 per kgMS. In addition to global supply growth slowing, they are seeing imports into major dairy markets improving compared to a year ago as China’s dairy consumption growth remains positive.

Lastly, we foresee the RBNZ cutting rate in June to around 2% and expectations of a further rate cut in August remains on. The Central bank may act on the housing market if they cut any further. However, the bank has not signalled any cut in the next policy meet in June, retaining its easing bias. Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index increased 39.83 points, or 0.58 pct, to 6,947.87.